Nobel Prize Winning Economist Abhijit Banerjee: Is Blockchain the Key to Financial Inclusion?
We went along to the Asian Financial Forum (AFF) on Day Two to hear what Nobel Prize-Winning Economist Prof. Abhijit Banerjee would say in his keynote speech on financial inclusion. Insightful as it was, it mainly covered his application of randomized control trialing in inclusive finance and the insights he and his colleagues had gained from the trials.
Banerjee—who won the esteemed prize along with fellow economist and spouse Esther Duflo and Harvard Academic, Michael Kremer—held a small group press event so we decided to ask him directly for his thoughts on blockchain and decentralized finance (DeFi) in creating financial inclusion.
FinTech in Financial Inclusion
Financial inclusion refers to making financial products and services accessible and practical for everyone regardless of the individual or businesses net worth or company size. According to the United Nations, financial inclusion is positioned prominently as an enabler of other development goals for its 2030 Sustainable Development Goals.
Many articles and research papers have been written on the potential for financial technologies (FinTech) to create greater inclusive finance. Advancements in digital transactions and peer-to-peer based lending have become particularly important for developing countries where many do not have access to tradition bank financing.
Decentralized Finance (DeFi) technology is a huge part of FinTech as it incorporates emerging technologies with the purpose of improving services to clients and enhancing the overall financial industry. DeFi is basically a set of smart contracts, protocols, decentralized applications (dApps) executed on a blockchain with the objective of providing lending and trading alternatives away from the centralized banking system, with its archaic legacy processes and high fees.
A quick look at the DeFi network website, and you will see the second mission of the community is in pursuit of financial inclusion and the provision of solutions to actively empower individuals by building products to better engage with decentralized systems.
Banerjee’s Thoughts on FinTech in Financial Inclusion
As we are aware, Banerjee is no expert in blockchain or FinTech services. Instead, his award-winning research was focused around the application of RCT into the field of Economics and focused on creating practical pathways to financial inclusion.
Keen to hear his thoughts, we focused our question around another Nobel Laureate’s work—1974 Nobel Memorial Prize winner Fredrich Hayek. In his book titled, “Denationalization of Money: The Argument Refined”, Hayek advocated for the establishment of competitively issued private moneys, arguing that private businesses should be allowed to issue their own forms of money, deciding how to do so on their own. Fast forward to today, and giants of industry such as Facebook are trying to put this theory into practice with their own Libra coin.
As time was limited we asked Banerjee two questions: 1) Do you believe the advent of blockchain can help achieve Hayek’s proposed denationalization of money? 2) What are your thoughts on DeFi and the potential long-term role of projects such as Facebook’s Libra in facilitating financial inclusions?
Banerjee was quick to respond at the podium, “I have no particular sympathy for most of Hayek’s views including this one. I would say the banks have actually done a pretty good job of regulating money supply and at this point, I would say inflation rates are too low rather than too high. Most economies are suffering because the negative inflation rates are connected to that.”
On Facebook’s Libra, Banerjee continued, “I don't see a reason why we want to have extremely tight controls on money supply and I don't think it would do anything particularly good for finance. I think that Facebook is trying to sell a story, which either I don't see or, perhaps, I don't understand the story but my guess is that there's nothing much to that story.” He clarified his views saying, “I think the first challenge is not short-term finance, which I think Facebook could facilitate, but the long-term finance that lots of potential entrepreneurs in the developing world don’t have—and the reason why they don’t have long-term finance has very little to do with the control of currency by the private sector or the public sector. So I don’t really buy into any part of this story.”
Banerjee double-down and expressed, “I think the constraints are not that. I mean, I think we've written a lot about what the constraints are (on inclusive finance). I don't think that the enforcement of loan contracts is going to be improved because of blockchain. I just think this is somebody in California thinking thoughts about developing countries.”