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On Prize-Linked Savings

It’s basically a no-lose lottery; you get the chance to hit a big payday, but you still get to keep your money if you don’t.

TJ Palanca


May 8, 2012

The Philippines GDP is still mainly spent on end consumption, crippling to a country that needs to develop and upgrade its own industry.

I love quirky solutions to economic problems, and this is no exception. Consider these two issues:

  1. Consumption makes up a very large chunk of our GDP, and while this may mean we’re happier, it means we have less to save and use for weathering shocks and building up productive capital. The ADB reports that household saving went from 9.8% of GDP in 2000 to 2.4% of GDP in 2007. Likewise, the BSP conducted a survey to find out that 8 out of 10 Filipinos were unbanked.

  2. Filipinos love the lottery, especially the poor and uneducated. The odds are horrible and you only win what’s left after the many tax and charitable deductions. It’s called a fool’s game or even a “tax on stupid people” for a reason.

This Freakonomics podcast showcases a new financial product that could be the stone to kill both birds: prize-linked savings. Essentially, it’s a savings account with a twist. You get an interest rate that is a bit lower than the prevailing rate, but all these small amounts of interest are pooled together to create a lottery fund which will be given out to some lucky depositors every month or so.

How would this solve any of the above issues? We must first understand that people play the lottery not as an investment (because it is a disgusting investment) but as an experience. People buy lottery tickets to dream and imagine a better future. PLS will allow people to experience the same thrill while at the same time keeping their money in the bank.

It’s been done in other countries and was seen to encourage the unbanked to set up and maintain savings accounts. The bank that pioneered this product also gained hugely. However, in South Africa where this was first introduced, only state-run lotteries (the PCSO in our case) can organize lotteries, and the program was eventually shut down.

I really want to see how this does in the Philippines. It’s basically a no-lose lottery; you get the chance to hit a big payday, but you still get to keep your money if you don’t.