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Elizabeth Wolf

A topic that Sen and Bauchet et al. deliberate on – and one that I also find very interesting – is the simple phrase “details matter” (Bauchet, 19). While each author approaches it from a different frame, Sen uses economic markets and Bauchet uses microlending, to illustrate their points, they both discuss the benefits of using markets as a means to end economic efficiency and yet also highlight the often overlooked elements of a social structure that determine the efficacy of economic tools.

Bauchet says is rather concisely, “No perfect design solution has been found to eliminate the issues of asymmetric information, but some types of risk should be easier to insure than others” (17). Overall, this economic paper outlines (in great detail) the complicated reality of microfinance. While prior economic postulation suggested that microcredit was the be-all-end-all for economic growth in developing countries, this paper reveals that the effectiveness of microcredit is dependent on many factors, some of which might not be obvious. Households need more than microcredit loans, but “when such needs are met appropriately, the impact should be nonetheless enhancing” (2). However, what constitutes these “needs” vary on a country-by-country basis. Different individuals will respond to microcredit in different ways. So will different societies. As an example, increases in microloans in India were not shown to significantly change how much the household spent or to reduce exogenous household shocks, but it did change what the spent their income on. A narrow study simply measuring income expenditures would overlook this increase in societal and individual welfare. A nuanced approach to measuring development must be adopted.

Sen puts it this way: “The importance of substantive freedom has to be judged not just in terms of the number of options one has, but with the adequate sensitivity to the attractiveness of available options” (Sen, 117). But who defines “attractiveness” and the true “number of options”? Is it the developing country, the developed countries providing social and economic support, some objective international third party? Where does the autonomy lie? Though I’ve never spoken with either, I would postulate that both Bauchet and Sen would argue that this somewhat qualitative assessment lies in the lands of the country itself. I thought Professor Goldsmith’s insights in class regarding students who have studied abroad and not understood the culture – but were conscious to not intervene but first observe and then act – was very apropos. While markets do have a universal effect in bettering the conditions of the citizens, the execution of the most growth for the most people in the sectors of the society that need it most and will use it best must be done by the people who are versed in the unquantifiable details that cumulate in a society and market tone. In the same manner, the investment in education, health, and access to credit markets leads to the greatest advancements in human capital. But in what stage of education or what aspect of health care would aid be most effective? Who should receive the microcredit loan, and under what conditions? Once again, only the citizens of that state are able to make that call. While ways of improving human agency, general quality of life, human capacity and overall economic output can be effectively outlined by economic giants like Sen and Bauchet et al., the day-to-day work must be done and specific policies must be formulated at the national or regional level. However, these frameworks do begin an interesting and necessary discussion.

Andy Kleinlein

Bauchet’s “Latest Findings from Randomized Evaluations of Microfinance” shed light onto how savings can ultimately lead to economic development. Previously in class, we have focused on models that include savings, but we hadn’t yet gone into detail on how specifically saving and investment worked in developing nations. Bauchet’s paper explored studies that have been done. This is the most intrigued that I have been by a reading so far because it takes issues in the world and tests these hypotheses, almost scientifically. As someone with little economic background, I struggle to come to terms with the big picture changes. This gave insight into changing things specifically and focused on how it can be done. It detailed how changes could be made. Savings/investment in these studies is shown to help people, but in different ways. Some people use the money to put it back into their businesses while others chose to hold on to the money for their family. I feel that other economists should look into conducting such studies with education, etc. to see what works and where. Instead of hitting a homerun every time, Bauchet explains that it might have to be in smaller steps. These actions that have been taken help, but do not completely solve the problem. I would also be interested to see how these work out in the long term. I believe that eventually, the opportunities in savings would allow for families to pour money into have healthier, better educated children.


I believe my primary take away from the microfinance article can be summed up in the quote “Microcredit is an opportunity that different people will take advantage of in different ways—whether because of disposition or circumstances.” As the authors trace through the latest findings on microfinance, it seems as though every randomized or non-randomized trial or study has the potential to yield different results based off of slight nuances in the way the trial was executed. And, depending on the nuances in the product or credit plan offered, a wide range of results can occur that can leave a reader (like me) unsure of what, if any, fundamental guarantees there are to what works in microfinance. I am currently enrolled in statistics, and a lot of what we do in the course relies on assumptions just like economics; and, we spend a considerable amount of time figuring out ways to try and correct for error resulting from these assumptions. Similar to our inability to achieve perfection in statistics class, the studies on microfinance conducted in microfinance in developing countries are going to be highly susceptible to error, and any one of the individual findings in this article could be quite off from the true nature of things.
With this in mind though, I did notice that the plans that worked the most definitively in this article were the simplest, most logical ones. For instance, commitment savings, which are useful as a result of people’s lack of self-control (or their social network’s lack of self-control), remind me of a book I had when I was a kid, where a toad has his friend, a frog, put his cookie jar on top of a shelf he can’t reach, so that he won’t eat the cookies right away. Another simple plan that was shown to work in this article was simply giving the rudimentary “rule of thumb” accounting education, as opposed to the more complex rules which presumably inundated the entrepreneurs with too much information. Finally, people generally respond to incentives, and the implementation of fingerprinting for paprika farmers to receive a loan was a very simple, and interesting, use of incentives to lower default rates, as the fingerprints created accountability for credit-worthiness.

Julia Mayol

I think this paper does a great job in clarifying the effects of microcredits. Many people believe that it has the potential to increase household health, education, empower women and reduce poverty, which in fact it does not. The authors do a great job in showing that, even though microcredits have a positive effect in poor households, it is not magical and that some people overvalue it.

To me, one of the most important effects microcredits has is the fact that it can change poor household consumptions: not the amount but how they spend it. Households changed from “temptation” goods such as alcohol and tobacco to durable goods. I think that from Sen’s points of view, in which what matters is not what you buy but what are you capable of doing with it, this change in the consumption is really important. Even though alcohol and tobacco might give you instant happiness, durable goods are more likely to increase your well-being. They might have the same effect as alcohol and tobacco but besides lasting longer, durable goods might benefit an entire family, rather than just one individual.

It is a little bit disappointing to read that it has little effect, if any, in female empowerment. Moreover, when talking about savings, studies suggest that women face significant barriers to savings. Once again, we see the necessity of empowering women. Even though microcredits do not seem to show any effect on health, savings do. I think it is really interesting how something that seems so trivial and of simple access for us, such as a saving account, can have an effect in making women less vulnerable to health shocks, and making them able to afford medical expenses.

Furthermore, I thought it was really interesting how a small thing such as a SMS text reminding the saver of their purchase goal, could increase average savings balances by 16%. I think sometimes we fail to understand that “low income people” are still people who own few things, and whenever they have a chance to buy something that they can afford and they like, such as alcohol, they will do it. Additionally, I thought it was interesting how teaching simple rules of –thumb is more effective than teaching traditional principles-based accounting rules. Households which were taught the first one applied the concept more often and earned more revenue. The authors then write “less may well be more when it comes to training poor business owners in sounds financial practices.” When reading this I had a weird feeling. This sentence makes poor households seem not smart enough to understand complex things. But I believe this study is really important, as it shows two things. First, the lack of education and its importance, as I believe these people are not able to understand traditional principles-based accounting rules since they lack basic knowledge of education, and might even struggle with other concepts. Second, this study shows that poor households are smart and capable of applying concepts and are also willing to improve the performance of their business.

Matthew Sgro

Bauchet's "Latest Findings from Randomized
Evaluations of Microfinance" is certainly an interesting digression into the benefits of financial services for the poor. It was also interesting to learn more about how the poor choose to use their savings to impact investment and overall welfare. However, I found myself questioning the paper after reading ,"While
microcredit in the India study showed no discernible
impact on measures of health, education, and
female empowerment, it led to more businesses being
created and enabled poor households with businesses
to change their spending patterns" (pg. 2). From a "Sen-perspective" it seems there should be a focus on improving health, education, and female empowerment before focusing on improving the microfinance services. In my mind I believe Sen would argue that improving those factors first is a more efficient way to go about development in poor countries. When those freedoms are increased the people (total population including women) can then more truly take advantage of the new microfinancial services; therefore leading to a larger GDP and greater economic prosperity.

The fact that the services such as microcredit have benefited poor households in several ways (i.e.-> re-prioritizing their spending habits) should not be overlooked. Going from spending their already limited money on durable goods rather than tobacco and alcohol is a win for the poor in and of itself. BUT again, the author acknowledges, "The results of these randomized evaluations find
little, if any, evidence of impact on use of healthcare,
education, or female empowerment . . . The groups that benefited
most from increased access to credit tended to
be men with relatively high incomes."

In essence I do not believe the ideas brought forth by this paper in regards to better credit and saving opportunities for the poor are useless. However, I believe Sen would argue that we must improve the poor's ability to have basic freedoms (health, education) before we can think about these 'second-tier' items. Ultimately, if there is not a strong base in place for the development of poor nations then trying to build on the second level of the 'pyramid' (when it is of no benefit to elements such as women's freedom/empowerment) is a waste of time.

Michael Hegar

In the "Latest Findings from Randomized Evaluations of Microfinance" article I found the grace period for micro-loans interesting. If borrowers are able to invest 100% of the loan they have an increased chance of making greater strides in growing their business. That is not so say that a grace period that allows 100% of investment is always the answer and studies show that even with a grace period some borrowers still default on their loan. That is why it is important to make sure those who are given micro-loans are serious about using the loan to improve their business as a way to improve their lives.

I am not very interested in accounting or finance but the idea of microfinancing and evaluating borrowers reminded me of Bus 217, Managerial Finance. We looked at businesses and how to evaluate their stock price and volatility in order to make informed investments. Similarly, if micro-lenders had a more formalized process for vetting potential entrepreneurs to invest in, they could properly invest in the ones that would have the most success and be able to pay back the loan.

The microfinance industry is still fairly new and it will (hopefully) continue to improve. Filling the "missing middle" with "small, formal firms" would be a good starting place.

Allie Barry

The “Latest Findings from Randomized Evaluations of Microfinance” echoed a similar general idea as the first reading in our semester, “The Economic Lives of the Poor”. While people tend to look at the poor and make certain assumptions, this paper works to highlight the fact that the poor may not think rationally in the way that economists may think, but they do behave in similar ways to the average person. People do not always act rationally, but they will weigh what matters most to them and act on that just as those who are not poor do. I imagine if I had texts reminding me of what I’m saving up for, then I would save more and spend less as well. So one of the main take-aways I found from this reading was that the study of behavioral economics may be just as important if not more important when trying to come up with effective policies and programs for developing countries rather than the developed countries. Another example where I saw this demonstrated was the way that group lending did not always work out. I don’t know if my own parents would be willing to borrow money as a group with their best friends, and these are all financially stable individuals, let alone people in a developing country who are battling poverty. Not only does this have to do with individuals being risk averse and not wanting to expose themselves to their friends risk of default, but this also mixes financial stress with social lives which can cause lots of tension.
Lastly, on a somewhat unrelated note, I found the point about women facing more barriers to saving very interesting. The paper mentions that its possible that saving allows women to “shield their income from others”. After discussing women’s agency this is one point that never crossed my mind before, that women may face more pressure to give money to their husbands or to lend to friends, family and neighbors. As unfair as it is, it would make sense that if husbands have dominance over their wives that they may take their earnings as their own. I would be very curious to hear more about how and why it is that women face these barriers to saving and weather they are attributed to women’s inequality.


Bauchet's "Latest Findings From Randomized Evaluations of Microfinance" clarified one of the questions that always bothered me when the topic of poverty came up, Why don't poor households save more and invest in the future? Before reading the article I, like many of the supporters of Microfinance, thought that simply giving people access to capital markets and ways to get loans would guarantee prosperity and a positive outcome. But as Bauchet points out purpose and details matter a lot when it comes to how low-income borrowers make decisions, and trying a one size fits all solution where you throw money at a problem will ultimately not workout. It reminded me of our discussion from class a while back when we talked about how low-income families are extremely risk averse due to the fact that a short period without a source of revenue can be life or death for them. This fear of disrupting income often makes them look for low risk consumption now instead of investment for the future. This combined with the loan providers wanting to minimize their risk creates a situation where both groups are at odds with one another and require a new approach to the system in order to see the effects people expect from Microfinance. Rationally it makes sense to then work our way from the one size fits all approach to looking for a more individual approach that ensures both sides are happy and benefiting, but in order to do this new services and products need to be created that are customizable enough so that it works. Otherwise the limits on poor peoples decisions will be to much for a substantial impact from micro financing.


In reading “Latest Findings from Randomized Evaluations of Microfinance,” I was particularly struck by what the authors refer to as the “missing middle.” The firms that are stuck in the no man’s land between microcredit and mainstream credit are left without many options to further their capital through financing. A small enterprise without much collateral but with the entrepreneurial spirit and some documented success could very well be stuck in the middle – just as the lower middle class trap can suck in a family with enough to get by but not enough to move up in the socioeconomic ladder. There is a discernable lack in the middle when considering financiers – the small, yet formal firms that provide the reliability and structure of a mainstream bank but eschew the hoops through which one would have to jump are nonexistent in developing countries with a great deal of businesses in the aforementioned middle rung.

So I wonder – can high potential be a form of collateral? In a developing economy, little is guaranteed. But if there were means of proving potential as a promissory form of security and deposit, would there come to fruition a middle ground bank that would provide for loans to grow capital without the requisite to-do list required by formal and mainstream banks? Could venture capital be exported to developing economies? The paper would argue against the notion. But what if the ideas, skills and trustworthiness could be insured? This is where Khwaja’s computerized psychographic test becomes prevalent. A test that could meet or exceed the predictive abilities of the tried and true credit scoring model could allow for ideas, skills and trustworthiness to serve as more than just characteristics. They could be collateral of sorts. The inherent issues lie in the lack of consequence should the borrower default. Could this newly formed middle ground, formal bank remove a borrower’s trustworthiness if he defaulted? There is no real significance should the worst case come to be. If the system is not based on credit score, a docked rating might not matter for future business endeavors. So, then, what becomes of a firm who is duped repeatedly by borrowers who seem reliable on paper but never repay a loan? The system is flawed, and it will continue to be so until a system can be put into place that provides financing for those with entrepreneurial promise and consequence for those who default.

Matthew Jones

The availability of financial services seems to be of vital importance to spurring development in the developing world. However, the fact that these areas possess little capital and thus little incentive for lending or insurance institutions to arise is absolutely ridiculous. Even though "Latest Findings from Randomized Evaluations of Microfinance" proved that Microfinance can have mixed results based on numerous factors, we still need to ensure the developing world has access to financing institutions. These institutions can have a profound effect on poverty reduction and well-being if they are implemented in the correct manner. The different ways these programs can be implemented in different societies is vital to the understanding of development economics for me. Similar Microfinance policies produced varying results based on the people and societies targeted.

The more I learn about development, the more I realize that the importance of an individualistic approach in influencing outcomes of health, economic growth, or Microfinance. The conclusions developed in "Latest Findings from Randomized Evaluations of Microfinance," strongly reinforced the notion that a "one-size fits all" approach simply does not work. We must acknowledge that the developing world is composed of an abundance of cultures and people that ultimately will be affected by similar policies in different ways. Institutions and policies will reap the benefits that we believe they can, the more we are able to implement them in an individualized case by case manner.

Rachel Baer

As an Accounting and Business major, I found “The Latest Findings from Randomized Evaluations of Microfinance” to be particularly interesting. I appreciate the importance of keeping up to date records of financial transactions, and believe that it can help in improving business in developing countries.

The paper discusses the role of financial institutions and microcredit in improving the well being of the poor. One aspect of the paper that I found to be particularly interesting was the Evaluation of Product Features- Design Matters. In my finance class, we learned that a safe dollar is worth more than a risky one, and decreasing risks associated with borrowing and lending money in poor and developing countries could be beneficial for both lenders and borrowers. The paper proposed an interesting question on risk management: “does increased repayment flexibility correlate with increased profit and still allow the lender to manage default risks adequately”? (pg. 11) One example described in the paper was a study conducted in West Bengal. Those who were provided with loans that had longer grace periods invested 6% more of their loans in their businesses and they saw 30% higher average profits (pg. 12). While these results were only relevant to this particular area, they lead me to believe that providing loans with a grace period could improve well-being of borrows and lenders in poor countries. It could perhaps provide more of an incentive to invest and grow businesses, since investing in a business produce very long-term benefits.

Another part of the paper that I found interesting was this idea of the “missing middle”. This concept reminds me of our discussions of Sen’s Development as Freedom. These small, formal firms are unable to grow and be successful due to their lack of freedoms, in this case, access to capital and formal financing. To tie this back to our discussions earlier in the class, providing access to markets and secure financial institutions from which to borrow could give individuals living in poor countries access to these freedoms and more opportunity to grow successful businesses and improve overall quality of life.

Lilly Grella

After reading the introduction to the article on microfinance, I realized just how little thought I had given the subject. After learning about this financial institution in poverty 101 and then again in intro economics courses, I assumed it was a surefire way of achieving some form of poverty alleviation and economic development. Like seriously, the pioneer of microcredit/finance won a Nobel Peace Prize for its creation. That alone was reason enough for me to brush off the topic for the time being. But you know what they say about people who assume things… it makes an ass out of u and me.
The findings in this paper articulated just how over hyped the microfinance institution is today. People assume, just as I did, that microcredit does what it is said to do: transform lives and spur economic development. Unfortunately, after reading this article I feel more as though this belief in itself has undermined the potential achievement these sorts of financial institutions have. We often hear the powerful anecdotes of the (oftentimes) women who take out a microloan and are able to begin a business and hire more women shortly after. While it is obvious that that these stories are filled with intense emotion, the article points out this kind of story is only one type of situation microfinance touches. The article stresses the importance of understanding just how unique each situation is. Only when this is understood will microfinance be able to move in a more encompassing direction. The shift from one size fits all to an individualized technique allows for microfinance to expand towards its full potential through increasing its reliability and flexibility towards aiding people.

Walker Tiller

In the paper, "Interest Rates in the North and Capital Flows to the South:Is There a Missing Link?" there is an interesting discussion between the fact that interest rates raised in the US for example leads to tightening on capital lending to developing countries in emerging markets. This is an interesting paper to discuss especially in the recent development of the Fed finally deciding to raise rates by a little this year and the plan to continue raising rates soon. This in combination with the unknown's about President Elect Trump's policies for the future and the stock markets positive reactions to his election causes a lot of uncertainty about the future of capital available for the emerging markets. In the past raising interest rates would hurt the emerging markets in search of capital but this is all uncharted territory for the debt and equity markets and will be interesting to follow over the next four years. The markets immediate reaction was negative but followed the rest of the week with extremely positive growth. This could be exciting for the global market as investors become more confident and active in looking for different investments including emerging markets.

Alex Shields

To begin with, the conclusion that access to loans makes people less likely to focus spending on temptation goods surprised me, at least initially. My first thoughts were that the additional money from a loan would allow people to focus more of their take home money on temptation goods because they have more money in total to spend. After thinking about it for a little, I considered the risk that would come with taking a loan, especially in developing countries, and realized that a person willing to take that risk will likely put all this money towards their business in order to be able to pay back their loans. At the same time, I felt like after all our conversations in class about the potential impacts of increased finance access for poor people, this paper would find more evidence that access to financial resources would improve the lives of the poor in developing countries. Instead the paper found that there were very little impacts on social issues like healthcare, education and women's empowerment.

I found the conclusions from this paper to be very interesting in comparison to some of the other readings we have done. This paper takes a lukewarm stance to the question at hand whereas others often are actively trying to convince you that their findings are a breakthrough in the understanding in development economics. It was once again refreshing to find another group of economists saying that one-size-fits-all policies will not be impactful but rather each individual policy must be tailored according to each individual sitation.

Cara Hayes

“Latest Findings from Randomized Evaluations of Microfinance” speak volumes to how strong the cycle of poverty actually is. In almost all topics we have covered in class so far, lack of access to credit markets is one of the most common characteristics of impoverished households. Three of the four biggest constraints facing those working in agriculture in developing countries are related to this. Amartya Sen even identified economic facilities as its own distinct type of freedom. It is clear that functioning markets and the ability to obtain credit are very important in regards to development. The idea of lending money to families who lack collateral and credit or access to financial institutions seemingly has so much potential in achieving these goals.

For these reasons, the results of this research were very surprising to me. The authors found that microfinance has no observable impact on measures of health, education and female empowerment. Furthermore, the groups that benefited the most from increased access to credit were men in high-income quintiles who weren’t even targeted by microfinance institutions. The other forces contributing to poverty are so strong that supplying microfinance is not enough to release an individual from the poverty trap. This sentiment is captured by the fact that “poor people face various limits, and their ability to capitalize on opportunities varies greatly” (19). Overall, I found the findings of this report to be very disheartening but think that the conclusion the authors came to, that microfinance should be studied and applied at the individual level, shows promise.

Ololade Rachel Oguntola

When you come from a developing country, microfinance is not far from the word on the street. It is much talked about by both the rich and poor and how this new concept can truly help in alleviating poverty. While reading Bauchet’s et al’s ‘Latest Findings from Randomized Evaluations of Microfinance”, I was particularly struck by how the results show that microcredit is not necessarily the whole answer to reducing poverty. From the study, it showed that microfinance did little to empower women or improve access to health or education. It is however important to understand that microfinance by way of providing financial services to low-income people should not be entirely dismissed. Inasmuch as the studies have shown that certain areas that are key to promoting development i.e. health, education and women empowerment are not necessarily improved by microfinance, microfinance has sure contributed to the lives of many poor families across the developing world. If it did not, there would hardly be any talk about it, over-hyped as it may be.

It is therefore important to look into the design of the financial services and identify the best ways in which a case by case strategy can be designed. This way, the talk will shift from a general idea that microfinance alleviates poverty to a more specific idea of what type of microfinance can contribute significantly to development in a way that really targets health, education and women empowerment. By not exercising a one-size-fits all model, we avoid the trap that assumes that microfinance works for poor people in all developing countries. As we have learned over the weeks, all poor people are not the same. While some may be interested in business ideas, others may simply want to improve their living conditions. The onus is now on MFIs in different developing countries to really understand their customers and understand their priorities. By so doing, financial services for poor people can evolve and truly contribute in alleviating poverty and improving standards of living.

Spencer Payne

Even though we have already discussed the Latest Findings from Randomized Evaluations of Microfinance, I wanted to write my blog post about something that occurred to me after class.

Many of the findings presented in the paper are interesting. However, I was particularly intrigued by the fact that default rates were the same regardless of whether loans relied on individual liability or group liability. I think this says a lot about (1) why those seeking microfinance default on loans and (2) their social values.

Regarding point one, I assume that default rates are a function of the risk associated with the way in which people choose to spend and/or invest the money they attain from a loan. And, for the sake of argument, I also assume that the loan conditions (e.g. interest rate, grace period, etc.) are the same across individual and group liability loans. Given these two caveats, I do not think it would be unreasonable to suggest that loan-seekers predominantly default for reasons out of their control. After all, when we assume that default rates correlated with investment risk, comparable default rates imply that people are investing similarly regardless of whether their loan is predicated on the notion of individual or group liability. But perhaps more importantly, comparable default rates suggest that a loan-seeker’s motivation to pay off his/her loan does not waver in the case of a group liability arrangement.

This leads me to my second point — that it appears the peer-pressure principle overrides the free-rider principle in the case of microfinance. By this, I mean that loan-seekers feel such a strong social responsibility to pay off their loans that they appear to be unwilling to take additional risk at their group’s expense. I think this implication is fascinating, because I doubt we would see a similar trend in more developed countries. And I would be curious to see if any literature examines question further.

Jillian Leigh

The first economists to study the effects of interest rates in the US on developing countries focused on finding one explanation, just like the title of this paper suggests, "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link." Eichengreen and Mody explain that initially there were two views on this topic. The first, "if the price and availability of foreign finance depend largely on conditions of the capital-importing countries…, then the borrowers should be able to regulate inflows by adopting the appropriate policies," (pg. 2). The second view, "If…the price and availability of funds depends heavily on external financial conditions,… then emerging markets may find themselves alternatively swamped by and starved of foreign capital," (pg.2). Then in the conclusion of the paper the authors state, "In sum, the fact that both supply and demand responses have been important and that the balance between them has differed by region and between fixed- and floating-rate issues goes a long way toward explaining why previous analyses which have overlooked these distinctions have failed to identify an interest-rate effect," (pg.24). What this paper has concluded is that there is not on missing link to explain the effect of interest-rates. The two views introduced at the beginning of the paper neglected to realize is that there isn't just one overarching effect, the effects are very situational. This is a theme that I have noticed after reading many of the articles this term. The reason that the Washington Consensus didn't work was because it focused on one way to help developing countries rather than individualized programs that incorporate the differences of each country. The economists mentioned in the beginning of this paper supported either the first view or the second view. What they missed was that they were both wrong because some of the country's results supported their view while others supported the other. This just proves again that there isn't just one missing link, rather a unique one for each country.

Matt Parker

In Barry Eichengreen and Ashoka Mody's paper, they examine the relationship between interest rates and capital flow between emerging and industrialized markets. What they discovered, is that contrary to popular belief, it is not merely a demand issue or supply issue. That is to say, the flow of capital can not be traced back solely to the financial conditions of a specific side of the market. Eichengreen and Mody dispel the notion that it is solely the conditions of the emerging market or solely the conditions of the developed market that dictate capital flows. There is not a single missing link but rather nuances and complexities of the market at the time that lend itself to more favorable conditions for capital outflow. What struck me reading this paper is that here lies another example of when our models don't paint the entire picture (they are not supposed to) but yet they still serve to influence monetary policy. Here we see that as always, the real story is far more complex and so each case must be taken at face value, examining global context in order to determine the best course of action (best here applying both to emerging markets looking for foreign capital and foreign markets supplying the capital.)


We studied microfinance institutions in my social entrepreneurship class, focusing mainly on Banco Compartamos in Mexico. BC started as an NGO and slowly became a commercial bank. They were constantly seeking more funds to loan out, so they became interested in going public and becoming a for-profit organization. BC claimed the move increased their access to investors, allowing them to scale up their business and serve more people in Mexico, while keeping their cost of capital low – and interest rates low. The goal of MFIs is to keep their costs down, so their cost of capital needs to be as low as possible, in addition to their transactions costs which include the cost associated with lending the money (storefront, employees etc.) Critics argue that it will be much harder to not raise the interest rates now that there are shareholder seeking profits, and the larger public company will certainly require higher transaction costs as the bank moves up into larger corporate offices. Muhammad Yunus responded with “just because they are willing to pay does not justify it, that is if you call it microcredit, cause microcredit has a philosophy, a purpose, to help people get out of poverty.” He and many other skeptics believe it is impossible for an organization to keep the social mission of microcredit while seeking profits. This week’s reading on microfinance points out the importance of the design of MFIs. It is clear that the programs can be designed to be more beneficial to the lenders of the borrowers through the repayment periods or group liability aspect. One would hope the social mission of the MFI would guide its decision into create the most beneficial situation for the borrowers, but we already see that that is not the case. With the introduction of for-profit MFIs, it is interesting (maybe scary) to see how programs will be designed to meet the needs of the borrowers or the shareholders. This whole case study emphasizes the questionable role of business in economic development. I can’t really pinpoint what someone like Sen would think of this particular organization. While they are providing a much needed service, it could be that they are exploiting uneducated people into unfavorable transactions.

Ella Rose

I found the reading on micro-credit particularly fascinating. It seemed like the article was written to a person exactly like me. I was one of those people who grew up loving the idea of micro-financing. The headmaster at my high school was on the board of a micro-financing nonprofit. We learned all about its processes and had guest speakers come in to tell us all the merits of this strategy for poverty alleviation and women's empowerment. When I was a senior, my final project for economics class was to start a business (using a small loan) and make a profit over the course of a month. All the proceeds were donated to Hope International, this micro-financing company. No one ever talked about the shortcomings, and I went on assuming that micro-financing was THE solution to kickstarting economies in developing countries. So naturally, I found this article very interesting. I think a part of the reason no one ever talks about the shortcomings or downsides to this kind of finance is because it logically seems like it is going to work. Looking at human nature, it seems to obvious that for a normal economy full of rational people, that there would be no way to have a bad outcome. But herein lies the problem. There are so many more factors and barriers that prevent people from acting in a rational way, or for an economy to behave "normally." Micro-finance has such a strong story behind it, and very convincing anecdotal evidence. I am glad people have pushed beyond that to actually review the outcomes and try to improve this business.

I still believe that micro-financing is a valuable asset for a community. It requires careful thought and planning, and creative solution to cultural restraints. And it most certainly requires careful evaluation and the flexibility to change based on findings.

Charlotte Braverman

Eichengreen and Mody’s paper, “Interest Rates in the North and Capital Flows in the South: Is There a Missing Link?” made me think a lot about what we’ve been discussing in my intermediate macro class. Eichengreen and Mody contest the prevailing notion that capital flows to developing nations are not terribly sensitive to interest rates and ultimately, their research suggests that the interaction between the supply and demand side for this capital has somewhat obscured any effects due to changes in the interest rate. They conclude that interest rates in industrialized countries do in fact affect capital flows to developing countries.

With regards to the Keynesian theory we have been studying in intermediate macro, we have talked a lot about how the flow of financial capital around the world is highly sensitive to interest rates. If this is true, Eichengreen and Mody argue, “emerging markets may find themselves alternatively swamped by and starved of foreign capital” (Eichengreen et al, 2). Conversely, Keynes argues investment in plant and equipment is dependent on a whole host of things and much less sensitive to changes in the interest rate. Therefore, the Keynesian framework may have interesting implications for foreign direct investment and though FDI is not discussed in this paper, it too is often thought to be a critical piece of modern economic development. While the flow of capital to emerging markets may be vulnerable to changes in the interest rate, it seems possible from a Keynesian perspective that FDI may be more stable and resilient.

When crafting potential policy responses to the issue of volatility due to changing interest rates, the question then becomes which is more important: capital flows or FDI? If these capital flows are thought to play a critical role in the successful development of emerging markets, it might make sense for developing countries to impose the capital-inflow taxes that Eichengreen and Mody mention. However, if more consistent FDI can mitigate the effects of changing capital inflows, it may make more sense to focus instead on policy that encourages FDI.

David Cohen

After reading Eichengreen and Mody’s paper, I can definitely comment on their findings that interest rates in the US, the largest economy in the world, has a significant impact on developing countries. I can relate this article to Professor Davies’ International Finance class. Based on an international dependence variation of the Mundell-Flemming Model, I can support the idea that US interest rates will have an effect (at least theoretically) to output in another economy.

When US interest rates fall, this usually creates an excess demand for foreign currency, depreciates the exchange rate, and makes US exports more attractive. One way the US can make this happen is by enacting expansionary monetary policy. This leads to a shift outward of the LM curve (shifting our output out and interest rates down). Our increased income will then lead to a small increase in exports for the foreign country because we are able to import more of their goods. The resulting excess demand for foreign currency leads to a shift out in our IS curve due to a depreciated exchange rate and increased exports. However, the foreign country’s exports will decrease sharply, causing a shift back in the IS curve further than it originally shifted out (leaving this country with a lower interest rate and output). This is why expansionary policy is seen as a “beggar-thy-neighbor” policy, because you essentially steal demand from foreign countries. This is also why all countries drove interest rates into the ground during the financial crisis (and they are mostly still there). If one had graphs to accompany my explanation, he/she could clearly see that lower interest rates usually spell poorer economic performance for the rest of the world. However, if the US enacts expansionary fiscal policy, this results in a rise in output for both the US, as well as the rest of the world.

The finding in the article seems to be opposed to the general view that free market and free trade economic policies akin to ours, and championed in the Washington Consensus, are the way for poorer countries to achieve growth. This finding also seems to validate views that impoverished countries are trapped in an inescapable cycle, whose fate is dependent on the developed world. The Mundell-Flemming model seems to support the second idea here (and prove that those who adopt a floating exchange rate) often end up worse when the United States Federal Reserve enacts expansionary monetary policy.

Corey Guen

As with nearly all conclusions to rigorous economic (or any other social science) analysis, Eichengreen and Mody’s paper “Interest Rates in the North and Capital Flows in the South: Is There a Missing Link?” posits that the rigid hypotheses presented in the introduction are never the only answer, but instead a combination of multiple nuanced factors. In this case, the authors determined that capital flows to developing countries are neither solely the product of wealthy countries’ interest rates, nor solely the product of developing countries’ policies and behavior. The authors, as well as several of my classmates, acknowledge the potential economic impact that monetary policy decisions have on developing countries, so I will focus on a more moral question, and relate it to a class discussion I had while abroad in New Zealand. This was a global political economy course, and the article in question discussed countries who choose to “dollarize”, that is to peg their volatile currencies to the US dollar. Argentina has discussed this action before, and Ecuador, El Salvador, and Zimbabwe among others are currently dollarized nations. The article, written from a Latin American perspective, raised the issue of being at the whim of US monetary policy, and the struggles that can bring when the US has actively denied dollarized nations input in policy decisions. While one could argue these nations made a conscious choice to peg their currencies to the dollar, I would stop short by referencing the evidence for in Eichengreen and Mody’s article. Despite the fact they found US interest rates to not be the sole determinant of capital availability in developing countries, the decisions of the largest economy in the world have far reaching effects, and oftentimes acting in self-interest results in the phenomenon David Cohen described as “beggar-thy-neighbor policy”, in which demand is essentially stolen from other countries. I find too often Americans are so concerned with our domestic issues we fail to reflect on the impact our decisions have on those who live around the world; we tend towards the mindset that our decisions affect those of us within US borders, especially when it comes to decisions like monetary policy. I don’t mean to argue that Ecuador should suddenly have an equal say at the Fed simply because it relies on our currency’s stability, but I do think both the dollarization article, the Eichengreen article and even our recent Presidential election are evidence that more thought should be given to the ripple effect our decisions have. As the largest economy and most politically influential nation on Earth, it is naïve to assume our decisions and their effects are confined within US borders and to US citizens.

Pearce Embrey

Eichengreen and Mody's "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?" really dove into the empirics of determinants of international finance. I think that their study is very important, as it is able to draw substantial conclusions regarding the relationship between the supply of international credit and the demand for developing-country debt. I think that this research is particularly interesting, because it goes beyond the traditional notion of direct foreign investment. The most striking point of the article, to me, is that there are a number of reasons why some developing-countries may not choose to borrow from more industrialized nations. The study of economics deals a lot with the idea of incentives, and I wonder if there is a way to incentivize the developing-countries into borrowing, even if the interest rates are relatively high. I understand the initial hesitation on the part of the developing-countries, but they are in need of some sort of financial influx to jump-start their economies.

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