This is a really important question, and I agree a bit of a puzzle. Burke, Bergquist, and Miguel sort of address it in “Sell Low and Buy High”. Burke et al. test the effect of providing credit to farmers in Kenya. They find that with access to credit, farmers are able to save more of their harvest and sell it at a different time when local prices are higher, raising their income and allowing them to pay back the loan. The return on investment is 29%.
But, as you say, 29% is a big return—why aren’t local lenders already providing this opportunity? From the very end of the paper (p. 838-9):
What our results do not address is why wealthy local actors—for example, large-scale private traders—have not stepped in to bid away these arbitrage opportunities. Traders do exist in the area and can commonly be found in local markets. In a panel survey of local traders, we record data on the timing of their marketing activities and storage behavior but find little evidence of long-run storage. When asked to explain this limited storage, many traders report being able to make even higher total profits by engaging in spatial arbitrage across markets (relative to temporal arbitrage). Nevertheless, this does not explain why the scale or number of traders engaging in both spatial and intertemporal arbitrage has not expanded; imperfect competition among traders may play a role
So, yeah, they don’t really know. Lenders have other good opportunities, and maybe discount future returns enough that they would rather engage in spatial rather than temporal arbitrage. As Larks wrote, too, risk aversion and fixed costs could make these very small loans to people in extreme poverty unattractive.
Lenders have other good opportunities, and maybe discount future returns enough that they would rather engage in spatial rather than temporal arbitrage.
If that’s all it was (which it might not as you said), then that would be a good opportunity for EA money, it seems to me
It could be and I know there’s at least one non-profit working in this space (Taimaka Project). One Acre Fund also provides loans to farmers. However I don’t think this intervention seems likely to be much better than cash transfers, and could be worse (because less targeted and involves a lot more overhead).
Oh, also Tyler Cowen and Esther Duflo sort of discuss this question in their Conversation (ctrl + f “invest” or “return” to find the discussion). Duflo says:
So there are some people with very high rates of return, as you were saying, 50 percent or 60 percent. But there are not very many. I think that is why the . . . First of all, there are not very many, and they are not necessarily the one that have access to money. That’s one of the big reasons why the cost is lower, is that there is a mismatch between the investment opportunity and who has the money. And that’s what my colleagues call misallocation.
This is a really important question, and I agree a bit of a puzzle. Burke, Bergquist, and Miguel sort of address it in “Sell Low and Buy High”. Burke et al. test the effect of providing credit to farmers in Kenya. They find that with access to credit, farmers are able to save more of their harvest and sell it at a different time when local prices are higher, raising their income and allowing them to pay back the loan. The return on investment is 29%.
But, as you say, 29% is a big return—why aren’t local lenders already providing this opportunity? From the very end of the paper (p. 838-9):
So, yeah, they don’t really know. Lenders have other good opportunities, and maybe discount future returns enough that they would rather engage in spatial rather than temporal arbitrage. As Larks wrote, too, risk aversion and fixed costs could make these very small loans to people in extreme poverty unattractive.
Thanks for your answer!
If that’s all it was (which it might not as you said), then that would be a good opportunity for EA money, it seems to me
It could be and I know there’s at least one non-profit working in this space (Taimaka Project). One Acre Fund also provides loans to farmers. However I don’t think this intervention seems likely to be much better than cash transfers, and could be worse (because less targeted and involves a lot more overhead).
Oh, also Tyler Cowen and Esther Duflo sort of discuss this question in their Conversation (ctrl + f “invest” or “return” to find the discussion). Duflo says:
Thanks for the additional info!