Q & A with Seed Grant Recipient Esteban Puentes
Esteban Puentes' studies the interaction of the financial sector and entrepreneurship in Chile. Despite high growth, formal access to banks is still limited. Puentes talks about how many Chileans find themselves entrepreneurs when they'd rather be employees working for a company.
Q. How do you describe your research project and the questions you’re seeking to answer to non-economists?
A: First, the project was designed to collect relevant data from small-entrepreneurs. This survey is the first one in Chile to obtain information about access to credit, savings, assets, and formality of small enterprises. Also, since in small enterprises the household and the firm are almost the same productive unit, it is important to gather information about both. The survey collects comprehensive information about household characteristics. More importantly, this is the first time that we have longitudinal data of small businesses, which allow us to understand the dynamics of these types of firms. Now we can study the entry and exit of small firms. Secondly, with the data available it is possible to study the strengths and weaknesses of Chile’s small businesses. More specifically, we can study who has access to credit in Chile and how that access is related to profits and sales, and how savings can help to finance investment. Another important topic is related to formality of the business. This refers to the act of paying taxes and having all the permits needed to transact business. Being formal can be very important because it can allow access to formal credit and to social security for the owner of the business.
Q. What do you hope to contribute to the understanding of financial systems and poverty with your project?
A: Chile is a special case, because financial markets are relatively more developed than in the rest of developing countries. However, there are no in-depth studies of how access to financial markets helps households to overcome poverty, especially for small entrepreneurs. This new data can help to reduce that knowledge gap. At the same time, because of the longitudinal nature of the data, it is possible to study how savings might help start businesses and encourage their development. From the data we know that 73 percent of households financed their businesses using their own savings. This statistic implies that credit has not been used to start businesses for the majority of entrepreneurs. At the same time, it is very important to understand the potential of income generation that small businesses have so that they may become a strategic tool in overcoming poverty.
Q. What interested you in this line of research?
A: First, I’m interested in access to credit. In principle, households can access credit through retail stores; however, it is not clear how households are excluded from the credit market. It could be because they do not want to borrow or, they do want to borrow but the formal sector does not want to lend to them. Another topic is formality: The Chilean Government has made important efforts to formalize small firms; yet, most of them are still informal. It would be very interesting to know how formality is distributed and how it affects business outcomes. Finally, it is important to understand if individuals start businesses as a form of subsistence or as a project that could generate a constant flux of income and become a real alternative to overcome poverty. From the data, we know that 30 percent of current self-employed individuals would like to work as employees, which suggest that they are temporarily working as self-employed.
Q. What do you think is most significant about your research findings?
A: The preliminary data we have analyzed suggest that many individuals who become self-employed do it because they are not able to find a wage job. This indicates that for an important segment of small business owners their current occupation is related more to survival than to profitability. For instance, 12 percent of individuals started to work as self-employed because they failed to find wage work and 5 percent because they were fired in their last jobs, while 21 percent of small businesses are part of a family tradition. At the same time, 23 percent of small business owners started their businesses because they found a market opportunity. Additionally, only 59 percent of the self-employed think that they earn a higher income as self-employed. Studying the prevalence of self-employment as a subsistence job is extremely relevant to understanding the potential of small entrepreneurs as a strategy for poverty alleviation.
Q: What are the obstacles to household savings?
A: Poor households find it very difficult to save formally, that is in bank accounts or other financial instruments. Generally, formal savings are highly related with income, where richer households tend to save more than poor households. Poor households have low and unstable incomes that make formal savings problematic. Other obstacles for poor households to save formally are the costs and rules that many times savings account have. Around 5 years ago Banco Estado, the state own bank, where most poor households held savings accounts, changed the rules and started to charge for its savings accounts, creating confusion and trust problems with the financial system. Additionally, simple savings accounts have withdrawal limits that heavily reduce the liquidity of savings.
Q: What is the role of the financial system in household savings in Chile?
A: The financial system in Chile should create simple and new saving products, especially for the poor. In many cases the poor prefer informal savings to formal savings because of regulations and costs that make formal savings unattractive. The challenge is to create better financial instruments in general, not only for savings, but also for insurance and credit.