By David Porteous (Oct, 2004)
http://www.dfid.gov.uk/news/files/trade_news/adb-workshop-makingfinancial.pdf
Abstract
This paper analyzes the emerging mantra 'Make the Markets Work for the Poor' (MMW4P) and discusses it with respect to one sector Ai the financial sector in South Africa (SA).
This paper uses case studies from the SA financial sector in the past ten years to provide answers to questions such as:
what does it mean for a market to work for the poor?
is increased access to markets always a good thing?
is market enablement a sufficient strategy?
how best is to influence market development to become pro-poor?
Key takeaways of this paper are:
- 'Markets that work for the poor' are those that harness the power of markets to provide goods and services to the poor on a sustainable basis.
- Measurements of 'markets working for the poor' are: increased usage of the product or service, alternatives exist and a market for this product/ service is acceptable.
- South Africa's case suggest that current market structure is reaching its 'access frontier' and new strategies are needed to reach the unbanked.
- The role of the government in enabling market conditions should concentrate on leading and facilitating and avoid direct intervention. This could mean the need for new skills and/or institutions to act as catalysts.
Summary
For a 'market to work' it should minimize transaction costs between buyers and sellers to a minimum. Also, there is certainty and basic stability about the roles of the different parts and components of the market.
A 'market that works for the poor' is such that expands real choices offered to poor people (based on Amartya Sen's). The measurements that highlight if a market is working for the poor are:
Usage by poor people of a service or product is increasing (ie poor clients as a % of total clients)
Existing alternatives to poor people (instead of measuring choice, it's easier to measure alternative products available within the market or substitutes in other markets)
A market in the service in question is acceptable
Before developing policies to make markets work for the poor, the access frontier must be assessed. This frontier refers to the maximum proportion of people in a society who could access a product or service, given the cost and market structure (this involves regulatory environment and technology considerations). It is important to know where the frontier is and how it may move in the medium and long-term.
Additionally, the author suggest specific market features should be considered. For example, if price discrimination could be possible, the scale of the market or the lumpiness of the product. In the case of the financial markets, the issue to consider is fragility of the market, which warrants some caution in changing policies
In analyzing the case of South Africa, the author begins by measuring if financial markets are working for the poor. He found out that in the past years usage has increased, but at a slow rate of growth. The assessment also shows that it could be reaching its access frontier, since current requirements to open an account include having a formal employment. As of now, 85% of formal employees have a bank account.
Alternatives to expand the access frontier to include at least the 86% of unbanked South Africans, who do not have a formal job, but still receive an income (ie self-employment or person-to-person transfers):
Spread of information and discussion among stakeholders. Information on current usage and non-usage should be available to all participants in the market. This would lead to a discussion about the trajectory of the access frontier probably motivated by the development of new products or new technologies or maybe the planned entry of new competitors. These answers would give a sense of a possible natural movement outwards without the need for intervention and for those where there is the need to develop specific strategies to shift the access frontier.
Subsidized or cross-subsidized services. In order to increase access or to bank the unbanked in developing countries the strategies followed have been either to provide services directly at subsidized rates or to require existing providers to cross subsidize and extend their services to the unbanked. The question is what do these strategies do to the access frontier over time? The first one may 'freeze' the frontier since no market player will be able to compete with the state, while the second one could lead to market fragmentation, deterring new entry and innovation at the bottom end of the market.
Innovative policies in South Africa have given birth to common strategies among banks, such as the Basic Bank Account, which will be introduced in participating banks as an individually branded low-end product under an umbrella brand known Mzansi. Also, it has been suggested that they could create a fund to reward/ encourage banks that take on and keep low income customers and to cover some of the fixed costs of market development. Also it could pay for projects to educate customers.
The author's overall assessment suggests that the government's role may need to be more directed to facilitating and leading. This places high skills demand on the capacity of the state and may need new development institutions to support market making activities. The best way to influence markets to become poor friendly is in most cases through catalysts, especially when there is suspicion about motives and agendas between public and private sector.