Robert Lensink

The Empirics of Microfinance: What Do We Know?

Microfinance has received a lot of attention recently, both from policy makers as well as in academic circles. Two of the main topics that have been hotly debated are explaining joint liability group lending and its implications for reducing information asymmetries, and the trade-off between the financial sustainability and outreach of microfinance programmes. This Feature contains three novel empirical contributions providing new insights with respect to why and how joint liability group lending works. It also contains the first large-scale systematic analysis of the trade-off between financial performance and outreach of microfinance institutions.

The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter?

Abstract This paper investigates the short-term effects of foreign bank entry on the behaviour of the domestic banking sector. We hypothesise that these effects are dependent on the level of economic development of the host country. Our investigation shows that at lower levels of economic development foreign bank entry is generally associated with higher costs and margins for domestic banks. At higher levels of economic development the effects appear to be less clear: foreign bank entry is either associated with a fall of costs, profits and margins of domestic banks, or is not associated with changes in these domestic bank variables.

Foreign Direct Investment: Flows, Volatility, and the Impact on Growth

This paper contributes to the literature on FDI and economic growth. We deviate from previous studies by introducing measures of the volatility of FDI inflows. As introduced into the model, these are predicted to have a negative effect on growth. We estimate the standard model using cross-section, panel data, and instrumental variable techniques. Whilst all results are not entirely robust, there is a consistent finding that volatility of FDI has a negative impact on growth. The evidence for a positive effect of FDI levels on growth is not robust, nor is that for any effect of human capital.

Assessing Aid: A Manifesto for Aid in the 21st Century?

The World Bank report Assessing Aid argues that aid can have positive effects on growth and infant mortality, but only when good policies are being followed by the recipient. It follows, especially since aid is fungible, and so cannot be targeted to particular uses, that donors should focus their aid on low-income countries with good policies (i.e. apply greater selectivity). This paper explores a number of weaknesses in these arguments. The growth regressions are not robust, so that different results can be obtained with relatively minor variations in model specification. In particular, the argument that aid only works when policies are right is not supported in other studies - and even the World Banks evidence can be interpreted as saying policies work better when supported by aid inflows. The choice of which policies are good policies is also problematic, and the analysis in the report ignores the likely presence of threshold effects and other non-linearities; others would, anyhow, propose a different set of right policies, especially if the focus is poverty reduction rather than growth. The importance of fungibility may be over-stated so that donors can in fact target poverty-reduction activities, suggesting that the selectivity rules proposed in Assessing Aid are misleading. Even if the reports proposals are to be accepted it is silent on a number of important issues-such as whether to use the level or change in the index-that face the aid manager in practice.

Infant and child mortality in developing countries : Analysing the data for robust determinants

Is development best achieved by going for growth, or does specific attention need to be paid to directly improving human welfare? In contrast to the Human Development Reports of the UNDP, the World Bank has stressed the growth approach. Recent work has reinforced this position by arguing that health spending is extremely ineffective in reducing infant or child mortality, which is mainly explained by a countrys income per capita. This article contests this position through testing the robustness of determinants of infant and child mortality. We have estimated over 420,000 equations which show that, while income per capita is a robust determinant of infant and child mortality, so are indicators of health, education and gender inequality. Some health spending, such as immunisation, is thus shown to be cost effective way of saving lives. Our results are consistent with the view that much health spending in developing countries may be poorly targeted or otherwise ineffective, but do not support the position that public health strategies should not be given too great a role in pursuing improvements in human welfare.

Financial system development in transition economies

This paper provides an overview of the major issues with respect to financial system development in transition economies, which were discussed at a conference in Groningen, the Netherlands, December 1997. After a brief remark on the role of financial system design during economic transition, the paper focuses on the role of stock markets in the process of financial intermediation with emphasis on the role of regulations in these markets, the role of deposit insurance to improve bank system stability, and the importance of an independent central bank, measurement issues relating to central bank independence and its impact on inflation and growth. ” 2000 Elsevier Science B.V. All rights reserved.

Does uncertainty affect economic growth?: an empirical analysis

Does Uncertainty Affect Economic Growth? An Empirical Analysis. — This paper investigates the effect of uncertainty on economic growth. We construct measures of export uncertainty, government policy uncertainty and price uncertainty to augment a growth model, and using econometric techniques we test for robustness of the effects of these measures on economic growth in a cross-section of 138 developing and developed economies during the 1970–1995 period. The result clearly shows a robust and negative effect of uncertainty on economic growth. These results underline the importance of export stability and policy credibility.ZusammenfassungBeeinflu\t Unsicherheit das wirtschaftliche Wachstum? Eine empirische Untersuchung. — Die Verfasser untersuchen den Einflu\ von Unsicherheit auf das wirtschaftliche Wachstum. Sie entwickeln Ma\e für die Unsicherheit am Beispiel der Exporte, Regierungspolitik und Preise, um ein Wachstumsmodell auszubauen. Danach testen sie ökonometrisch die Robustheit der Wirkungen dieser Ma\e auf das wirtschaftliche Wachstum eines Querschnitts von 138 Industrie- und Entwick-lungslÄndern in der Zeit von 1970 bis 1995. Das Ergebnis zeigt deutlich einen robusten und negativen Einflu\ von Unsicherheit auf das wirtschaftliche Wachstum. Dies unter-streicht die Bedeuting stabiler Exporte und einer verlÄ\lichen Politik.

Joint Liability Lending and the Peer Selection Effect

We show that the joint liability lending contracts derived in Ghatak (2000) violate an ex post incentive-compatibility constraint which says that the amount of joint liability cannot exceed the amount of individual liability. We derive and characterise optimal separating joint liability contracts incorporating this constraint.

Changing the conditions for development aid : a new paradigm

The publication of the Assessing Aid report of the World Bank in 1998 has stimulated the debate on the future of development aid and aid policies. This collection contains a number of studies that aim to contribute to this debate. In this introduction we put the discussion on the future of development aid into perspective and summarise the main findings of the other contributions in this collection. We focus on two issues: the aid effectiveness debate before and after the Assessing Aid report, and the discussion on policy conditionality and good governance. Our main conclusions are that the evidence on aid effectiveness provided in the World Bank report is less convincing than has been claimed and that the good governance criterion proposed by the World Bank for distributing aid comes down to introducing conditionality in disguise.

Do Powerful CEOs Determine Microfinance Performance

Recently, microfinance has been coming under public and media attacks. The microcredit crisis following from microfinance-induced suicides in 2010 in the Indian state of Andhra Pradesh indicates that weak corporate governance and imprudent risk taking have far-reaching consequences. Yet, analyses of corporate governance mechanisms among microfinance institutions (MFIs) remain underdeveloped. As a response, this study examines the impact of CEO power on MFI risk taking by deriving explicit predictions of this effect from a characterization of the microfinance industry. Based on a sample of 280 microfinance institutions, our results suggest that powerful CEOs of microfinance non-governmental organizations (NGOs) have more decision-making freedom than powerful CEOs of other types of MFIs. This induces them to make more extreme decisions that increase risk. Furthermore, the decision-making freedom powerful CEOs have in NGOs appears to lead to worse decisions, because the presence of powerful CEOs in microfinance NGOs is associated with lower performance.