Yesterday The Nation carried another of its typically anti-rural headlines. “Village Funds increase consumption : Academics” The subheading went on “people should be talk to save instead.” (I presume they meant “taught” rather than “talk”, but for some of these commentators talk is cheap.)
The Nation’s report was referring to this study of the village funds undertaken by Joseph P Kaboski and Robert M Townsend. The report makes for much more interesting reading than the headlines suggest. It is a useful contribution to the evaluation of an important Thaksin-era program. All too often the local economic development policies of the Thaksin government are dismissed as populist initiatives in vote-buying, without any serious analysis of their positive and negative impacts. (For previous New Mandala discussion on the village funds see this post.)
I have only had a chance to read Kaboski and Townsend’s report quickly (and some of the statistical analysis is, quite frankly, beyond me). But the overall impression I got from the report is of a credit scheme that had modest positive impacts, and that these positive impacts were most marked for the poorest borrowers. Yes, consumption did increase among rural borrowers (how dare they spend money on consumer durables!) but this is only one element in a broader picture. Here is the report’s summary of its main findings.
Our interpretation of these findings is that the VRF [Village Revolving fund] has indeed had a moderate impact on household spending, and also (but to a lesser extent) on household income.
Further investigation shows a number of interesting patterns. First, most of the effect of VRF borrowing is concentrated in the poorest quintile of the population (as measured by expenditure per capita), where it raised spending by 5.2%, making the program markedly pro-poor. Second, the effect of the VRF appears to work most convincingly through its influence on farm income, suggesting that it is credit-constrained farmers who have best been able to put the loans to productive use. This is not what the designers of the Fund had envisaged; instead they had expected that it would boost household-level non-farm enterprise. We speculate that the short-term nature of the VRF loans makes them suitable for farmers - they allow for the financing of inputs during a crop cycle - but are not long-term enough to be very useful for most of the other remunerative activities that households might initiate.
The third interesting finding is that there are synergies between VRF and BAAC loans; borrowing from one or the other alone has little discernible impact on incomes or even expenditure, in contrast to the large impact associated with borrowing from both sources. This has some important practical implications. The BAAC should be slow to withdraw from village-level lending, even if it is tempted to do so by a perception that the VRF can fill the gap; or alternatively, the BAAC should be sure to channel enough resources via the VRF to allow it to fill the gap adequately. Our results also suggest that if the government wants to expand the VRF, the most productive approach would be to target poorer farming communities.
Finally, a caveat. Our results do not allow one to make a judgment about the desirability of the VRF. That would require additional information about the full costs of the program and an evaluation of its sustainability. It would also be valuable to determine whether the impact of the VRF weakens over time, a finding that is common elsewhere… These both require further research, which would be particularly desirable given the importance of the Thai experiment with large-scale microcredit.
Critical commentary on the report, or on other studies of the Village Fund, would be very welcome.
7 responses so far ↓
1 Phil // Aug 6, 2008 at 10:56 am
Prior to abandoning this topic for my graduate thesis, my research was generally in accordance with the findings of the Nation’s article. All the people in the various villages that I spoke to regarding the VRF spoke highly of it as a source of credit that was otherwise unavailable to them. This was true for Phu yai baan, straight through to those doing rap-jang type work. I initially attributed the positive endorsements as a result of Thaksin-style “populist” rhetoric, but could it be true that some of Thaksin’s rural economic policies did produce outcomes beneficial to the said targets?
2 Ruby // Aug 6, 2008 at 1:21 pm
Are villagers happy that they have easier access to money? Yes, undoubtedly.
Are they wise managers of this money? From my observations (and these are just observations based on what I have seen or heard), much has been gambled away, and household debt has risen as a result of the scheme. Some manage it well, but many manage it poorly. While the study referred to does illustrate some beneficial aspects of the scheme, those who have simply lost the money and increased their debt are perhaps mostly outside the stats.
Is it a good scheme? Yes, and equal access is important. I think it highly likely that poor money-managers in the past will learn from mistakes, or copy the methods of those who have successfully used the loans in the future.
3 jonfernquest // Aug 6, 2008 at 10:51 pm
The VRF programme might be the most “ambitious” microcredit programme, like the paper claims, but how successful is it actually? How does it compare to the Grameen bank programme, for instance?
There is currently a rural debt moratorium with debt payments delayed. If debt payments weren’t delayed would there be high default rates signaling ineffective use of the funds? I know the SME loans were plagued with problems.
Is this a just non-transparent off-balance money grant, an injection of fiscal spending into the economy to temporarily stimulate the economy, or does it actually strengthen the competitiveness of the economy in the future and contribute to future economic growth?
4 Homer // Aug 7, 2008 at 2:46 am
We can talk about his “markedly pro-poor” policies as much as we like, but in the big picture, is it worth his markedly anti-poor policies, you know, like the rampant corruption and tax fraud activities. And the markedly pro-death policies like drug wars and southern violence, we must also bear in mind.
5 matty // Aug 7, 2008 at 2:29 pm
Was Thaksin’s VRF loan fund scheme successful?
———————————–
“By May 2005, the VRF disbursed $6.9 billion to 17.8 million borrowers (an average loan size of $387)”. IMPRESSIVE!
“By May 2005, 99.1% of all villages had a VRF in operation and 98.3% of the originally scheduled amount had been distributed.” - IMPRESSIVE!
“Data– SES 2004
* 34,843 households were interviewed from 2,044 municipalities and 1,596 villages
* One sixth of 69,486 adult members borrowed from VRF at least once with higher proportion among the poor and rural areas
* Interest rate was about 6 percent
* Equal share (50%) of VRF loan in agriculture and non-agriculture
* Loan default was about 8 percent
* Some 70% among borrowers believed VRF helped improve their economic situation” - IMPRESSIVE definitely!
“Average treatment effects of VRF participation
* VRF borrowing helps increase per capita expenditure by 5.5% and per capita income by 4.4%
* An average increase of income by 220 baht per month and expenditure by 200 baht
* This rise in income implies a 17.6 percent rate of return to borrowing
* Rates of increase in income and consumption are more for the poor than for the non-poor
* Much of the effects are via farm income
* Farm income rises by 40 percent compared to 9 percent in non-farm income
* VRF is not a consumer credit nor a conduit necessarily for non-farm income growth
* Our results are consistent with other findings based on panel of 960 households from rural Thailand (Kaboski and Townsend)”
“BAAC versus VRF
* Of households covered in 2004,
* —23% borrowed from VRF only
* —15% from both VRF and BAAC
* —6% from BAAC only
* Those who borrow BAAC are slightly poorer and substantially dependent on farm income
* Borrowing from either BAAC or VRF only has small gains compared to borrowing from both sources
* BAAC plus VRF raises expenditure by 9 percent and income by 8.5 percent.
* Many BAAC households are likely to be credit constrained and thus, VRF plays an important complementary role”
_____________________
Cannot deny the conclusions of the study-research by Shahid Khandker of World Bank “Does the Village Fund Matter in Thailand?” (Regional Seminar on Poverty Monitoring and Evaluation, Nanchang, China, May 11-12, 2007 )
Thaksin’s VRF Loan scheme worked and worked splendidly according to the purpose it was meant to serve.
People who dislike Thaksin, including yours truly, should still give credit to Thaksin where credit is due. And Thaksin’s VRF scheme should be strengthened and improved - - - because it would go a long way towards reaching the very poor in remote rural villages and improve their living conditions quickly.
6 Sidh S. // Aug 7, 2008 at 4:00 pm
With a very limited knowledge of finance, I instinctively believe in micro-credit schemes and agree that VRF scheme should be “strengthened and improved” - at least with greater transparency in the process and better financial advice to borrowers. I understand that the Grameen Bank has a very percentage of small loan default (less than 2% if I remember correctly which is very impressive especially when compared with defaults by rich borrowers) and I hope VRF can emulate that.
7 karmablues // Aug 8, 2008 at 4:24 am
Sidh, based the two articles below, I would agree with your comment that greater transparency and better financial advice to the borrowers would be beneficial to VRF. I would also add better management of the funds.
http://www.time.com/time/asia/2005/thai_thaksin/story3.html
http://www.thaiworld.org/en/thailand_monitor/answer.php?question_id=113
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