Econ 280 - Papers for this week.

Here is the paper for tomorrow

http://www.povertyactionlab.org/publication/latest-findings-randomized-evaluations-microfinance

 

Here is the one for Thursday

http://eml.berkeley.edu/~eichengr/research/posen.pdf

You only have to comment on one of the papers - your choice.

 

 

 

 

 

Comments

[Samantha Smith]

I am blogging on the first paper, “Latest Findings from Randomized Evaluations of Microfinance.” Going into this paper, I had a relatively negative view on microfinance. While I understand that microfinance is necessary for those unable to get into the traditional banking sector, my previous knowledge of microfinance had to do with understanding the extremely high interest rates, the general lack of aid, and the concept that microfinance is seen as “a million one dollar loans.” This paper helped me changed my previously negative view of microfinance into a slightly more positive one. While I understand that microfinance isn’t a fix all and that it doesn’t solve all issues of poverty and development, it does solve the problems it does intend to. Reading, “while media reports interpreted the lack of positive results along measureable dimensions of health, women’s empowerment, and education as signs that microcredit was a failure, Banerjee and Duflo say this study presented clear evidence that microcredit was working n the dimension it was supposed to,” made me realize while all of the issues surrounding microcredit and finance exist, there are some positive changes that come out of microcredit, specifically, a shift away from certain temptation expenditure, better choices, greater investment, and taking advantage of opportunity.

In my opinion, another interesting aspect of this paper is the emphasis on the nuances of the structure of these microcredit deals. This makes a lot of sense and I previously did not know that these deals could be structured in different ways such as group/individual defaults and delaying repayment. I didn’t know too much about microcredit, so I just thought that people got generic loans and the only thing that changed was exactly how high the interest rate was.

Lastly, I think it would be interesting to further look at the difference in savings and credit. In this paper, it seemed to me that savings might be better at alleviating poverty and fostering growth, even though it might be harder to initiate it.

Although this paper does a very good job looking at the positives of microcredit while acknowledging the negatives and showing the empirical evidence in an honest manner, I would be interested in seeing a paper written the other side of this argument or empirical evidence to show the negatives associated with microcredit.

[Bennett Henson]

Microfinance in America has a fairly negative connotation. When I think Microfinance I think payday loans and institutions like Check Into Cash that charge ridiculously high rates to low income families who need the money to hold them over until their next pay check comes in, which then must be used to pay off the loan. Through reading "Latest Findings from Randomized Evaluations of Microfinance" I realize that these Microfinance institutions are not only necessary in LDCs, but can be beneficial. Many poor people in LDCs do not have access to formal financial institutions, and if they want to take out a loan many of them have to go to their friends and relatives, who then have to take out their savings, which can in turn hurt the already fragile economy. By increasing exposure to micro finance institutions like Spandana, people in small underdeveloped economies have the ability to reprioritize their spending and focus on improving their lives in the future instead of consuming what they have because they don't have a safe place to save their money. Microfinance is not an end all be all solution to the credit problem in many LDCs, but through some of the studies conducted in this study it allows poor people in LDCs to differ some of their consumption through saving, and also allows entrepreneurs a safe way to raise the capital they need in order to start up a business which could ultimately strengthen the local economy.

An important aspect of micro finance institutions is that they give people a safe place to store their money. There is a demand for these savings institutions. An example from the reading is the Bumala village bank in Kenya. Savings accounts were opened up even though these accounts offered no interest on deposits and came with high withdrawal fees. The most interesting data collected from this experiment was that women were likely to deposit their money into these savings accounts. This helps prevent them from having to lend their money out to relatives, friends, and spouses. The ability to save their money empowers women, which as we have seen throughout this course is a crucial aspect to alleviating poverty. Financial institutions are necessary for an economy to thrive, and Microfinance seems like a good way to introduce these services to poorer areas.

[Kate LeMasters]

As Sam and Bennett already said, this role of this paper is to expand the goals of microfinance and holistically look at what all it can accomplish in different contexts. It isn’t a panacea for poor households but it also isn’t doomed as a development mechanism. Many MFIs have difficulties with loan uptake and repayment because often, as the article states, microloans benefit household’s well-being in ways other than business creation (e.g., savings, health, education inputs). While I agree with Sam and Bennett that these outcomes are also highly beneficial and shed light on the good that microfinance can do, it doesn’t support microfinance as an institution. If MFIs are profit generating and are giving out loans rather than grants, they must have a guaranteed payback to remain in business, or they would be a micro-granting institution. Of course, I’m not proposing that MFIs fail if they increase savings without business expansion, but they may need to expand their mission if that is the overall goal.
I wanted to focus briefly on the discussion about insurance. The authors state that Gine, Menand, Townsend, and Vickery (2010) found that increasing access to insurance increases farmers’ propensity to plant risky, rain-sensitive crops that provide higher profit. I would be interested to see how the introduction of insurance would affect agroforestry, our main discussion last week. Theoretically, this would allow farmers to take higher risks by partaking in a farming activity (agroforestry) that would be more risky, new to them, required rain, etc. I don’t think insurance was a factor in Professor Casey’s paper, so it would be interesting to think about how this would affect the results.

[Juan Cruz Mayol]

Even though the last three people have commented on the microfianance, I will do so as well to avoid having to think about Argentina's crisis and the Tango effect (equivalent of the tequila effect mentioned in the paper).
I was surprised when I read about their previous negative conception of the term, when in 2006 Muhammad Yunus won a Nobel Peace Prize for his work pioneering micro-loans. Since Muhammad Yunus founded his bank in 1976 with $27 from his own pocket, he has been able to lend money to about 6 million people, out of which 96% are women. From our previous readings, this money in the hands of a mother would most likely end up in health care, food, and education for her children, or in new business creation, as well as having a 'female empowerment effect'. As discussed in class, this female empowerment could result in a positive or negative outcome for economic development, but as Duflo stated in one of her papers that we read, it is worth sacrificing the short run for the long term trade offs. Some of the studies even showed a shift of consumption goods like tobacco or alcohol, to more durable goods and increase in savings.
I like the conclusion for this report, where it states that it is important for microfinance to treat poor people as individuals and do not attempt a "one size fits all". This is key to explain why certain methods might show some failures in some places, and successes in some other places, as we learnt before with the prescription economic models. As improved results were found from improving skills (human capital), other factors might also help improve results; this is why it is important to keep making studies to find ways to improve the effectiveness of microfinance.

[Curtis Jay Correll]

Microfinance is not the magic solution to poverty. It has limited success in a variety of areas. In many cases it has not proven to increase profits for business, has not had the desired effects on consumption and has not caused some massive and quantifiable change in women’s empowerment. It is instead a tool that has brought about small and positive effects all over the world. It is important to look at microfinance as what it is, an undertaking to provide credit to those who could not otherwise access it. Of course not all loans have quantifiable positive social impacts, but the same can be said of loans on a larger scale in traditional finance markets.

Microfinance firms have had many positive effects. Little effect has been found of credit on healthcare and education, but significant impacts on welfare have been found due to the ability to withstand shocks. This is a huge purpose behind finance markets, the ability to use debt to get through the bad times and pay it off during better times. Business profits on the whole were not found to increase, but more businesses were formed as a result of credit access at the micro-level. While consumption has not been shown to increase as a result of micro-loans, consumption patterns often change away from wasteful goods to food and other positive goods. These are all small effects, but it makes perfect sense that microfinance would have small effects, and it clearly has proven able to effect the lives of some and help them rise out of poverty.

I loved that the paper went beyond just showing the positive effects of microfinance and went further to evaluate methodology behind microfinance and its effectiveness. My impression from the paper was that access to savings has proven more important for improving welfare than access to credit. So the analysis of reframing and design of savings accounts was really interesting to me. The fact that what is most beneficial to the firms in terms of risk-reduction is often not the most socially beneficial option for borrowers stands to reason, but was interesting to read about. The fact that these issues could be altered or reframed was particularly interesting. Loans with a built in grace period proved more effective, though with a higher default rate. The fact that this could be adjusted easily by simply offering the grace period with a higher interest rate was really neat.

Other small changes were also really cool. The counter-intuitive fact that by switching from group-liability to individual-liability, you actually see essentially no increase in default rate was fascinating, particularly since removing that disincentive will encourage more people to engage in the credit market. The ability to increase saving through education, parallel accounts, commitment savings and simple reminders is really encouraging. Just by instituting these small changes, microfinance firms seem to be able to increase their impact. This article did an awesome job of showing this, while taking into account the limitations or potential negatives of microfinance.

[Callie Northrop]

I was most interested in the studies on savings throughout the paper. We’ve discussed the benefits of savings through several of the other papers we’ve read, but this paper seems to really highlight the benefits. The idea of the commitment savings account seems to be very effective, though I imagine it is difficult for people in the developing nations to commit to relinquishing control to their money for some time. I think it is interesting that this savings account increased the likelihood of famers to invest more in fertilizers and crops. I had never considered that a famer’s income would come in all at once, at the harvest time, making investments during the growing season months later extremely difficult. For this reason, I thought it was interesting that the self-control aspect of the commitment savings account was not as influential as predicted. I would have thought self control would have been one of the biggest contributing factors, especially after the very first paper we read this semester studying the purchasing choices at the micro level. I wonder why there were such significant increases in agricultural input use, crop output, and household total expenditures.

[Daphine Mugayo]

Looking to make a quick buck in Uganda, money lending is the "it" solution today. The money lending business has dramatically risen in Kampala, Uganda and targets just about anybody from people looking to start businesses, pay off debts, consumption, or even just to pay for classes. The ability for these lenders to provide an immediate source of cash has won them customers from different income brackets; low income, upper low income and even some middle income. These lenders exploit the urgency of these customers by raising the interest rates. As these businesses are mainly in the urban area, they do not favor the poor as you must produce collateral sufficient for the loan you are requesting. In this scenario, as these informal sources require less paper work, time and procedure for one to acquire a loan, many individuals seek them out in urgent need for cash, giving them an upper hand to exploit the customers.

On the other hand, more and more microfinance businesses are rising. One question though, aren't microfinance firms often profit maximizing firms? Bauchet et al give great ideas on how these firms can be adjusted to benefit the poor but if microfinance firms are not primarily concerned for the poor, how are these changes supposed to be put in place? In other wards, what incentives exist for microfinance firms to adjust their structure in favor of poverty alleviation?
On that note, I find it interesting that the paper did not look at microfinance organizations formed by individuals within particular fields such as microfinance firms by farmers or livestock owners? I feel like these would have the added advantage of experience in the field of practice, allowing for peer mentoring, sharing of knowledge and better understanding of economic goals. We saw these earlier in the course where they were seen as unsuccessful but also in this reading the authors emphasize that microfinance has generally been publicized as unsuccessful. One may argue that poor households are unable to save enough amongst themselves to start a microfinance, but such a setting could just as well be the reason to motivate these poor individuals to start saving. In such cases, if government/ public sector is able to further back such enterprises, I feel that this may be a better arena to provide formal loans to the poor.

[Mary Beth Benjamin]

Before reading this paper, “Latest Findings from Randomized Evaluations of Microfinance”, I generally had a poor understanding of what microfinance meant in the context of poverty. (Micro)Financial services seek to assist those who lack access to traditional banking and financial services, whether it is due to their lack of credit history and formal employment or the lack of financial services available to them in the region. In a recent current events article regarding the lack of financial services available to those living in rural and impoverished communities, particularly in Africa, I learned that 41% of adults living in developing economies have any type of bank account. This is in contrast to the 89% of adults in high-income countries with bank accounts. Bank accounts provide the most basic way to store money for savings that would otherwise be unsecure in their possession. It is evident from the example in rural Kenya that there is a demand for these savings institutions. Even when there was no interest offered for deposits, and when there were considerable withdrawal fees, there was still a high demand for this service, which “suggests that the alternative is worse”.
I know from my previous knowledge, that on average, 63% of women in developing economies have bank accounts. I liked that the article talked about the specific effects that expanding access to savings accounts to women, had on their consumption (ie that with savings accounts, their food expenditures were 10-20% higher) and their business investment (ie those with savings accounts had 45% higher daily investment in their businesses). Although the article says that there was no evidence found to suggest that microfinance was empowering women “along measurable dimensions such as exercising control over how the household spent its money”, it does say that the resulting female empowerment from putting money into savings accounts “seemed to reduce the risk of appropriation by relatives, friends, and neighbors”. This sample size was small, however, reducing the pressure for females to share their savings with others could have caused the increase in female empowerment.
According to the paper, one of the major benefits of microfinance is that it helps reduce poverty and improve development outcomes by enabling the poor to structure their consumption towards long-term durable goods and business investments by “smooth(ing) consumption, start(ing) or expand(ing) a business, cope(ing) with risk, and increasing or diversifying household income”. The article sites evidence that increasing access to financial services also has positive effects on the use of healthcare, the level of educational attainment, and the degree of female empowerment within a society. There is great potential for microfinance to have positive effects at the household level in many rural and impoverished communities.

[Andrew Winter]

When I initially read the paper for Tuesday I didn't have much background knowledge of microfinance so I was a little confused but our class discussion helped make it clearer. We've looked at household decisions before in this class and in particular the decisions made by low income households and I think (unless I'm wrong) that this idea is at the heart of microfinance. When poorer households are forced to make decisions, we talked about how it seemed like they kept making 'bad' decisions, but when we looked a little deeper we concluded that these 'bad' decisions were the result of risk aversion and simply trying to survive. We have also looked at how this leads to a cycle where development and growth are made nearly impossible, so a large part of development economics is dedicated to trying to find a solution. Microfinance appears as one of those potential solutions. By providing low income households with credit or a boost in savings, their ability to make decisions grows dramatically and gives their entire communities the chance to develop.

I personally feel like microfinance could be extremely effective. The idea that it can provide these regions with a modern economic structure that increases capital and investment sounds great. However, like all potential solutions, there are problems and cases where the increased credit or savings doesn't work. Trying to balance the successes and failures of this system is especially difficult because tangible results are only available in the long run. Regardless, this system has the potential to reduce a large percentage of poverty across the world and will hopefully do so in the near future.

[Alexandra Butler]

One conclusion of the Eichengreen and Mody paper I found very interesting was that interest rates in industrialized countries affect both the supply and demand of debt in developing financial markets. This was true especially for Latin American issuers of fixed-rate bonds. The rise in domestic interest rates encourage U.S. investors to keep money domestically while also encouraging Latin American borrowers to decrease the supply of new bonds. While these findings are empirically important, they also have important social implications. This relationship suggests that when domestic interest rates rise in the U.S., the poorest in developing countries no longer are able to receive loans, as developing countries become less likely to issue debt. I think it is often easy to think of markets, especially those in developing countries, as isolated. According to this paper, even past empirical research suggests that external markets do not influence capital flows to developing financial markets. However, this paper shows that it is important to think of markets in a global sense. Interest rates in the U.S. may affect who receives credit in developing countries. Given this information, policy makers should consider not only what interest rates do domestically, but also internationally. I think it would be interesting if the empirical analysis done in this paper could also be applied to the current global economy to see if the results still hold. Before reading both these papers, I also did not have a clear understanding of microfinance. While parts of this paper still go above my understanding, I feel as though I have a better grip on the supply and demand of debt in developing countries and its ties to global financial markets.

I also think that this North/South interaction is particularly interesting because this is not the first time we have seen the relationship between developed and developing nations discussed in terms of the more industrialized “North” and developing “South.” In particular, we previously discussed how colonial institutions created by the “North” have long lasting effects on the “South,” which may increase inequality and exacerbate poverty. In my institutions class with Prof Grajzl we read many papers that also discussed interactions between the “North” and “South,” particularly in terms of colonial institutions. It is interesting to see that this theoretical concept of a world divided into “North” and “South” is still used here.

[Jacob Strauss]

I found that portions of the second paper relates strongly to papers covered previously this term, notably Rodrik's piece on growth strategies and the Washington consensus. Eichenberg and Fishlow in 1996 wrote that "the fiscal balance of Latin America as a whole swung
from a deficit of three per cent of GDP in 1989 to a surplus of one per cent in 1993" and explained that there were shifts towards exports and privatization in these countries. Analysts at the time pointed out that domestic reforms brought capital into the Latin America and thus accounted for change in capital outflows, which is similar to what followers of the Washington consensus may claim occurs after privatization of state-run businesses. Of course, capital flowed into these countries regardless of whether they had undergone significant domestic reform, and this illustrates once again that when explaining growth/development one has to account for a wide variety of factors and be careful with a one size fits all approach.

Moving on, I found it thought provoking that the role of interest rates in the US has such a large impact on capital flows to developing nation. With the current debate on whether to raise interest rates to stop the inflation monster that's supposedly just around the corner, it is worthwhile to take a look at how these decisions affect development around the world. If policymakers are sincere about triggering growth in developing countries than the growth consequences of these decisions should be evaluated as critically as those policies designed specifically to create growth in other countries.

[Raymond Monasterski]

Having had perhaps the "reader's digest" understanding of microfinance before this week, I found the first article to be particularly interesting and helpful, especially its points on group vs. individual liability. When I started reading I thought that group credit would be more beneficial, as the individuals in the group are taking less individual risk. But when the individual defaults in the group, the groups suffers. While it's a key assumption of liability, there's not much of a repayment difference between group and individual liability, so the creditor is taking a great risk in loaning to the individual over the group. Thus, the creditor might have the ability to lend to more people over time, which means that while costs of microfinance are, the creditor will have the ability to loan to more people and hopefully receive more in return.

While the paper focuses on credit and savings, I thought it could have gone into greater detail about insurance. As we discussed earlier in the term, families in developing countries often use children as their "insurance policies." However, when they're able use some of their income/savings to make an investment in insurance, that allows them to better care for their children during bad times. Moreover, there isn't the risk of default when it comes to insurance, that there is when it comes to credit. Credit is still beneficial in the short-run, especially if used for proper investment, however, the credit users then have to pay back the amount of credit plus interest in the long-run. With insurance, there is not much of a change in the short-run, however the family is protected against long-run adversities. Moreover, since the family is protected against adversity with insurance, it will be able to leave children in school which improves human capital and eventually raises the children's ability to get credit. Certainly credit is important, but individuals will take less risk if they first use savings to purchase insurance, which I think has greater long-run benefits, especially in the already high-risk environment of developed countries and communities.

[Stephen Moore]

Before this class I had very limited knowledge of the basics of micro finance and the goals it hopes to achieve. I thought the paper for Tuesday addressed key criticisms of the micro finance. There is no panacea for poverty, and I found it interesting critics of micro finance seemed to expect that. I was also intrigued to see that micro finance did not increase spending, but promoted better spending away from tobacco and alcohol. Although this is harder to quantify than increased spending, it is an important development. We talked in class how some larger banks have explored a little into micro finance, and it would be interesting to see if they would explore the field further. Though, because these larger banks are incredibly profit focused, I fear that it could turn into a way to exploit uninformed and struggling families. The nonprofits in place are great start and it will be interesting to see how they develop in the future. I am hopeful that micro finance could be an important aspect of development economics, but, like with most things, there are risks involved and it is not alone the cure to poverty.

[Zach Colby]

I found our discussion on microfinance very enlightening and interesting. While I new what microfinance was, I did not know very much about it. There were many very intriguing facts and tidbits about the nuances of this concept. As Stephen brought up, I was most surprised by what microcredit money was spent on. In my cynical view, I would have thought that microfinance lump sums be spent in a less responsible way and in fact they are spent more responsibly than if no money had been received. This reminded me of the point brought up in Professor Casey's paper last week that seemed to go against the theoretical framework. Originally it was thought that farmers with higher income would take more risk but in fact they are less likely to take risks. Similarly, families with more income from microcredit and not engaging in negative consumption behaviors.

[Austin Pierce]

I was a little confused by the logic on page 5 of the Berkeley article. It says tariff rates went down, encouraging trade and thus capital flow. But trade does the equivalent of transporting a factor of production to an area. Thus, the kapital-rich North stays kapital-rich and produces kapital-intensive and the South stays labour-rich and produces labour-intensive goods.

Thus, it would seem that lowering tariffs would, cet par, keep such resources in the developed world. This would though increase the need to look for other potential factors if capital did indeed flow Southwardly.

The anecdotal evidence and theory make sense, and I appreciated the authors looking at both the demand and supply sides of the issue. It helps to bridge a gap between two important areas of consideration.

[Madison Smith]

I must admit that this Eichengreen and Mody article definitely went over my head, and I don’t think I have much of substance to say about it. The conclusion that it comes to about the importance of US interest rates on developing countries was pretty new to me, but I find it very interesting. It still surprises me just how much of an effect US policy can have on the rest of the world.

Going back to the first article, I asked Maggie, the girl who was with me in Vietnam, more about the microfinance system that she researched while we were there. It goes along well with the theories of the importance of women in microfinance that we focused on in class. The village had a group of women who created their own microfinance program where they would collect money as a group and then distribute it to an individual once a month in the form of a loan. They had interest rates of 2% for the loans, which is much smaller than the rates that most banks have to provide in order to make a profit. Because all of the women were contributing their own money to the program, I think it fostered a sense of responsibility among the group to ensure that the money was being used well. The process is completely run by this group of women that know the community better than anyone. I found it interesting to contrast this program against the banking version of microfinance that we talked about on Tuesday. I am not sure how common it is for communities to create their own microfinance systems, but I think that they do have some positive aspects that the banks don’t have such as knowing the community, and possibly more accountability since you are repaying individuals that you know very well rather than a bank. Obviously, banks also have positives such as more capital to contribute to the process, and less risk because banks have so much money to begin with. I think that a really good approach could be for banks to team up with these small community groups to assess the need, but also allow for more money to be loaned out because of the extra money that banks have access to.

[Ferrell Carter]

Eichengreen and Mody make a point to acknowledge both the supply and demand side of international finance, and how interest rates in developed countries affect investment in developing nations. I think it’s worthy to note that contrary to existing literature on the subject, higher interest rates in the US are not necessarily positively correlated with market spreads. In other words, just because the opportunity cost of borrowing increases in the US it doesn’t necessarily result in a difference between the offering price and the amount invested. Eichengreen and Mody are careful to recognize that the demand side of international finance and trading also plays an important role in regulating interest rates. While some high risk agents may opt out as interest rates rise, this will only decrease the spread among the nations willing to borrow from the US.

Like other things we’ve discussed in class, this paper recognizes the importance of looking at a situation holistically rather than from just one perspective. While models do tell the story simpler, it is crucial to look at issues from multiple sides- in this case, demand and supply- in order to see what really are the driving forces in international capital flows.

[Austin Hay]

I agree with what Raymond posted above, though for different reasons. Like Ray, it was counterintuitive to me that the group loans wouldn’t produce a lower loan default rate. It seems, in theory, to be the best solution for everyone involved. The borrowers have decreased costs, the lender takes on a smaller risk (hedging his bets that someone in a group will be able to fully repay the loan, versus counting on an individual to do so), it also encourages (theoretically) more people to save and borrow (putting more money in the economy). It seems like a smart approach to lend to groups, evidently though it doesn’t prove to provide lower default rates.

A lot of people have posted about how important insurance could be to these communities, and I really liked Kate’s point above. It would have been great it we introduced this insurance talk last week in agroforestry. In that context insurance could very well provide the impetus for more farmers to adopt the new, slightly riskier, methods and hopefully have higher yields.

[Andrew Riehl]

To go along with what some people have said about the second reading, I find it very interesting the effect that financial policies of developed countries, specifically the interest rates, can have on the economic stability of developing countries. The world economy is linked in so many ways that we do not even realize. When the United States raises its interest rates and investors keep money in the country, it actually affects Latin America in negative ways. They cannot borrow as much and therefore the poverty continues to be a problem. Loans are necessary for them to reduce poverty as we learned in the microfinance reading. The opposite effect occurred after World War I in which interest rates remained low in the United States in order to get investors abroad for reconstruction and reform in Europe. It all shows that we can never look at one side of an issue and there is always something else going on that we originally did not take into consideration. I also, honestly, thought other parts of this reading were difficult to understand and had trouble understanding the other points of the article. I tried to gather as much as possible about it, but the technical terms and statistical talk made it tough. I am interested to learn more about the article tomorrow.

[HeeJu Jang]

Reading Eichengreen and Mody's paper reminded me of Eric Rosengren's talk from few weeks ago. As Rosengren said, the (nominal) interest rate in the US has been set close to zero for quite a while now. With continuous failure to achieve 2% inflation rate, Fed has been unsuccessful in escaping the liquidity trap. According to Eichengreen and Mody, a high US interest rate curtails investment abroad because people can attain high yields by investing within domestic economy. In other words, low interest rate will necessarily make foreign investment more attractive. I wonder if that is the case with the current interest rate of 0%.

At the same time, I would like to question if the 'US interest rate' theory alone can explain the whole picture. Take Baht devaluation in 90s as an example. Many US investors were putting their money in Thai economy because the interest rate was quite high there. In 1997 however, the huge capital influx into Thailand suddenly diminished precisely because many US investors lost confidence in Thai financial institutions. To be honest, I am not sure whether the US interest rate rose quickly and significantly at that time as to incentivize American investors to withdraw their money from abroad. Nevertheless, I believe that panic among investors rather than change in domestic interest rate caused the reverse in direction of capital between Thailand and US.

Lastly, I wonder if this paper is undermining the gradual rise of economic power in South. Alexandra's comment about the lingering impact of colonial institution on North and South division particularly made me think about this point. It is true that most of the wealth in today's world is still concentrated in the northern hemisphere. However, the countries that used to be considered as "poor" and "backward" are now fast catching up. For instance, increasing number of Chinese are investing their money in US economy these days. I think it would be interesting to observe the pattern of foreign investment from the South's perspective.

[C Wood]

I also had some difficulty with the second article and I think my comments on the first article, especially after class discussion, would be more meaningful. Relating to what others have also commented on, I found the micro-finance article to address an area I had never really considered would be the most beneficial way to allocate resources to tackle poverty. It makes more sense though that this occurs through the banks making a profit also. This thought is also slightly concerning when evaluating motivation. Reading the article however, I see this type of system in a much more positive light. Additionally, the research into the design of such systems that is discussed in the article can continue to make micro-finance even more beneficial.

There is another area mentioned in the article and expounded upon in class that I found very significant and different than I would have predicted. This is the way that savings accounts with high penalties for withdrawal helped people, especially those already with higher relative incomes, to save more since the social pressures to share were more easily escaped. This thought struck me as strange because I was brought up where it was respected to make smart decisions and save your money; however, in very poor places, this is seen as morally wrong. This makes sense, and programs like this therefore are making significant impacts by allowing these people to save more, and likely improve their standard of living more quickly than they otherwise would be able to. The only question here though is that banks have now altered the already very tight resource allocation within a struggling group. Upon reflection, is this possibly detrimental to those who depended on others for slight insurance when times were very hard to help them out of devastation? I don't know how significant of a problem this is, but this could be problematic especially if the already more capable/higher income families are chosen by banks for business over the poorest who need the most help. Is this inhibiting the workings of a kind of insurance system built into the culture of these poor communities? If so how significant is this, and could other forms of insurance then be used to target the poorest families? This is an area not many people have commented on that intrigued me. I would be interested in learning more about long term impacts on inequality distributions in communities where these systems have been used.

[Jean Turlington]

This article helps to explain how interest rates and the state of global financial markets impact where people borrow and lend. The first part of the paper, which explains how interest rates in advanced industrial countries determine capital flows to emerging markets, makes intuitive sense. When safer, more reliable countries have higher interest rates on their bonds, people will be more likely to put their money in those markets. Lenders do not have to undergo as much risk for a relatively high reward. The more interesting, and harder to explain part, is how conditions in emerging markets and interest rates in emerging markets effect how lenders respond to giving money to these potentially more risky borrowers. Supply and demand are very important in explaining the effect of interest rates and the interest rate effect. Developing countries may not be as inclined to issue debt, if they do not believe there will be enough demand to serve their needs. Conversely, if there is huge demand, countries may want to issue more debt. Either way what is happening in other developing countries and in developed countries has an impact on how this debt will be received.
There seem to be so many variable factors that affect whether a debt issuance by a country or a private group will be successful. I had not really thought about the global scale of this before and the interconnectedness of everyone. Countries need debt and many times cannot control when they need to issue it, and if other conditions are out there which make it a less than ideal time to issue bonds there might could be negative effects for the country. They might have to pay higher than they hoped for the debt or other things, which could take away from other things such as programs in place to fight poverty or programs to improve infrastructure. I do not think the United States or another large country would change their interest rates or policies to help the developing countries at the cost of their own, but maybe if they are more conscious of the impact they are making smaller things could result in changes that could help both countries. Everything is interconnected and people and governments should be aware of how their decisions effect others.

[Chandler Moody]

I’m covering the Eichergreen and Mody “Interest Rates in the North and Capital Flows to the South.” I’m going to first say that I’m not a finance person, so a lot of this paper was hard for me to understand. The purpose of this paper is to find economic evidence regarding interest rates as a determinant of capital flow to emerging markets. The model uses data for primary market spreads of all developing-country bonds issued from 1991-1996. For reference, Latin America had the largest fixed-rate market and East Asia had the largest floating-rate market, where interest rate is variable over the duration of debt obligation. By using launch spreads as their data, the paper highlights how only the credit-worthiest borrowers come to market when global financial conditions tighten. Measures of creditworthiness used included external debt relative to GNP, international reserves relative to GDP, debt service relative to exports, and the variance of the export growth rate. As many other people have noted, it is important to look at both supply and demand side. As we talked about last class, the S curve (savers) and the D curve (borrowers) show where the interest rate lies. This means that the borrower’s decision is as important as the international investors’ side. When rates in the US increase, it is shown to have a negative effect on Latin American borrowers because the demand from international investors decreases. This is just one example of how changing interest rates affect international markets.

[Wilson Hallett]

In reading Eichengreen and Mody’s article surrounding the flow of capital between the North and the South, I was surprised to read that many of the econometric regression analysis does not support the widely-acclaimed theory that capital inflows to developing countries are largely contingent on interest rates in major financial hubs such as the U.S. As mentioned, the article seeks to illustrate this relationship and uses regression analysis and historical context to do it.

The story makes sense over the 20th century. When interest rates were low in the U.S., investors sought higher yielding returns in developing nations. I understand that there are many developing nations in various regions across the globe that have independent governments, financial structures and varying monetary policies that make each one unique and different. The individual state of affairs of each nation would appear to make a difference when deciding where to invest in debt if interest rates were low in the U.S. However, many financial instruments, whether they be in equities or debt, are bundled together in various indexes nowadays (probably more so now, than 16 years ago when this article was written). There is a concept of having diversified investments for individuals and corporations. However, this diversification sometimes only extends to an “emerging markets” level. For example, an individual investor may seek to have bond exposure in his portfolio, but he does not want 100% U.S. treasury bills because rates are so low. He wants to diversify his bond exposure to “emerging markets.” So, he simply buys a mutual fund of bonds of emerging markets. He may not be entirely sure where the actual bonds are located, but he has “diversified” his holdings because he is invested in emerging markets. This simple anecdote follows the story of the article, I think. Investors seek higher yields in developing nations that are willing to offer debt, but may not always distinguish between country and region.

[Lucy Ortiz]

I admit that I found this paper a little complicated due to its math speak, however what I took from it reminded me strongly of the conversation we had in 398 (I think) recently, in regards to Sommer's project (again, I think). We were discussing the importance of looking at both the supply and demand side in the Loanable Funds market, in regards to the effect of violence on microfinance institutions. As was discussed Eichengreen and Mody piece, a shift in both sides can sometimes mask the movement of the individual curves. In the context of Sommer's work, we discussed how an act of violence may decrease the supply of funds, but may also cause a decrease for the demand of loans, due to a fear of continued acts of violence. In this situation, if the shifts were the same magnitude, both shifts would be unrealized if one only looked at the interest rate. Along the same line, these authors suggest that the reason that there hasn't been much documented changes in demand for foreign bonds due to increases in the US interest rate, is because people are failing to look at the demand side of the foreign countries as well. The change in supply of US funds has been masked by decreases in demand in developing countries. I didn't really wrap my head around the effects of fixed-rate issues and floating rate issues though and would like to discuss that a little more.