• Thailand’s Million Baht Village Fund provided credit to people with rural businesses.

    Thailand’s Million Baht Village Fund provided credit to people with rural businesses.

    Photo: Consortium on Financial Systems and Poverty

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Taking credit

Thailand’s Million Baht Village Fund provided credit to people with rural businesses.

When Thailand’s government started offering microfinance loans to villagers, did anyone benefit? An MIT economist investigates.

Microfinance seems like a boost for entrepreneurs in developing countries: Give them little loans, and people can make their small businesses a bit larger. Starting in 2001, the government of Thailand used this idea as the basis of a program called the Thai Million Baht Village Fund, which distributed loans in 77,000 rural villages.

The program was simple, providing a million baht (the Thai currency), or about $24,000, to create banks in each of those villages. But the outcome of the program was complex, as MIT economist Robert Townsend outlines in a newly published paper. In areas where loans were disbursed, consumption grew, income for those in agriculture and other forms of business grew, and wages grew for laborers — all signs of economic growth — but overall asset growth in the villages decreased.

“The flow of funds from savings to investment does not work very well when left to its own” in Thai villages such as these, says Townsend, the Elizabeth and James Killian (1926) Professor of Economics. “These kinds of interventions seem to have pushed the system in the right direction.”

And yet, he is quick to note, the program was hardly an unambiguous success; its effects varied significantly, among and within villages. Like microfinance generally, Townsend suggests, the Million Baht fund yielded encouraging signs while raising other questions for further study.

“Two or three years ago microfinance was thought to be the big cure for many diseases, while detractors have always wondered about sustainability,” Townsend says, adding that there are still comparatively few rigorous studies of the subject.

A long-term help, or just short-term spending money?

The matter of sustainability is one of the key problems raised by Townsend’s study of the Million Baht fund: People who received loans changed their spending and investment habits, but not always in ways that produce long-term growth.

“Many variables moved rather dramatically,” Townsend says. Consumption, for instance, doubled on average in the short run. “The order of magnitude of that increase was quite surprising,” he says. But six or seven years after the program was implemented, consumption had dropped back down significantly. So what happened?

“Our interpretation is that when they introduced these village funds, households … needed less in their rainy-day funds, and they converted part of that savings into consumption. Others likely lacked liquidity at the time the program was introduced and borrowed to increase consumption. Still others likely reduced consumption in order to invest, although there are not enough data to nail that down definitively.”

The overall effect helped produce some economic growth, specifically with improved capital and hired labor. A typical entrepreneur using the program, Townsend suggests, was a trader with a pickup truck, buying goods from farmers and taking them to area markets. “Gasoline purchases went up, auto repairs went up, so it looks like traders were improving and expanding their business,” Townsend notes.

Those small-business owners also hired additional workers to help them, which may have been the most unambiguously beneficial effect of the program. “In villages where there is a substantial expansion of credit per capita, the wage rate goes up,” Townsend says. “Clearly there was some transformation in these businesses — taking on more labor, putting upward pressure on wages — so wage-earners benefitted.” The research found a wage increase of about 7 percent for the average household, and 12,500 baht in increased wage income for every 10,000 baht of credit from the fund.

Townsend and his co-author, Joseph Kaboski of the University of Notre Dame, suggest this change can lead to long-term rises in village wages, putting more money in the pockets of those who do not run businesses, but make a living strictly through labor. “There are spillovers, benefits for people who didn’t directly get credit,” Townsend says.

For all of that, however, overall assets did not grow as a result of the program, suggesting that its impact was limited. Financial savings dropped. Moreover, the Million Baht fund did not create many new, more productive businesses in Thai villages.

“I thought we would see substantial changes in the occupations as a result of this village-fund experiment,” Townsend says. “We don’t see too much of that. It was more businesses improving than new businesses expanding.”

Global implications?

The paper, “The Impact of Credit on Village Economies,” was published in the latest issue of the American Economic Journal: Applied Economics. Townsend has been overseeing fieldwork on the finances of Thai villagers continuously since 1997.

The results in this paper are based on household finance surveys Townsend and his colleagues took from 1997 through 2007; because the Million Baht Village Fund was disbursed quickly, in 2001 and 2002, the researchers believe they were able to discern a clear before-and-after picture, revealing the fund’s effects, and were able to track long-term financial changes in the villages.

The paper is “an important contribution to the issue of access to credit in emerging economies,” says Flavio Cunha, an assistant professor of economics at the University of Pennsylvania who has read the study. He notes that the wage increase suggests improved productivity, resulting from the expansion of credit in villages, which he terms an “important implication for policymakers.” The behavior of the villagers in the study, Cunha adds, can help researchers determine “what type of economic models we should zero in on when it comes to studying investments and consumption in developing economies.”

Townsend acknowledges that — as with most studies focused on one country — it is an open question how much light the results shed on the issue more broadly.

“We don’t know if this Thai experience generalizes to other countries or not,” he says. Still, he points out, “some aspects of what we’re finding are similar” to the results of a microfinance experiment that economists in MIT’s Abdul Latif Jameel Poverty Action Lab (J-PAL) conducted in Hyderabad, India, a few years ago.

From a policy standpoint, Townsend thinks new finance interventions are still worth pursuing — while applying lessons learned from the Million Baht fund experience.

“We see some evidence that some of the people who did get the credit made good use of it,” he notes.

Funding for the research was provided in part by the Bill and Melinda Gates Foundation, the John Templeton Foundation, the National Institute of Child Health & Human Development and the National Science Foundation.

Topics: Economics, Finance, Humanities, microfinance, Development


Excellent article. Microfinance is very popular in India in coming to the rescue of low income groups to carry their business free from the clutches of greedy money lenders. Microfinance is usually understood to entail the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. In some regions, microfinance is used to describe the supply of financial services to low-income employees, which however is closer to the retail finance model prevalent in mainstream banking.

Dr.A.Jagadeesh Nellore (AP), India

Actually , One Million Boht Village Fund didn't. Start from no where but I started experiment on microcredit system in small scale in Nam Phong District Khon Kaen province Thailand. Then there were 126 villages which I gave 2,000 baht per village to village women development committee. The only think I wanted to confirmed my believe that you do not have to train them to manage the fund because they knew what they need and they understand their priority well better than all of us in the government which alway tell them what to do and think that they always needed prior capacity building. Just like father know best. What I have only asked them is to manage this fund fairly and give priority to the most needed one first. And most importantly they have to return money back to the fund and able to tell me all the time if I asked where is the money. They can charge interest if they all agreed but should not creat too much burden on their fellows. They can borrow for any need . For example...

For example , if they short on food, books for children, sickness, household need, or anything they need. Since 1986, I found that my money I have allocated to 126 villages have been increased significantly non of them have lost because some of them have charged interest from borrowers. To guarantee that if the borrower dead I have suggested that they should set up funeral fund in which if the borrower died the member will have to pay the decease's family 10 baht each. So the family can pay back to the fund. From the Women village Fund in Nam Phong, the One Million baht Village Fund initiated. I have not yet finish writing the origin of One Million baht Village Fund in Thailand. But I am happy to share experience with those who interest.

Suwit Khunkitti

Fromer Deputy Prime Minister

Founder and Ex-Chairman of National Village and Urban Community Fund , Thailand

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