Yesterday The Nation carried another of its typically anti-rural headlines. “Village Funds increase consumption : Academics” The subheading went on “people should be talk to save instead.” (I presume they meant “taught” rather than “talk”, but for some of these commentators talk is cheap.)

The Nation’s report was referring to this study of the village funds undertaken by Joseph P Kaboski and Robert M Townsend. The report makes for much more interesting reading than the headlines suggest. It is a useful contribution to the evaluation of an important Thaksin-era program. All too often the local economic development policies of the Thaksin government are dismissed as populist initiatives in vote-buying, without any serious analysis of their positive and negative impacts. (For previous New Mandala discussion on the village funds see this post.)

I have only had a chance to read Kaboski and Townsend’s report quickly (and some of the statistical analysis is, quite frankly, beyond me). But the overall impression I got from the report is of a credit scheme that had modest positive impacts, and that these positive impacts were most marked for the poorest borrowers. Yes, consumption did increase among rural borrowers (how dare they spend money on consumer durables!) but this is only one element in a broader picture. Here is the report’s summary of its main findings.

Our interpretation of these findings is that the VRF [Village Revolving fund] has indeed had a moderate impact on household spending, and also (but to a lesser extent) on household income.

Further investigation shows a number of interesting patterns. First, most of the effect of VRF borrowing is concentrated in the poorest quintile of the population (as measured by expenditure per capita), where it raised spending by 5.2%, making the program markedly pro-poor. Second, the effect of the VRF appears to work most convincingly through its influence on farm income, suggesting that it is credit-constrained farmers who have best been able to put the loans to productive use. This is not what the designers of the Fund had envisaged; instead they had expected that it would boost household-level non-farm enterprise. We speculate that the short-term nature of the VRF loans makes them suitable for farmers – they allow for the financing of inputs during a crop cycle – but are not long-term enough to be very useful for most of the other remunerative activities that households might initiate.

The third interesting finding is that there are synergies between VRF and BAAC loans; borrowing from one or the other alone has little discernible impact on incomes or even expenditure, in contrast to the large impact associated with borrowing from both sources. This has some important practical implications. The BAAC should be slow to withdraw from village-level lending, even if it is tempted to do so by a perception that the VRF can fill the gap; or alternatively, the BAAC should be sure to channel enough resources via the VRF to allow it to fill the gap adequately. Our results also suggest that if the government wants to expand the VRF, the most productive approach would be to target poorer farming communities.

Finally, a caveat. Our results do not allow one to make a judgment about the desirability of the VRF. That would require additional information about the full costs of the program and an evaluation of its sustainability. It would also be valuable to determine whether the impact of the VRF weakens over time, a finding that is common elsewhere… These both require further research, which would be particularly desirable given the importance of the Thai experiment with large-scale microcredit.

Critical commentary on the report, or on other studies of the Village Fund, would be very welcome.