The government-initiated village-fund scheme appears to have increased rather than reduced borrowing from loan sharks, probably because recipients of the funds are forced to borrow from moneylenders to repay the loans, a University of Chicago economist said on Monday.
Robert Townsend, a Distinguished Service Professor of economics at the university, found that villagers’ short-term loans, including those from loan sharks, had increased significantly. He believes that villagers borrow short-term loans from unofficial “loan markets”, probably to pay back their local village fund. This runs contradictory to some people’s conviction that the village fund would help reduce informal borrowing.
Townsend, however, admitted that his study does not provide an evaluation of the programme’s merit, saying that more research is needed for that. The results of the study aim at presenting a research model for use in assessing the larger projects of the government, he said.
Dr Ammar Siamwalla, honorary adviser to the Thailand Development Research Institute, commented on Monday that Townsend’s study is a very high-quality piece of research.
The Thaksin administration initiated the village fund scheme, injecting Bt1 million per village nationwide in a bid to help villagers start their own businesses and reduce reliance on loan sharks.
In 2002, the second year of the scheme, the funds may have decreased informal borrowing, because villagers were given loans from the scheme with which to repay the loan sharks, he said. But the next year, when the village-fund loans came due, households probably borrowed again on the black market to repay those loans, according to Townsend’s study on the impact of the funds in four provinces: Chachoengsao, Lop Buri, Si Sa Ket and Buri Ram.
The expansion of short-term credit has included loans for consumption and agricultural expenses, with perhaps some of the loans coming from commercial banks, said Townsend while presenting his paper, “The Impact of Credit – An Early Evaluation of Large-Scale Government Credit Injection”.
Townsend said that consumption and expenditures have both increased. He also found that savings have increased along with personal income.
No new types of business have been established, but the total number of businesses has increased, possibly an indication that the availability of credit has lowered the business failure rate, he said.
However, loan defaults have risen, and village funds have caused household assets to decrease.
These findings may indicate that credit and new investments have increased projected income. And households are borrowing against these increased future incomes by reducing assets to increase current consumption.
Credit may also have lowered the need for buffer-stock savings, producing a similar effect, but more research needs to be conducted to support this conclusion, Townsend said.
The Thaksin administration introduced the project in 2001 to about 80,000 villages and communities nationwide. Each village, regardless of population, received Bt1 million.
Local critics have blamed the village funds for a surge in household consumption and debt.
Townsend used data compiled over seven years to analyse outcomes. Information between 1997 and 2003 provides a before-and-after picture of the fund.
Wichit Chaitrong
The Nation
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