Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

greater scope for reforms that can advance both equity and efficiency goals. While manyidentification problems make our empirical results more suggestive than definitive, we dofind evidence that both the quality of projects and institutional practices matter. Some ofthe trends in the speed of institutional reforms are encouraging, others disquieting. Butthe evidence suggests there may be scope improved performance with possibly beneficialdistributional consequences from continued reforms.Experience in other countries suggests that the poor are capable of saving at highrates and that they are both credit-worthy and have demand for loans (Morduch, 1999).But savings responds most to convenience and security, while lending to the poor cannotbe profitable unless interest rates are allowed to be higher than in other areas (tocompensate for the higher administrative costs). The early experience of microfinanceinstitutions operating in China’s poor areas has been very positive, supporting the notionthat institutional reform and greater regulatory flexibility may encourage financialinstitutions to lend successfully in poor areas (Park and Ren, 2001).Thus, prognosis for the future depends very much upon reforms that have yet tooccur in China. If inter-bank markets are liberalized without interest rate liberalization,the effects could be quite negative for poor areas, but more open entry and pricingpolicies could be quite helpful. Underlying institutional development to better enforcecontracts, share credit histories, increase the effectiveness of collateral and guarantors assecurity for loans, increase the quality of managers and loan officers, and provideappropriate incentives will support more effective financial intermediation in both richareas and poor, but their importance to lending in poor areas may be even greater becauseof the greater institutional challenges to banking with the poor.32