Jessica Goldberg gave a thorough response to my last post about financial services in Malawi. I strongly encourage anybody interested in the topic to read the whole thing – lots of her research is on exactly this topic, and she certainly has better information than my aforementioned hearsay and conjecture. I’m going to excerpt a few pieces here that hit on what I see as the most important issues.
Moreover, many individuals in Malawi opt for direct deposit when it’s offered to them on a voluntary basis. Your claim that that banking services in Malawi are “basically unwanted” is certainly overstated, and can be refuted with evidence from research that I and others at U of M have been involved in! I’ll concede that banking is expensive, but it’s only inconvenient if you fail to consider the alternative.
This is her strongest point, and hits on the weakest part of my post. It’s incorrect to say that the services are “basically unwanted” because that implies that nobody would want them at any price. This is untrue – as Jessica points out there is plenty of research showing people will take up these services if offered – so I withdraw that claim.
What is true is that in equilibrium almost none of these services are consumed: in the absence of an intervention, the market-clearing quantity is zero or close to it (this is in fact a precondition for an intervention to be informative; we can’t study offering banking to a population where everyone is already banked). But people do want these things, so why aren’t they using them? Jessica hints at one reason in her point about ATM fees:
Now, one institutional improvement might be to reduce the withdrawal fees — since people pay a flat fee per ATM transaction in Malawi, they can save money by making fewer large transactions rather than more smaller transactions.
Finance is almost absurdly expensive in Malawi. Keeping your money in the bank here will lose you 2% in real terms per year, before considering the host of fees you get charged. Taken together with low quantities this implies a severely constrained supply. I attended a fascinating talk by the CEO of Standard Bank where he pointed out all of the regulations and bureaucracy that makes his business expensive to run. Beyond over-regulation there are probably other reasons for limited supply here.
The second reason is that people may not actually want things that would make them better off:
Finally, there are other reasons that payments via direct deposit may be welfare-improving. One is that having money in the bank removes the immediate, visceral utility of consumption, and may therefore lead to more savings and less temptation to spend on small luxury purchases that are regretted later. Having money in the bank can also function as an excuse for denying a friend or family member who asks for money — “sorry, I don’t have any right now.” Transaction costs can be your friend.
This is something that people might sign up for in advance, but at some point being constrained against your will can actually be helpful. If temptation, be it personal or social, is an issue then making it hard for people to get at their money can make them better off even if they claim they dislike such a system. Jessica actually has a great project on exactly this topic, trying to carefully measure how much people are susceptible to temptation and why (Disclosure: I worked as an RA on that project, but I can’t take any credit for their methodology, which is very well-designed).
The reason I see efforts to promote financial development as “strangely socialist” is that we as economists have put a lot of effort into finding interventions that will work, but not nearly enough into figuring out why they’re not already happening. Prospective suppliers of finance see investment at the margin of entry as a poor decision. Why? In general, we like to think the market does a good job of allocating scarce resources across competing demands, so why isn’t it doing so here? There are plenty of good potential reasons. One is the behavioral issues discussed above – maybe people don’t want or demand things that they really should be using. Another is a simple lack of information – given that we need expensive experiments to figure out which things work, it’s conceivable that investors just don’t know about them. It’s also entirely within reason that consumers just need to try stuff out before they realize how great it is. A third reason is various constraints on supply or barriers to entry that lead to high prices. You only need to spend a couple of days negotiating fuel cues or paying your employees in bills worth $3 (Malawi’s highest denomination) to see how many such constraints are at play.
Whether this is a first-order concern depends on your perspective. It’s not necessary if we want to optimize the use of the marginal dollar of aid money or government spending. It is necessary if we hope to build a financial sector that can, in Jess’s words, “help people smooth consumption, invest in profitable businesses, and manage their household affairs.” My impression is that not nearly enough effort is going into research on why the useful services we’re studying aren’t currently being provided.
Research on this topic is an unmitigated good, and very important. It’s tough to see Malawi developing economically without a robust financial sector. What I see as a bad thing is attempts to roll out policies to induce people to use financial services that, for whatever reason, they don’t want. Those policies could be good, for the reasons Jessica points out, but I think we’re a long ways off from being able to make that judgment.