The savings group (SG) intervention is a low-cost way of increasing financial inclusion amongst the most marginalized in the developing world. It enables borrowing and provides a rate of return on savings. However, the target population’s low financial literacy requires simple accounting which constrains the group’s design. This creates distortionary incentives and reduces the overall impact of the intervention. This paper first estimates whether the consumption smoothing benefit of the intervention in its current form justifies the implementation costs. The marginal benefits of eliminating some of their distortionary features are then modeled to estimate whether they outweigh the costs of changing the design of SG, which may require technological innovations.
Various savings group designs are compared using the financial value of the consumption smoothing benefit, which is estimated as the state-contingent cash transfer needed to match the welfare gain of the savings group. The savings group is modeled in a heterogenous agent macroeconomic model with idiosyncratic income shocks that reproduces the key distortionary features of savings groups: ∼ 1 year cycle with share-out, restrictions on equity purchase, restrictions on borrowing based on the availability of loanable funds, fixed interest rate on borrowing, etc. The model is calibrated using data for savings groups in Uganda.
The consumption smoothing benefit of SG is estimated to provide members who were ex-ante financially excluded a value of USD$2.76 per member per month. Given the long expected lifespan and low implementation costs in the literature, savings group are found to be a cost-effective intervention if a large enough share of participants reached are financially excluded ex-ante. Loosening the cash-flow constraint by allowing members to repay their loans using their share-out equity in the share-out meeting would substantially increase the welfare of agents in a low income state, smooth out aggregate borrowing over the group’s cycle, and increase the financial value of the consumption smoothing benefit by over 10%.
Derivation of Average Effective Tax Exempt Proportions by Commodities using Weighted Low-Rank Matrix Approximation for Estimation of VAT Tax Expenditures Model in Developing Countries
Estimation of tax expenditures is crucial to provide policymakers with the tools necessary to perform tax policy analysis as well as to ensure governmental transparency and integrity. Their estimation and reporting is common practice in OECD countries, and is growing in the developing world. The availability of the necessary high quality data is the most significant hurdle preventing estimation. The complex dynamics of value-added taxes (VAT) makes its tax expenditures particularly challenging to estimate with the available data. This paper applies the weighted low-rank matrix approximation methods to derive a vector of tax exempt proportions for each commodities in the national accounts’ supply-use tables (SUTs) using the SUTs’ VAT slice of the use matrix. This method makes it possible to calibrate VAT tax expenditures model using national accounts data, which is more readily available.