DeFi and emerging economies, what’s the tie?
Decentralised Finance can have a positive real world impact for developing countries.
Why, you might ask.
As a prior student of international development and a tech enthusiast, I like to reflect on what social advancements blockchain technology brings to the table.
What’s DeFi?
DeFi, also known as Decentralised Finance, has been attracting significant attention in the financial realm for a considerable period now. The innovation lies in the possibility of offering financial services via decentralised protocols and apps -dApps- built on blockchain technology.
What are emerging economies?
Emerging economies are these nations that lie between the developing and developed stages. How is this measured? Usually through these indicators: HDI (Human Development Index), HPI (Human Poverty Index), MPI (Multidimensional Poverty Index) and GPI (Genuine Progress Indicator) among others.
During this decisive phase, emerging economies experience rapid growth as well as increased volatility. One of the challenges faced by small and medium-sized enterprises (SMEs) in emerging markets is accessing affordable credit. Banks in these markets tend to have high lending rates, making it very difficult for small businesses and individuals to secure loans.
Challenges
Now, it is no secret that many developing economies have unstable democratic foundations which hinder essential development to a great degree. As quoted by Daron and Acemoglu on Why Nations Fail (2012), there are two main reasons why nations struggle to develop and become prosperous nations:
1) ‘Economic prosperity depends on the inclusiveness of the political and economic institutions of a country.
2) Nations fail today because their extractive institutions do not create incentives to save, invest and innovate.
On the one hand, shaky democratic institutions can entail several challenges:
Lack of political stability, a weak rule of law, corruption and lack of transparency, limited civic participation -less participatory societies-, socioeconomic inequalities, and external influences, to name a few. Addressing these requires long-term efforts to promote stability, rule of law, transparency, civic engagement, socio economic development, and protection against external pressures. In an ideal world, we can hope for international cooperation and capacity-building programs to help overcome these challenges.
On the other hand, the priorities of these countries are not focusing on becoming tech pioneers, or fostering innovation, let alone incentivising citizens to save and manage their finances adequately, often leaving wealth in the hands of a few.
Moreover, many developing countries suffer a phenomenon called natural resource curse, or paradox of plenty: countries rich in natural resources often experience negative consequences such as economic stagnation, corruption, inequality, and political instability, instead of benefiting from their resource wealth.
Now, not being a silver bullet to tackle all socioeconomic challenges, decentralised finance does open up a multitude of opportunities for developing nations, and it can be a game changer for them.
DeFi alternatives offer several important benefits for emerging economies along with a few challenges.
Most importantly, financial Inclusion: providing access to financial services for individuals who are unbanked or underbanked, enabling them to participate in the global economy and access basic financial tools. Secondly, reduced intermediaries: By eliminating intermediaries like banks, DeFi reduces the cost of financial transactions and removes the need for trust in centralised institutions.Thirdly, transparency and security: DeFi operates on blockchain technology, which offers transparent and secure transactions, reducing the risk of fraud and corruption. Fourthly, empowering individuals: allowing individuals to have full control over their finances enabling them to manage, lend, borrow, and invest without relying on traditional financial institutions.
And lastly, innovation and efficiency: DeFi fosters innovation by enabling developers to build new decentralised applications, smart contracts, and financial instruments, leading to greater efficiency in the financial system.
In summary, while decentralised finance alternatives offer significant potential for financial inclusion, transparency, and innovation in emerging economies, challenges related to volatility, regulation, technical barriers, consumer protection, and scalability should be carefully considered and addressed for their large scale adoption and long-term success.
How will emerging economies leverage DeFi? It is still yet to be written… but it is already happening.
