Robin Burgess and Rohini Pande's article, "Can rural banks reduce poverty? Evidence from the Indian Social Bnaking Experiment" examines the effect of forced commercial bank branch expansion into rural areas by the Indian Government from 1977 to 1990.
They however fail to comment on:
A) the reasons why policy of opening 4 bank branches in unbanked locations before opening 1 in already banked locations was discontinued in 1990,
B) the cost of such a program on GDP due to almost 40% default rate in such unbanked rural locations, and
C) the opportunity cost of not being able to open as many urban branches and attaining much higher levels of return on desposits and loans.
Notwithstanding these pitfalls, there are still some important economic lessons to be learnt from the paper. Traditionally it has been argued that bank nationalization and increased formalized credit by the government in rural areas could actually exacerbate poverty, because of elitist groups capturing the subsidy in interest rates to loans in that area and thereby the poor becoming poorer because of lesser and lessser credit available. This paper however shows that opening a bank branch in a rural unbanked location per 100,000 persons reduces rural poverty by 4.74%.
After bank nationalization in 1969, the Indian government, in wanting to improve access of formal credit and saving opportunities to the poor, implemented a policy rule which lead to the opening of bank branches in roughly 30,000 unbanked rural locations from 1969 to 1990. This is commendable especially in India where beuracrcay and corruption drastically marr any infrastrucural or financial develoipment. It was however also necessary because banks before this would always open up more and more branches in urban already banked locations because of high savings and demand of loans at high rates.
The paper thus shows that bank expansion reduced poverty noticeably and exponentially in states with low initial financial development while it did not have much of an effect in urban locations. However, the policy was abandoned in 1990 due to more than 40% default rates and more opening of the economy due to liberalization vanguarded by the present Prime Minister, Dr. Manmohan Singh, as the Finance Minister at that time.
The question though still remains, is a "GDP growth shining" India appreciably better off than a more equitable India with lesser extremes of wealth distribution?
They however fail to comment on:
A) the reasons why policy of opening 4 bank branches in unbanked locations before opening 1 in already banked locations was discontinued in 1990,
B) the cost of such a program on GDP due to almost 40% default rate in such unbanked rural locations, and
C) the opportunity cost of not being able to open as many urban branches and attaining much higher levels of return on desposits and loans.
Notwithstanding these pitfalls, there are still some important economic lessons to be learnt from the paper. Traditionally it has been argued that bank nationalization and increased formalized credit by the government in rural areas could actually exacerbate poverty, because of elitist groups capturing the subsidy in interest rates to loans in that area and thereby the poor becoming poorer because of lesser and lessser credit available. This paper however shows that opening a bank branch in a rural unbanked location per 100,000 persons reduces rural poverty by 4.74%.
After bank nationalization in 1969, the Indian government, in wanting to improve access of formal credit and saving opportunities to the poor, implemented a policy rule which lead to the opening of bank branches in roughly 30,000 unbanked rural locations from 1969 to 1990. This is commendable especially in India where beuracrcay and corruption drastically marr any infrastrucural or financial develoipment. It was however also necessary because banks before this would always open up more and more branches in urban already banked locations because of high savings and demand of loans at high rates.
The paper thus shows that bank expansion reduced poverty noticeably and exponentially in states with low initial financial development while it did not have much of an effect in urban locations. However, the policy was abandoned in 1990 due to more than 40% default rates and more opening of the economy due to liberalization vanguarded by the present Prime Minister, Dr. Manmohan Singh, as the Finance Minister at that time.
The question though still remains, is a "GDP growth shining" India appreciably better off than a more equitable India with lesser extremes of wealth distribution?
2 comments:
i have always believed that statistics are just the means to supplement (read strengthen) one's argument on a particular issue. Independently they do not hold any water. So once one decides on a particular view, there will always be statistics (just like law where there always are cases to support either arguments) to supplement the views.
Therefore the factum of India rising or India shining as it was earlier portrayed essentially depends on who the observer is and what one looks at. One can prove either sides that while the shining part is only a myth (for example by looking at the underdeveloped and un-performing segments) equally it can be proved that India really has improved (considering the GDP growth percentage etc.) and statistics will support both versions.
So as far as the article is concerned, it doesn't make an impact on me for it is essentially just another paradigm way of looking at the situation. I would be more concerned with going to the grassroots myself and finding out the real position, as I may observe, unfazed by statistical analysis ...
I think you falsified your own logic here Tarun.. "Just like law where there always are cases to support either argument," understandably economics has statistics too. But just like an experienced lawyer or a jury comes to a conclusion pertinent to a case, an economist comes to the conclusion on the effects of a policy on a country's welfare at large by looking at statistics.
all this article did was to quantify the effects of financial development by exactly the method you prescribed: "going to the grassroots and finding out the real position." The question now is why was this program with such positive results for rural areas all of a sudden stopped because of the program's disadvantages to the rich/middle class.
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