Jean-Louis Arcand is the director of the department of international economics at the Graduate Institute of International and Development Studies (Iheid) in Geneva. Specialized in microeconomics of development, he has conducted numerous evaluation studies of development projects in Africa.
Is inclusive finance a new response to the challenges of poor countries?
Issues of consumption smoothing and risk management are omnipresent when looking at households in developing countries. In essence, we ask about the mechanisms used by poor people to avoid being hungry before the harvest or having too much food afterwards. Most of the answers available are informal. By storing sorghum in small huts on stilts to prevent rats from eating it, Burkinabe villagers save money. Financial institutions that allow savings or insurance only replicate mechanisms that have always existed. We know, for example, that the Romans already insured their ships and that forward contracts were used as early as the Renaissance. Microfinance and access to banking services are a small component of all these mechanisms that make it possible to cope with the vagaries of life.
Is formalizing these practices necessary?
Any shock-proofing mechanism that can be made available to poor people has the potential to improve their well-being. But we must be aware of several realities. First of all, when introducing a new mechanism, there are almost always winners and losers. For example, it has been shown that the availability of reliable weather forecasts in India leads to higher wages for agricultural workers when good weather is expected, because the demand for labor is higher: this is a good thing for landless workers, but bad for small landowners, who are often just as poor. These protection mechanisms must therefore be designed to cover the needs of different categories of the population. Then, it is not enough to introduce formal mechanisms for them to be adopted. People need to have confidence in economic institutions in the broad sense. Without a functioning regulatory environment and judicial system, the instruments of financial inclusion will not change anything, because they will not be used.
To contribute
The contribution area is reserved for subscribers.
Subscribe to access this discussion space and contribute to the discussion.