4
The video recording of the seminar as well
as the related Thought Leadership Brief
authored by Prof. Visaria are available at
Sujata Visaria
, IEMS Faculty Associate and Assistant Professor
of Economics, presented a seminar proposing a better way to
offer loans to small-scale agricultural entrepreneurs in emerging
markets—and, in particular, to small-scale, impoverished Indian
farmers.
Recently, researchers have found that in a number of countries
in different parts of the world, the traditional microcredit model
(based on Grameen Bank in Bangladesh founded by Nobel Prize
winner Muhammed Yunus) featuring small individual loans to
self-selected groups of borrowers with weekly repayment and
joint liability has failed to promote entrepreneurship and risk-
taking, or increase borrower incomes, and thus may not be an
effective way to lift the poor from poverty. Prof. Visaria pointed
out that even in situations where traditional microcredit may
appear to be a good fit, this is not necessarily the case for
agricultural entrepreneurs. Agriculture is a high-risk business that
does not see immediate returns, making it difficult for farmers
to make weekly loan payments until after the harvest. Another
reason for a low microcredit success rate amongst agricultural
workers is that such workers are required to hold each other
accountable for loan repayment. This type of social pressure can
be too much for many impoverished farmers, and has even led
some Indian farmers, unable to face the shame of defaulting, to
commit suicide.
Prof. Visaria and her team proposed a solution to the problem of
traditional microcredit in agriculture: Trader-Agent Intermediated
Lending Scheme (TRAIL), which allows a local agent (often a
moneylender or trader) to recommend borrowers who may
qualify for loans specifically geared toward poor farmers, with
commissions paid to the recommender upon successful loan
repayment. Rather than requiring loan repayment within
the first week, repayments for TRAIL loans are made in lump-
sum payments every four months to
better match crop cycles and with
no joint liability. This design takes
advantage of local agent information
on the credit-worthiness of potential
borrowers, avoids high costs of weekly repayment meetings,
and does not require close monitoring by bank officers, all of
which are components of traditional microloan scemes. Because
the TRIAL payment scheme is more relaxed, lenders have little
incentive to aggressively pursue repayment until many months
later during the harvest season. Perhaps the most innovative
aspect of this lending scheme is its built-in crop insurance,
which prevents farmers from defaulting due to acts of nature
that would otherwise make loan payment a near impossibility.
Upon analyzing the results from field trials in India, Prof. Visaria
concluded that the TRAIL scheme was more cost-effective,
imposed lower costs on borrowers, and had higher repayment
rates compared to alternative microfinance schemes. Moreover,
TRAIL loans significantly increased agricultural incomes from high-
risk, high-value cash crops.
According to Prof. Visaria, the promise of microcredit has yet
to be fulfilled. Her TRAIL approach may be a better alternative
financing method for agricultural entrepreneurs who are in a
position to benefit from greater credit access.
FINANCING SMALLHOLDER AGRICULTURE: AN EXPERIMENT WITH
AGENT-INTERMEDIATEDMICROLOANS IN INDIA
HKUST IEMS Academic Seminar (2014.12.08)
Learn more about the event at
Justin Yifu Lin
, former Chief Economist of the World Bank and
current Honorary Dean of Peking University’s National School for
Development, delivered the keynote address at the Inaugural
Management and Organization Review (MOR)
Research Frontiers
Conference, which invited leading scholars working on innovation
in emerging markets to discuss the key research questions and
most promising research directions for the future. The event was
hosted by HKUST’s Department of Management and co-sponsored
by HKUST IEMS. Organization of the conference was led by
Arie
Lewin
(Duke University), Editor of
MOR
, and included
Albert
Park
, Director of HKUST IEMS, and
J.T. Li, Jiing-Lih (Larry)
Farh, Sam Garg, Yaping Gong
, and
Bilian Sullivan
, all
faculty in the HKUST Department of Management. It included 7
sessions on a wide range of topics with a focus on prospects for
innovation in China, while drawing lessons from the experience
of other emerging markets and developing countries, as well as
developed countries.
Prof. Lin’s keynote address was on “New Structural Economics:
The Third Wave of Development Thinking”. He explained that the
first wave of development thinking after WWII took a structuralist
approach, emphasizing market failures and the need to build
up modern industry by direct government interventions and
import substitution. The second wave of development thinking
was neoliberalism, which emphasized government failures and
proposed to build up well-functioning market institutions even if
it required shock therapy (today often known as the “Washington
C o n s e n s u s ” ) .
U n f o r t u n a t e l y ,
these prescriptions
failed to help most
developing countries
move ahead. The
only regions which
managed to move
from low income
to middle income
t o h i g h i n c ome
status were Korea
and Taiwan. One
lesson from their successful experience, as well as those of Japan
and more recently China, is that although markets served as the
basic institution for resource allocation, in these successful cases
governments played a critical facilitation role for structural change
by making forward-looking investments in sectors consistent with
each country or region’s dynamic comparative advantage.
As countries move up the product ladder and produce more
sophisticated goods and services, individual firms in new sectors
may not internalize all of the positive economic benefits for the
country as a whole when making investment and innovation
decisions, justifying government action to work with firms to
eliminate key barriers faced by firms in rising sectors. A lively
question and answer session followed Prof. Lin’s talk, in which
some participants questioned the extent
to which governments have the ability to
know which promising sectors to support.
CONFERENCE ON GLOBALIZATION
OF KNOWLEDGE CREATION AND
INNOVATION IN THE CONTEXT OF
EMERGING ECONOMIES
(2014.12.04-07)
Justin Yifu Lin
