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zaki wahhaj 120x120New discussion paper by Paolo Casini, Lore Vandewalle and Dr Zaki Wahhaj, KDPE 1503, January 2015

Non-technical summary

A type of financial intermediary for the rural poor that has gained prominence in India in recent years are self-help groups (SHG), which are typically set up by non-governmental organisations to help the SHG members borrow and save. At the outset, SHG members pool their savings to create a common fund and give out small loans to one another. At a later stage, SHGs are able to open savings with commercial banks and apply for loans. By 2012, about 103 million households in India had at least one member in an SHG...

In this paper, we study the long-term, non-financial impact of SHGs on the villages in which they are based. Using first-hand date collected in the Indian state of Odisha, we provide evidence of women-only SHGs undertaking collective action for the provision of public goods -- most notably on issues relating to public infrastructure, alcohol consumption and forestry -- starting on average 3 years after their inception.

We also document a change in the behaviour of the ward-level representative of the village government (the Gram Panchayat) following the introduction of SHGs within villages. The representative's main responsibility is to communicate the ward's problems and needs to public officials. We find that these representatives tackle an increasing variety of public issues, and tackle issues that SHGs consider more important once these groups begin to
undertake collective action.

By exploiting the variation in the timing of the introduction of SHGs in different villages in our study area, and using econometric methods based on the concept of instrumental variables, we are able to provide evidence that the link between collective action by SHGs and the increased effort in public good provision by ward-level representatives is causal.

Using the method of randomised control trials, a number of academic studies have been conducted recently to investigate the economic and social impact of access to microfinance on households in the short-term (two or three years following its introduction). This paper is similarly concerned with the impact of a type of microfinance, but our focus is its social impact at the community-level and we are able to assess long-term effects (up to 13 years
after the creation of SHGs).

To explain why the ward-level representative would increase effort in response to collective action by SHG members, we use game theory to model the strategic behaviour of village members and their elected official. We assume in the model that (i) the elected official's objective is to maximise his re-election chances, which depends on the welfare of his electorate during his tenure; and (ii) the introduction of SHGs reduces the cost of collective action for its members. We show that the marginal value of the official's effort is higher when the village members undertake collective action and therefore, if the creation of SHGs enable women to be collectively organised, he would exert higher effort in addressing issues of interest to them.

Our theory, coupled with our empirical findings show that government provision of public goods and collective action by individuals may act as complements due to strategic decisions by the individuals concerned, even if their respective contributions are perfect substitutes.


Read the complete paper here.

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