Source: OHIO STATE UNIVERSITY submitted to NRP
FORMAL AND INFORMAL FINANCIAL MARKETS, HOUSEHOLD RISK MANAGEMENT, POVERTY TRAPS AND RESOURCE DEGRADATION
Sponsoring Institution
National Institute of Food and Agriculture
Project Status
COMPLETE
Funding Source
HATCH
Reporting Frequency
Annual
Accession No.
0198168
Grant No.
(N/A)
Cumulative Award Amt.
(N/A)
Proposal No.
(N/A)
Multistate No.
(N/A)
Project Start Date
Oct 1, 2009
Project End Date
Dec 31, 2010
Grant Year
(N/A)
Program Code
[(N/A)]- (N/A)
Recipient Organization
OHIO STATE UNIVERSITY
1680 MADISON AVENUE
WOOSTER,OH 44691
Performing Department
Agriculture, Environment and Development Economics
Non Technical Summary
A search for risk management tools is at the core of economic development policy concerns. Particularly threatening are systemic shocks. First, differential access to financial and insurance markets may influence the impact of the global financial crisis on various groups of the population. While increased access to credit may lead to over-indebtedness, those who accumulated financial savings may suffer smaller welfare losses. Research will assist the authorities in identifying vulnerable segments of the population and in designing efficient interventions. Second, sharp food and fuel price increases created additional challenges for consumption smoothing among the poor and the demonstration of their creditworthiness. The costs of income and consumption smoothing sharply increased. The link between missing financial and insurance markets and poverty traps became stronger. Efficient financial markets will be critical in food supply shifts and the income generation that allows food market participation. While some governments have reinstated subsidized, target credit programs, OSU has identified their weaknesses. Instead, innovations in financial technologies, incentive-compatible institutional designs, and appropriate prudential regulation are needed. An understanding of the connection between finance and insurance and the adoption of new plant varieties that are less vulnerable to drought, less dependent on chemical fertilizer, and more focused on the poor will be critical for food security. Third, the impact on poor farm-households of major storms and drought is a policy concern. Farm incomes increasingly depend on climate shocks, as the global environment changes. The frequency and severity of catastrophic shocks have particularly harmful impact on credit portfolios and cultures of repayment. Government reactions (e.g., loan repayment moratoriums) increase moral hazard. There are, however, promising innovations in financial and insurance markets. The microfinance revolution illustrates how new financial technologies allow substantial expansion of the frontier of finance. Experiments in index insurance show how to address catastrophic risk in a cost-effective manner. The superior performance of microfinance institutions during systemic shocks has revealed lessons about innovations in financial technologies, institutional designs, and regulation frameworks. OSU has been a leader in the identification of these lessons. The one weakness of these new institutions has been their limited ability to diversify against systemic risk. Traditional insurance markets have not been able to offer affordable instruments to cope with these events either. Financial institutions, processors, exporters, and growers potentially demand new insurance products that can address these types of risks. OSU has been a leader in the development of new index insurance products. The revised project will explore the combined effect of innovations in financial and in insurance markets in modifying the behavior of household-farms and financial institutions and in influencing the final resource allocation and consumption smoothing outcomes.
Animal Health Component
50%
Research Effort Categories
Basic
20%
Applied
50%
Developmental
30%
Classification

Knowledge Area (KA)Subject of Investigation (SOI)Field of Science (FOS)Percent
6096199301020%
6026050301030%
6116199301050%
Knowledge Area
602 - Business Management, Finance, and Taxation; 611 - Foreign Policy and Programs; 609 - Economic Theory and Methods;

Subject Of Investigation
6199 - Economy, general/other; 6050 - Communities, areas, and regions;

Field Of Science
3010 - Economics;
Goals / Objectives
The goal is to develop conceptual and methodological frameworks for empirical research and policy applications about financial markets and risk management tools in poor countries. The project provides research-based criteria for policy interventions that enhance the performance of financial markets and institutions. It looks at critical linkages between formal and informal financial arrangements, the persistence of rural poverty, and strategies used by poor farm-households and the financial institutions that reach them in anticipating and coping with risk. Early, the project focused on household behavior in countries with major climate or market shocks and where markets and institutions do not offer efficient tools for risk management. Later, it examined responses to a broader set of systemic shocks, including political and macroeconomic instability. It focused on the behavior of various types of financial institutions that reach the poor and the rural areas. The revised project will explore the combined effect of innovations in financial and in insurance markets in modifying the behavior of household-farms and of financial institutions and in influencing resource allocation and consumption smoothing outcomes. In particular, the project will look at changes in borrower and in lender behavior from the introduction of index insurance. Among key questions to examine are changes in financial market participation and loan portfolio outcomes, depending on who purchases the insurance: the producer-borrower or the intermediary-lender.
Project Methods
The revised project will develop conceptual frameworks, missing so far, for the analysis of the joint influence of insurance and finance. Given this framework, empirical observation of household-farm and financial institution behavior in poor developing countries will allow testing of hypotheses. Field pilot projects will explore operational challenges. Efficient mechanisms for systemic risk management are at the core of economic development policy concerns. First, not much is known about what segments of the poor population have experienced greater income shocks from the global financial crisis and they are coping. Research will identify how differential access to financial services impacts vulnerable groups,help design appropriate interventions, and offer guidelines in the design of new regulation. Second, sharp increases in food and fuel prices create challenges for consumption smoothing and the demonstration of creditworthiness.Without well-functioning financial and insurance markets, the costs of income and consumption smoothing have sharply increased. Research will explore the intersection between food security and financial market development. Finance will be key in food supply shifts and in generating incomes that entitle participation of the poor in food markets. For this, the project has emphasized the importance of innovation in financial technologies, incentive-compatible institutional designs, and appropriate prudential regulation. PI Gonzalez-Vega (Executive Board member in CGIAR Generation Challenge Program)will explore links between the adoption of new plant varieties less vulnerable to drought, less dependent on chemical fertilizer, and more focused on the poor and access to finance and insurance. Third, farm incomes are increasingly dependent on climate shocks (El Nino), as the global environment changes and poor farmer survive in fragile habitats. Storms, drought, and other events will have harmful impacts on consumption smoothing, credit portfolios, and cultures of repayment. Access to credit will decline. But, the microfinance revolution illustrates the success of innovations in financial technologies. The Rural Finance Program at OSU has been involved in the design and analysis of many microfinance interventions. One weakness of these institutions has been their limited ability to diversify against systemic risk. Traditional insurance has not offered affordable instruments to cope with these events. Financial institutions, processors, exporters, and growers potentially demand new insurance products that address these types of risk. OSU has been a leader in the development of new index insurance products. Once hypotheses about behavior are derived, field research in Bolivia, Peru and Mexico and, as complementary funding becomes available, in other parts of the world, will allow both the testing of these hypotheses as well as the exploration of opportunities for policy dialogue with the authorities of these countries. The goal is to speed up the incorporation of research results into policy interventions, by identifying actual constraints to the implementation of the new financial and insurance products.

Progress 10/01/09 to 12/31/10

Outputs
OUTPUTS: From its start in October of 2009, the revised project developed new conceptual and methodological frameworks for empirical research about financial markets and risk management in low-income countries and for the adoption of research-based criteria for policy interventions. Among recent research outcomes have been two completed dissertations, four dissertations in progress, and a thesis. Two of them offered insights about interactions among international remittances, public sector conditional cash transfers, and financial markets, in influencing household behavior. Hernandez studied the impact of conditional cash transfers and remittances on credit markets, using survey data from Nicaragua and Bangladesh. Svarch examined if conditional cash transfers influence credit market outcomes, using household data from Mexico. Both developed frameworks that allow transfers and loans to be complements, rather than substitutes. Svarch added to results about Mexico, from the preceding project, which explored the impact of access to deposit facilities on human capital formation (Garcia de la Cruz) as well as determinants of the performance (technical efficiency) of microfinance organizations (Martinez-Gonzalez). These results, amply disseminated through OSU's partnership with leading Mexican universities (CIDE and COLPOS), have been discussed with Mexican authorities and led to policy actions at the Ministries of Agriculture (PATMIR) and Economy (Pronafin). In turn, Barquero-Romero explored motivations and the choice of channel for migrant remittances, using data about Costa Rica-Nicaragua South-South flows, and results have been disseminated through OSU's partnership with Academia de Centroamerica and the Central Bank of Costa Rica. Svarch is now exploring the interaction between village informal risk-pooling arrangements and the introduction of formal financial markets, while Guizar-Mateos is analyzing the impact of access to finance for small and micro entrepreneurs. Gonzalez-Vega addressed the impact of the global financial crisis, as a major systemic shock, on microfinance clients and institutions and extracted lessons for financial regulation. Using data from Bolivia, Gonzalez-Vega and Villafani examined the evolution of banks, microfinance organizations and other financial intermediaries in the long-term, to examine their comparative performance along the various stages of the cycle and design optimum prudential interventions. Additional analysis built on work by Gonzalez on over-indebtedness. These results attracted the attention of regulators and international organizations and were presented at over a dozen key international meetings (Bolivia, Colombia, Costa Rica, Italy, Mexico, Peru, Spain, the USA, among others). Miranda and Gonzalez-Vega explored the role of index insurance in addressing systemic risk in the optimal management of agricultural loan portfolios in developing countries. The new theoretical framework developed for this purpose was presented at the meeting of the Allied Social Sciences Association in January of 2010. Several journal articles have been published. PARTICIPANTS: P. Banerjee was no longer associated with the revised project. The key collaboration was between C. Gonzalez-Vega (Principal Investigator) and M. Miranda. This collaboration allowed a merging of perspectives about financial and insurance markets from which unusual synergies emerged. A. Sam and J. Chen played important roles in dissertation committees. Graduate students A. Ali (from the Central Bank of Pakistan), Dr. J.P. Barquero-Romero (now at the Central Bank of Costa Rica), M. Garcia de la Cruz (PATMIR), Dr. A. Gonzalez (now at the MIX Market), I. Guizar-Mateos, Dr. E. Hernandez (now at UNIDO, Viena), A. Martinez-Gonzalez (now at FAO, Mexico), R. Romero, M. Svarch, and Dr. M. Villafani-Ibarnegaray (now at University of Santa Cruz), all in the Department of Agricultural, Environmental and Development Economics, have played key roles in the research. Dr. N. Khare, from the Fisher School of Business and now a professor at the University of Dubai, researched the microfinance strategies of Indian banks. Formal collaborations were developed, funded by USAID, with the Centro de Investigacion y Docencia Economicas (CIDE) and the Colegio de Posgraduados (Colpos) in Mexico. Long-term collaborations with Academia de Centroamerica (in particular with Dr. Luis Mesalles and Rodolfo Quiros, both OSU alumni) and the Central Bank of Costa Rica (Roger Madrigal, OSU Ph.D.) were sustained. Training and exchange collaborations emerged with the University of Bergamo, Italy (with Davide Castellani as visiting scholar), the Autonomous University of Madrid, Spain, and the Microfinance Training Programs of the Boulder Institute of Microfinance and the International Labor Organization in Turin, Italy. Interactions with FAO in Rome were sustained. TARGET AUDIENCES: At the theoretical level, key audiences have been scholars interested in financial and insurance markets in low-income countries and impacts on rural households. Another key audience have been policymakers in developing countries (particularly Bolivia, Costa Rica, Peru and Mexico), who have learned about research results and have asked for policy advice. Participants in numerous microfinance, rural finance, and risk management training programs around the world and in international conferences on these topics have used case studies and lessons derived from this research. PROJECT MODIFICATIONS: The global crisis made the threat from systemic shocks evident, as low-income countries faced the consequences of greater volatility in globally integrated financial markets. The role of differential access to financial markets in determining the impact of the crisis on various groups is being debated. Not much is known, however, about what segments of the urban and rural populations experienced greater negative (or even positive) income shocks and how the tools at their disposal allow them to cope with these shocks. Also, little is known about domestic financial market responses to these shocks. The food and fuel price increases created additional challenges for consumption smoothing by poor households and for demonstrating their creditworthiness. In the absence of well-functioning financial and insurance markets, the costs of income and consumption smoothing increased and the link between missing financial and insurance markets and poverty traps became stronger. Additional research is needed to explore the intersection between food security and financial market development. Farm incomes are also increasingly dependent on climate shocks. The impact on poor farm-households of major storms, droughts, and other disturbances, which are expected to grow more severe with global warming, is also a policy concern. At the same time, there are important changes in rural financial markets and promising innovations in insurance markets. The microfinance revolution illustrates how innovations in financial technologies allow substantial expansions of the frontier of institutional finance. The Rural Finance Program at OSU has been involved in the design and analysis of many of these microfinance interventions. In turn, experiments in index insurance are showing the way for future ways of addressing catastrophic risk in a more cost-effective manner. OSU has also been involved in the design and analysis of these efforts. The revised project explored the combined effect of innovations in financial and insurance markets in modifying the behavior of household-farms and financial institutions and in influencing resource allocation decisions and consumption smoothing. The project looks at the simultaneous changes in borrower and lender behavior from the introduction of index insurance.

Impacts
Project results have influenced interventions that enhance the performance and impact of financial markets. The significant impact of remittances and conditional cash transfers, both on the demand for credit and on the evaluation of the creditworthiness of the beneficiaries (with a positive shift of the supply of credit) has alerted policymakers about the potential influence of these programs on financial markets. Given the potentially beneficial impact on financial markets identified by the empirical research, regulation has been revised to reduce the transaction costs of remittances. The disbursement of conditional cash transfers has been linked to ambitious deposit mobilization programs in Colombia, Mexico and Peru (under the leadership of Gomez-Soto, OSU Ph.D.) Prudential regulators in Latin America have revised norms, in order to capture the differential risk profile of microfinance portfolios and resolve regulatory asymmetries. The analysis of how index insurance can be used, not directly by farmers but rather by banks and rural finance organizations and other entities that implicitly insure large numbers of small farmers, to address systemic risk (from drought, floods and other catastrophic weather shocks), and thereby expand the supply of their services to populations so far excluded from access, has stimulated the development of specific insurance contracts in Peru and will do shortly elsewhere. The critical insight of Miranda and Gonzalez-Vega is that if banks, rather than individual farmers, purchase the contract, this reduces basis risk and makes the intervention profitable for the financial intermediaries. Moreover, it would help stabilize the bank's equity and reduce regulatory costs. Gonzalez-Vega has also explained how the transactional lending technology of microfinance organizations does not suffer from the conflicting incentives that have eroded financial markets during the global crisis. Microfinance is not, therefore, sub-prime. This observation has major implications for the way microfinance portfolios should be regulated. It also offers lessons about the role of credit scoring and other depersonalized lending technologies. This complements the work of Hartarska and Gonzalez-Vega, in the earlier project, about the role of social capital in US mortgate markets. The evaluation of the long-term role of microfinance institutions in the development of financial systems in countries with low incomes and incomplete institutions has attracted attention to the challenges and opportunities for the future of microfinance. As a result of this analysis, foreign experts now frequently visit Bolivia, to learn on the ground about these achievements and their determinants.

Publications

  • Claudio Gonzalez-Vega and Marcelo Villafani-Ibarnegaray (2010). Microfinance in Bolivia: Foundation of the growth, outreach and stability of the financial system. In Beatriz Armendariz and Mark Labie (eds.). Handbook of Microfinance. London: World Scientific Publishing Ltd.
  • Valentina Hartarska, Claudio Gonzalez-Vega and Dennis A. Nadolnyak (2010). Does social capital affect mortgage loan termination by low-income homeowners Social Sciences Research Network (http://ssrn.com/abstract=1726566)
  • Gonzalez-Vega, Claudio and Marcelo Villafani-Ibarnegaray (2010). Las microfinanzas en el sistema financiero de Bolivia. Evolucion, situacion actual y perspectivas. Santiago de Chile: Seccion de Estudios del Desarrollo, CEPAL.
  • Claudio Gonzalez-Vega (2010). El futuro de las microfinanzas. Federacion Peruana de Cajas Municipales de Ahorro y Credito. Lima, Peru.


Progress 01/01/09 to 12/31/09

Outputs
OUTPUTS: The project develops conceptual and methodological frameworks for empirical research and policy applications about financial markets and risk management in development countries. Two dissertations and a thesis offered insights about the interactions between international remittances, public sector transfers, and credit markets in influencing household behavior. Hernandez studied the impact of conditional cash transfers and remittances on credit markets, using survey data from Nicaragua and Bangladesh. Svarch examined if conditional cash transfers influence credit market outcomes, using household data from Mexico. Barquero explored motivations and the choice of channel for migrant remittances, using data about Costa Rica-Nicaragua flows. Miranda and Gonzalez-Vega explored the role of index insurance in addressing systemic risk in the optimal management of agricultural loan portfolios in developing countries. The impact of the global financial crisis on microfinance was examined by Gonzalez-Vega and Villafani, with special reference to Bolivia. Results were presented at a dozen international conferences and professional meetings. PARTICIPANTS: Banerjee is not longer associated with the project. The key collaboration has been between Gonzalez-Vega (Principal Investigator) and Miranda. This collaboration has allowed a merging of perspectives on financial and insurance markets. Chen and Sam have played important roles in dissertation committees. Graduate students Hernandez, Barquero and Svarch, in the Department of Agricultural, Environmental and Development Economics also played key roles in the research. TARGET AUDIENCES: The key audience have been policymakers in developing countries (particularly Bolivia, Peru and Mexico), who have learned about research results and have asked for policy advice. Participants in microfinance, rural finance, and risk management training programs around the world and in international conferences on the topics have used case studies and lessons derived from this research. PROJECT MODIFICATIONS: The global crisis made the threat from systemic shocks evident, as low-income countries faced the consequences of greater volatility in globally integrated financial markets. The role of differential access to financial markets in determining the impact of the crisis on various groups is being debated. Not much is known, however, about what segments of the urban and rural populations experienced greater negative (or even positive) income shocks and how the tools at their disposal allow them to cope with these shocks. Also, little is known about domestic financial market responses to these shocks. The food and fuel price increases created additional challenges for consumption smoothing by poor households and for demonstrating their creditworthiness. In the absence of well-functioning financial and insurance markets, the costs of income and consumption smoothing increased and the link between missing financial and insurance markets and poverty traps became stronger. Additional research is needed to explore the intersection between food security and financial market development. Farm incomes are also increasingly dependent on climate shocks. The impact on poor farm-households of major storms, droughts, and other disturbances, which are expected to grow more severe with global warming, is also a policy concern. At the same time, there are important changes in rural financial markets and promising innovations in insurance markets. The microfinance revolution illustrates how innovations in financial technologies allow substantial expansions of the frontier of institutional finance. The Rural Finance Program at OSU has been involved in the design and analysis of many of these microfinance interventions. In turn, experiments in index insurance are showing the way for future ways of addressing catastrophic risk in a more cost-effective manner. OSU has also been involved in the design and analysis of these efforts. The revised project explores the combined effect of innovations in financial and insurance markets in modifying the behavior of household-farms and financial institutions and influencing resource allocation and consumption smoothing. So far, the project has researched the influence of access to financial services on household-farm behavior, including output combinations and production technology. There has been less research on the influence of access to formal insurance, particularly catastrophic insurance, on this behavior. There is nothing in the literature that examines the influence of insurance on the behavior of financial institutions. The project looks at the simultaneous changes in borrower and lender behavior from the introduction of index insurance.

Impacts
The analysis of how index insurance can be used, by banks and rural finance organizations and other entities that implicitly insure large numbers of small farmers, to address systemic risk (from drought, floods and other catastrophic weather shocks), and thereby expand the supply of their services to populations so far excluded from access, has stimulated the development of specific insurance contracts in Peru and will do shortly elsewhere. The critical insight of Miranda and Gonzalez-Vega is that if banks, rather than individual farmers, purchase the contract, this reduces basis risk and makes the intervention profitable for the banks. Gonzalez-Vega has also explained how the transactional lending technology of microfinance organizations does not suffer from the conflicting incentives that has underlied financial markets during the global crisis. Microfinance is not, therefore, sub-prime. This has had major implications on the way microfinance portfolios should be regulated. The significant impact of remittances and conditional cash transfers, both on the demand for credit and on the evaluation of the creditworthiness of the beneficiaries (with a positive shift of supply) has alerted policymakers about the potential influence of these programs on financial markets.

Publications

  • No publications reported this period


Progress 01/01/08 to 12/31/08

Outputs
OUTPUTS: Research focus, on the management of systemic risk by households and financial intermediaries, shifted from climate and natural disasters to macroeconomic and political instability and the international financial crisis. Valuable lessons about risk coping and management emerged from three dissertations and two theses completed in 2008. Pearson explored the role of private and public information in credit markets and of information sharing among lenders (credit bureaus)in reducing the risk of loan portfolios and increasing access to finance. Experiments (guided by Wu) were implemented to discover behavior of lenders and borrowers under varied information regimes. A. Gonzalez explored the determinants of loan repayment and overindebtedness over sustained episodes of systemic shocks and identified how microfinance borrowers engage in extraordinary costly actions to protect credit relationships. Panel data from 5,000 Bolivian households was used to test hypotheses. Villafani contrasted performance of banks and microfinance organizations under successive systemic shocks and recommended separating rather than pooling prudential regulation. C. Gonzalez updated this results for Bolivia. Garcia-de-la-Cruz (best 2008 thesis) examined the impact of access to deposit facilities for household risk management on schooling choices. A large significant impact of deposits (larger than for loans) was identified for a panel of Mexican households. Martinez identified determinants of the technical efficiency of microfinance organizations in Mexico. In a forthcoming thesis, Svarch explores the influence of conditional cash transfers on credit markets in Mexico. In dissertations in progress, Barquero examines influences of remittances on use of financial services by migrants and households of origin, while Hernandez explores the impact on financial market outcomes of household remittances and conditional cash transfers. C. Gonzalez and Maldonado published results of impact of microfinance on schooling. PARTICIPANTS: Southgate, Rodriguez-Meza and Banerjee are no longer associated with this project. As PI, Gonzalez-Vega has been working with graduate students: Pearson, A. Gonzalez, Villafani, Garcia-de-la-Cruz, Martinez, Barquero, Svarch, and Hernandez, while not funded, received training under the project. Quiros, from Academia de Centroamerica, in Costa Rica, and Maldonado, from Universidad de Los Andes, in Colombia, collaborated with the research. A partnership with the Centro de Investigacion y Docencia Economicas (CIDE), under the USAID-funded TIES program, has allowed strong collaboration in Mexico. TARGET AUDIENCES: Policmakers in several developing countries (Bolivia, Colombia, Mexico, Peru) have received policy advice. Participants in microfinance, rural finance, and credit risk training programs around the world have used case studies and lessons derived from the research. PROJECT MODIFICATIONS: Not relevant to this project.

Impacts
The Bolivian experience has become the standard case study for the analysis of the impact of systemic shocks on the differential performance of various types of financial intermediaries and it is being used in influencial training programs (Boulder Institute of Microfinance, ILO, University of Bergamo, Autonomous University of Madrid, OSU). Several entities of the Mexican Government (FIRA, PRONAFIM, Financiera Rural, PATMIR) have adopted recommendations about the promotion of microfinance and the development of rural financial markets in this country. OSU researchers have been at the center of debate about the appropriate regulation of finance for the poor in Mexico. The Food and Agriculture Organization has disseminated results about the impact of supermarket chains on credit markets.

Publications

  • R. Quiros and C. Gonzalez Vega, 2008. Institutional Transformation to Create Linkages that Enhance Rural Access to Financial Services. The Case of the Fundacion Integral Campesina in Costa Rica. In Maria Pagura (ed.), Expanding the Frontier in Rural Finance. Financial Linkages and Strategic Alliances, Rugby, England: Practical Action Publishing.
  • M. Falk, R. Quiros, and C. Gonzalez-Vega, 2008. Opportunities for the Creation of Linkages and Alliances to Expand the Supply of Rural Financial Services: The Jose Maria Covelo Foundation and its Partners in Honduras. In Maria Pagura (ed.), Expanding the Frontier in Rural Finance. Financial Linkages and Strategic Alliances, Rugby, England: Practical Action Publishing.
  • C. Gonzalez-Vega, 2008. Modern Value Chains: Towards the Creation and Strengthening of Creditworthiness, in Rodolfo Quiros Rodriguez (ed.), Agricultural Value Chain Finance, San Jose, Costa Rica: FAO and Academia de Centroamerica.
  • J. H. Maldonado and C. Gonzalez-Vega, 2008. "Impact of Microfinance on Schooling: Evidence from Poor Rural Households in Bolivia." World Development , Vol. 36, No. 11, pp. 2440-2455.
  • C. Gonzalez-Vega and R. Quiros, 2008. Strategic Alliances for Scale and Scope Economies: Lessons from FADES in Bolivia. In Maria Pagura (ed.), Expanding the Frontier in Rural Finance. Financial Linkages and Strategic Alliances, Rugby, England: Practical Action Publishing.


Progress 01/01/07 to 12/31/07

Outputs
OUTPUTS: Research concerns, on the management of systemic risk by households and financial intermediaries, were expanded from climate and natural disasters to macroeconomic and political instability. Lessons about risk coping and management emerged from the research. Two dissertations completed in 2007 and three to be completed in 2008 explore these issues. Alpizar examined impacts of shocks (earthquakes) on the technical efficiency of the set of productive activities of agricultural households in El Salvador. Household panel data (see earlier reports) and data envelopment analysis to measure production performance were used. Econometric analysis identified determinants of efficiency and difference-in-differences regressions examined changes in efficiency as a consequence of exogenous shocks. Access to deposit facilities accelerates improvements of efficiency over time and helps mitigate the impact of shocks on efficiency. Gomez-Soto examined the role of deposit facilities in holdings of precautionary wealth and consumption smoothing. Given systemic shocks, reductions in the transaction costs of depositors and improvements in the safety of deposits (prudential regulation and diversified loan portfolios)improve household welfare. A dynamic model explored portfolio choices when the price of livestock and bank deposit safety are correlated to income shocks. Pearson explored the importance of information sharing among lenders (credit bureaus)in reducing the risk of loan portfolios and increasing access to finance. Several experiments were implemented to discover behavior of lenders and borrowers under asymmetric information. A. Gonzalez has been examining the determinants of loan repayment and overindebtedness during sustained episodes of systemic risk and has identified the extent to which microfinance borrowers are willing to engage in extraordinary costly actions, to protect their credit relationships. Large panel data from Bolivian households have been used to test hypotheses. Villafani has contrasted the performance of banks and microfinance organizations under successive systemic shocks and has made recommendations on separating rather than pooling prudencial regulation frameworks. In two other dissertations in progress, Barquero is examining the influence of South-South remittances on the use of financial services by both migrants and the households of orign, while Hernandez is exploring the impact on financial market outcomes of household remittances and conditional cash transfers. Three Master's students have explored similar issues. Svarch has examined the influence on access to credit of conditional cash transfers in Mexico, Martinez has investigated the technical efficiency of microfinance organizations in Mexico, and Garcia has examined the role of access to financial services on schooling, in the presence of systemic shocks. Results about shocks from social unrest and political instability in Bolivia were published by Gonzalez-Vega and Gomez-Soto. Results on the superior performance of microfinance over banks were published by Gonzalez-Vega and Villafani. PARTICIPANTS: Southgate, Rodriguez-Meza and Banerjee are no longer associated with this project. As PI, Gonzalez-Vega has been working with graduate students C. Alpizar, F. Gomez-Soto, S. Pearson, M. Villafani, A. Gonzalez, E. Hernandez, J.P. Barquero, D. Sharma, M. Svarch, M. Garcia and A. Martinez. All these students have been funded with external grants related to the project. A partnership with the Centro de Investigacion y Docencia Economicas, under the USAID-funded TIES program, has allowed strong collaboration in Mexico. TARGET AUDIENCES: Nothing significant to report during this reporting period. PROJECT MODIFICATIONS: Research concerns, on the management of systemic risk by households and financial intermediaries, were expanded from climate and natural disasters to macroeconomic and political instability.

Impacts
The Bolivian Central Bank and Superintendence of Banks and Financial Entities has used results to define strategies to evaluate and anticipate liquidity and credit risks resulting from recurrent crises. Several entities of the Mexican Government (FIRA, PRONAFIM, Financiera Rural) have adopted recommendations about the promotion of microfinance and the development of rural financial markets. The Food and Agriculture Organization has disseminated results about the impact of supermarket chains on credit markets. Research on the role of deposit facilities and comparative performance of banks and microfinance organizations will contribute to the worldwide debate about which microfinance institutions should be regulated and how.

Publications

  • J. Maldonado and C. Gonzalez-Vega, 2008. "Impact of Microfinance on Schooling. Evidence from Poor Rural Households in Bolivia." World Development, forthcoming.
  • C. Gonzalez-Vega. 2007. "Modern Value Chains: Toward the Creation and Strengthening of Creditworthiness", in Rodolfo Quiros (ed.), Financing of Agricultural Value Chains, Rome: FAO.
  • F. Gomez-Soto and C. Gonzalez-Vega. 2007. "Determinantes del riesgo de liquidez y volatilidad diferenciada de los depositos en el sistema financiero boliviano. Desempeno de las entidades de microfinanzas ante multiples shocks sistemicos." Latin American Journal of Economic Development, No. 8, April, pp.53-86.
  • M. Villafani-Ibarnegaray and C. Gonzalez-Vega. 2007. "Tasas de interes y desempeno diferenciado de cartera de las entidades de microfinanzas ante multiples shocks sistemicos. Se cumple el teorema de Stiglitz-Weiss en las microfinanzas bolivianas" Latin American Journal of Economic Development, No. 8, April, pp. 11-52.
  • Gonzalez-Vega, C. 2007. "Introduction", in Rodolfo Quiros (ed.) Financing of Agricultural Value Chains. Rome: FAO.
  • Gonzalez-Vega, C. 2007. "Introduccion", in Ricardo Monge-Gonzalez et al., Servicios Financieros para las Micros y Pequenas Empresas. Desempeno e Impacto Socio-Economico de BN-Desarrollo. San Jose: Editorial Tecnologica de Costa Gonzalez-Vega, C. 2007.
  • Gomez-Soto, F. Gonzalez-Vega, C. 2007. "Precautionary Wealth of Rural Households: Is It Better to Hold it at the Barn or at the Bank" Paper presented at the International Conference on Rural Finance Research: Moving Results to Practice, Food and Agriculture Organization, Rome, March 19-21.
  • Gonzalez-Vega, C. 2007. "Value Chains and Financial Intermediation. Some Theory and a Case Study about Creditworthiness, Supermarkets and Small Producers in Central America." Paper presented at the International Conference on Rural Finance Research: Moving Results to Practice", at the Food and Agriculture Organization, Rome, March 19-21.


Progress 01/01/06 to 12/31/06

Outputs
The research focus, on the management of systemic risk by households and financial intermediaries, was expanded from concerns about climate and natural disasters to concerns about macroeconomic and political instability. Comparative lessons about risk managing and risk coping emerge from these two strands of the research. Two dissertations are exploring consequences of droughts and earthquakes. Alpizar examines impacts of shocks on the technical efficiency of the whole set of productive activities of agricultural households in El Salvador. The research uses household panel data (see reports for earlier years) and data envelopment analysis to measure production performance. conometric analysis identifies determinants of efficiency and difference-in-differences regressions are used to examine changes in efficiency as a consequence of exogenous shocks. Access to financial services, in particular deposit facilities, accelerates improvements of efficiency over time and helps mitigate the impact of shocks on efficiency. Gomez-Soto examines the role of deposit facilities in holdings of precautionary wealth portfolios and consumption smoothing. In the presence of systemic shocks, reductions in the transaction costs of depositors and improvements in the safety of deposits (prudential regulation and diversified loan portfolios)improve household welfare. A dynamic model explores portfolio choices when the price of livestock and deposit safety are correlated to income shocks. Bolivia allows the exploration of shocks from social unrest and political instability. Gonzalez-Vega and Gomez-Soto examine determinants of the volatily of deposits and the liquidity risks faced by financial intermediaries, including microfinance organizations (MFOs). They find that a strong demand for precautionary deposits among poor households increases during times of crises, in contrast with other depositors. The quality of the client-institution relationship also explains the superior performance of MFOs in mobilizing deposits during periods of instability. Gonzalez-Vega and Villafani examine credit risk in MFOs during periods of crisis. Modifying the Stiglitz-Weiss model, they explain the influence of interest rates, systemic shocks, and innovations in lending technologies on MFO and bank profitability. Innovations in lending technologies allow MFOs a combination of higher but declining interest rates, higher profit rates, and lower default rates than banks, in a dynamic environment with systemic shocks. Katchova, Miranda and Gonzalez-Vega develop a dynamic model of individual and group lending under financial innovation and calibrate it with information from Bolivia. Gonzalez-Vega, Alpizar, Gomez-Soto and Villafani revised a detailed stocktaking exercise on rural financial markets in Mexico, being prepared as a book. Gonzalez-Vega made a presentation in Rome, at the FAO, on his research on the role of farmer linkages with supermarket chains in modifying the farmers' creditworthiness. Gonzalez-Vega and Hartarska published results on their research on low-income households mortgages in the United States and on the role of finance in investment in small firms in Russia.

Impacts
The Bolivian Superintendence of Banks uses results from this research to define strategies to evaluate and anticipate liquidity and credit risks resulting from recurrent crises. The Bolivian Central Bank has revised regulations concerning portfolio risk. Several entities of the Mexican Government have adopted recommendations about the promotion of microfinance and the development of rural financial markets. The Food and Agriculture Organization has disseminated results about the impact of supermarket chains on credit markets. Research on the role of deposit facilities will contribute to the worldwide debate about which microfinance institutions should be regulated and how as well as to the design of more appropriate deposit products for the rural areas of developing countries.

Publications

  • Quiros, R. and Gonzalez-Vega, C. 2007. Institutional Transformation as a Means toward Improved Opportunities to Create Linkages that Enhance Rural Access to Financial Services. The Case of the Fundacion Integral Campesina in Costa Rica. In Maria Pagura and Marie Kirsten (eds.), Expanding the Frontier of Rural Finance through Linkages, Rome: FAO and Ford Foundation.
  • Gonzalez-Vega, C. 2007. Cadenas de valor modernas: Hacia la creacion y el fortalecimiento de sujetos de credito. In Rodolfo Quiros (ed.), Financiamiento de las Cadenas Agricolas de Valor, San Jose, Costa Rica: FAO and Academia de Centroamerica.
  • Gonzalez-Vega, C., Chalmers, G., Quiros, R. and Rodriguez-Meza, J. L., 2006. Hortifruti in Central America. A Case Study about the Influence of Supermarkets on the Development and Evolution of Creditworthiness among Small aned Medium Agricultural Producers. Washington, D.C.: USAID Rural and Agricultural Finance Initiative. April.
  • Cermeno, R.. Roa-Garcia, M. and Gonzalez-Vega ,C. 2006. Desarrollo financiero y volatilidad del crecimiento economico. Evidencia para Mexico y Estados Unidos. Working Paper DTE-377. Division de Economia, Centro de Investigacion y Docencia Economicas (CIDE), Mexico, D.F.: December.
  • Katchova, A.L., Miranda, M. and Gonzalez-Vega, C. 2006. A Dynamic Model of Individual and Group Lending in Developing Countries. Agricultural Finance Review. Vol. 66, No. 2. pp. 251-266.
  • Hartarska, V. and Gonzalez-Vega, C. 2006. Credit Counseling and Mortgage Termination by Low-Income Households, The Journal of Real Estate Finance and Economics, Vol. 30, No. 3, pp. 227-243.
  • Hartarska, V. and Gonzalez-Vega, C. 2006. Evidence on the Effect of Credit Counselling on Mortgage Loan Default by Low-Income Households, Journal of Housing Economics, Vol. 15 (1), March, pp. 63-79.
  • Hartarska, V. and Gonzalez-Vega, C. 2006. What Affects New and Established Firms Expansion? Evidence from Small Firms in Russia. Small Business Economics. Vol. 27, Nos. 2-3, October, pp. 195-206.
  • Gonzalez-Vega, C and Villafani-Ibarnegaray, M. 2007. Las microfinanzas en la profundizacion del sistema financiero. El caso de Bolivia. El Trimestre Economico, Vol. LXXIV (1), No. 293, January-March, 2007, pp. 5-65.
  • Villafani-Ibarnegaray, M. and Gonzalez-Vega, C. 2006. El estado y las finanzas rurales y populares en Mexico. In Claudio Gonzalez-Vega (ed.), Los Mercados de las Finanzas Rurales y Populares en Mexico: Una Vision Global Rapida sobre su Multiplicidad y Alcance. Mexico, D.F.: AFIRMA.
  • Villafani-Ibarnegaray, M. and Gonzalez-Vega, C. 2006. El sector bancario y las finanzas populares mexicanas: Retos, oportunidades y amenazas para las organizaciones de microfinanzas. In Claudio Gonzalez-Vega (ed.), Los Mercados de las Finanzas Rurales y Populares en Mexico: Una Vision Global Rapida sobre su Multiplicidad y Alcance. Mexico, D.F.: AFIRMA.
  • Gomez-Soto, F. and Gonzalez-Vega, C. 2006. Formas de asociacion cooperativa y su participacion en la provision de servicios financieros en las areas rurales de Mexico. In Claudio Gonzalez-Vega (ed.), Los Mercados de las Finanzas Rurales y Populares en Mexico: Una Vision Global Rapida sobre su Multiplicidad y Alcance. Mexico, D.F.: AFIRMA.
  • Quiros, R. and Gonzalez-Vega, C. 2006. Perspectivas sobre el financiamiento de las cadenas agricolas de valor en Mexico. In Claudio Gonzalez-Vega (ed.), Los Mercados de las Finanzas Rurales y Populares en Mexico: Una Vision Global Rapida sobre su Multiplicidad y Alcance. Mexico, D.F.: AFIRMA. Alpizar, C. A., and Gonzalez-Vega, C. 2006. El sector de las microfinanzas en Mexico. In Claudio Gonzalez-Vega (ed.), Los Mercados de las Finanzas Rurales y Populares en Mexico: Una Vision Global Rapida sobre su Multiplicidad y Alcance. Mexico, D.F.: AFIRMA.
  • Alpizar, C. A., Svarch, M. and Gonzalez-Vega ,C. 2006. El entorno y la participacion de los hogares en los mercados de credito en Mexico. In Claudio Gonzalez-Vega (ed.), Los Mercados de las Finanzas Rurales y Populares en Mexico: Una Vision Global Rapida sobre su Multiplicidad y Alcance. Mexico, D.F.: AFIRMA.
  • Falk, M., Quiros, R. and Gonzalez-Vega, C. 2007. Opportunities for the Creation of Linkages and Alliances to Expand the Supply of Rural Financial Services: The Case of the Jose Maria Covelo Foundation and its Partners in Honduras. In Maria Pagura and Marie Kirsten (eds.), Expanding the Frontier of Rural Finance through Linkages, Rome: FAO and Ford Foundation.
  • Gonzalez-Vega, C. and Quiros,R. 2007. Strategic Alliances for Scale and Scope Economies: Lessons from FADES in Bolivia. In Maria Pagura and Marie Kirsten (eds.), Expanding the Frontier of Rural Finance through Linkages, Rome: FAO and Ford Foundation.


Progress 01/01/05 to 12/31/05

Outputs
In contrast to earlier years, when the central research issue was the management of risk related to climate and natural disasters, during 2005 the project focused attention on the implications for households and financial institutions of systemic risk derived from macroeconomic and political instability. Comparative lessons about risk coping are derived from these two strands of the research. Bolivia has been the main laboratory for an exploration of the consequences of sustained recession, social unrest, and political shocks. Gonzalez-Vega and Gomez examined determinants of the volatily of deposits and the liquidity risks faced by financial intermediaries, including microfinance organizations (MFOs). Their findings show a strong demand for precautionary deposits among poor households. The quality of the client-institution relationship largely explains the superior performance of MFOs in mobilizing deposits during periods of instability. Gonzalez-Vega abd Villafani undertook a comparative analysis of credit risk in MFOs and other intermediaries. They modified the Stiglitz-Weiss model to explain the influence of interest rates, lending technologies, and foreign exchange risk on the profitability of financial intermediaries. Innovations in lending technologies have allowed MFOs a combination of higher but declining interest rates, compared to other intermediaries, higher profit rates, and lower default rates in a dynamic environment with systemic shocks. This is one of few dynamic extensions of the theorem and few empirical applications. Building on the household panel dataset for El Salvador (see reports for earlier years) and using data envelopment analysis for a household's portfolio of productive activities, Alpizar defended a proposal for a dissertation that will examine the influence of access to alternative financial instruments as risk coping mechanisms on the rural household's productive efficiency. Gonzalez-Vega, Alpizar, Gomez and Villafani completed a detailed stocktaking exercise on rural financial markets in Mexico, as a prelude for the development of a related research agenda in this country. Gonzalez-Vega, Rodriguez-Meza and Quiros completed a study of the role of supermarkets in the creation of creditworthiness for small and medium suppliers of agricultural goods, particularly fresh fruits and vegetables. Risk-sharing arrangements are among the reasons for the success of these contracts. Gonzalez-Vega and Quiros completed three case studies on the role of linkages between formal and semiformal financial institutions in expanding the frontier of finance to poor rural populations subject to exogenous shocks. Using lessons from developing countries, Gonzalez-Vega and Hartarska published results on their research on mortgage termination by low-income households in the United States.

Impacts
The Bolivian Superintendence of Banks used results from this research to define strategies to evaluate and anticipate liquidity risks associated with the recent political crises. The Bolivian Central Bank redefined regulations concerning portfolio risk on the basis of the research. A microfinance institution was allowed transformation into a bank using recommendations from the project. The Food and Agriculture Organization will disseminate results on the role of linkages as a promising approach to reach difficult rural clientele with financial services. Mexican policymakers are using preliminary research results in strategies to improve rural financial markets in this country.

Publications

  • Hartarska, V. and Gonzalez-Vega, C. 2005. Credit Counseling and Mortgage Termination by Low-Income Households. Journal of Real Estate Finance and Economics. Vol.30, Number 3, pp. 227-243.
  • Gonzalez-Vega, C. 2005. Las Microfinanzas y la Formacion del Capital Humano. In Ensayos en Honor a Victor Hugo Cespedes. Edited by Grettel Lopez. San Jose, Costa Rica: Academia de Centroamerica.
  • Maldonado, J. and Gonzalez-Vega, C. 2005. Impacto de las Microfinanzas sobre la Educacion Formal de Ninos en Hogares de Bolivia. Desarrollo y Sociedad.
  • Gonzalez-Vega, C. and Quiros, R. 2005. Strategic Alliances for Scale and Scope Economies. Lessons from FADES in Bolivia. Rome: Food and Agriculture Organization.
  • Gonzalez-Vega, C., Chalmers, G., Quiros, R. and Rodriguez-Meza, J. 2005. Hortifruti in Central America. A Case Study about the Influence of Supermarkets on the Creation and Expansion of Creditworthiness on Small and Medium Agricultural Producers. Washington, D.C.: USAID Rural and Agricultural Finance Research Program.
  • Gomez-Soto, F. and Gonzalez-Vega, C. 2005. Determinantes del Riesgo de Liquidez en el Sistema Financiero de Bolivia y Captacion de Depositos por Entidades de Microfinanzas en un Entorno con Multiples Shocks Sistemicos. La Paz, Bolivia: PREMIER.
  • Villafani-Ibarnegaray, M. and Gonzalez-Vega, C. 2005. Tasas de Interes, Dolarizacion y Otros Determinantes del Riesgo y Rendimiento de la Cartera en el Sistema Financiero de Bolivia y Desempeno de Entidades de Microfinanzas en un Entorno con Multiples Shocks Sistemicos. La Paz, Bolivia: PREMIER.


Progress 01/01/04 to 12/31/04

Outputs
This project has examined, first, complex interactions among financial, land and labor markets in El Salvador. In particular, it has analyzed consequences of rural household participation in these markets and of market performance on the incidence and dynamics of rural poverty and natural resource conservation. Rural financial markets are influenced by the institutional infrastructure for the operation of other markets and influence degrees of failure in land and labor markets. Data from the panel of rural household observations for 1995, 1997, 1999 and 2001 have been used to study access to formal and informal finance, factors of exclusion-inclusion of particular clienteles, household-risk coping strategies, including international remittances, the dynamics of poverty, and patterns of land use. Researchers have published results on the determinants of participation in rural financial markets, migration and remittances, and the environmental consequences of household strategies to respond to adverse exogenous shocks, such as bad climate and international price changes. Results on an environmental Kutznets curve for rural El Salvador were presented at several conferences and published. Dr. Pleitez-Chavez completed his dissertation on international remittances as an informal co-insurance mechanism and Dr. Maldonado wrote a chapter of his award-winning dissertation on land use patterns and environmental degradation, both using these data. Second, in Bolivia, the purpose is to carry on research that promotes the expansion of the frontier of formal financial services into rural areas and other underserved market segments. During 2004, the researchers continued their assessment of the macroeconomic crisis and its implications on the performance of different types of intermediaries. One stricking result has been the better performance of microfinance organizations compared to banks and other intermediaries. The researchers have investigated the interrelated risks faced by intermediaries, including foreign exchange, interest rate, and credit risks. Risk models have been developed to examine their non-uniform incidence on various types of intermediaries. Researchers have worked with the Central Bank to explore the impact of dollarization and with the Superintendence of Banks to anticipate problems in dealing with risk under BASEL II. In collaboration with Dr. Mario Miranda, the project has been looking at opportunities for the development of indexed-insurance for agribusinesses and farmers in Santa Cruz.

Impacts
Developing country policymakers understand better how to promote rural financial market deepening and the development of risk-coping mechanisms. Banks and specialized financial intermediaries learn about best practices in microfinance and in reaching rural clients. International agencies learn lessons about policies and programs that work well. Policy reforms have already been implemented in Bolivia, Costa Rica, and El Salvador based on research results. Implications for low-income finance in the US are derived.

Publications

  • Gonzalez-Vega, C. Rodriguez-Meza, J, Southgate,D, and Maldonado, J.H. 2004. Poverty, Structural Transformation, and Land Use in El Salvador: Learning from Household Panel Data. American Journal of Agricultural Economics, Vol. 86, Number 5, pp. 1367-1374.
  • Rodriguez-Meza, J., Southgate, D. and Gonzalez-Vega, C. 2004. Rural Poverty, Household Responses to Shocks, and Agricultural Land Use: Panel Results from El Salvador. Environment and Development Economics. Vol. 9, pp. 225-239.
  • Gonzalez-Vega, C. 2004. Rural Financial Markets in Mexico: Issues and Options. Washington, D.C.: United States Agency for International Development. Mexico Rural Economy Strategy.
  • Gonzalez-Vega, C. and Villafani, M. 2004. Las Microfinanzas en el Desarrollo Financiero de Bolivia. La Paz, Bolivia: Proyecto PREMIER.
  • Gonzalez-Vega, C. 2004. Hacia una Mayor Profundizacion de los Mercados Financieros Rurales: Macroeconomia, Politicas de Promocion e Intereses Politicos. In Ensayos en Honor a Eduardo Lizano Fait. Edited by Grettel Lopez and Reinaldo Herrera. San Jose, Costa Rica: Academia de Centroamerica, pp. 479-532.