Why are there missing financial markets in poor countries?

In my critique of finance as a solution to problems in poor countries, I emphasized that researchers have underemphasized the fundamental point of why the highly-effective financial instruments they’re offering don’t already exist in the communities they study.

In a new working paper, Pascaline Dupas and Jonathan Robinson tackle, among other things, exactly this issue. They’re studying participants in rotating savings and credit assocations (ROSCAs), which are community-based savings clubs, so they’re basically focusing on the group most likely to have invested (so to speak) in a wide variety of financial instruments. The results aren’t exactly shocking – their main finding with respect to why the services they promoted don’t already exist is that the people simply hadn’t thought of the idea. But this kind of “trivial” finding is crucial if we want to move from experiments to policy. Things that don’t exist because they’re novel ideas can be brought into practice simply through information campaigns. If the reason is deeper – say the idea has been considered and rejected by the market – then we face a tougher task in terms of practical implementation. Indeed, I’d argue that in those latter cases the idea should probably be abandoned, unless we can find some fixable problem with the version of it that the market rejected.

[A really nice aspect of the Dupas and Robinson paper is that they focus on savings for health investments and emergencies, in part because health is among the highest-yield investments available in the developing world. Regular readers of this blog are sure to find it interesting.]

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About Jason Kerwin

http://nonparibus.wordpress.com/author
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