Five years after the Millennium Declaration and subsequent adoption of the Millennium Development Goals (MDGs), it is clear that this global commitment to cutting extreme poverty by half by 2015 is not succeeding in the poorest regions. In fact, discounting the massive and sustained economic growth of China, global indicators are essentially negative and worsening. This is not only repugnant, it is unnecessary. By effecting a paradigm shift, and by combining the effects of revolutions that have already taken place, we could not only cut poverty in half, we could make it obsolete – even before 2015.
The central proposition of this article is thus that it is entirely possible to make extreme poverty (hunger) obsolete on a global scale even before 2015. The time is ripe for a radical breakthrough combining things that are already occurring in technology, systems, capital flows and several other facets of globalization to create a global alliance. This global alliance would complement the many existing efforts and could effect a critical breakthrough in making poverty obsolete. Universal savings accounts combined with conditional transfers could transform the world’s poorest people into economic citizens and basic minimum consumers in a modern global economy.
Point of departure
The first condition needed to make poverty obsolete is to recognize that the traditional view that the poor are helpless victims requiring complex developmental efforts has been discredited. Over 50 years of development have demonstrated that this has not been effective in eliminating poverty.
The poor are in fact far more astute and capable than development agencies would have us believe. The 500 million households living in or near poverty across the globe survive on strategies that show persistence, acumen and shrewd realism. Above all, women, who even under duress and outright repression are the difference between life and death of these households, show an ability to survive and innovate with scarce resources.
For poverty to become obsolete it is fundamental to accept a radical paradigm shift from assuming the poor are helpless victims to viewing them as rational consumers and clients operating within the realities of their world. Moreover, the world of the poor is largely in the unregulated informal sector where the state is often a marginal player.
The second truth is that the state has been unable to reach the poor on the scale required to eradicate poverty through traditional bureaucratic approaches. Just providing the very basics of education and health is proving an overwhelming challenge for states of both low and middle-income countries. Latin America offers empirical proof that a whole region can grow significantly while creating massive poverty and concentration of wealth. Interestingly, though these societies have in general spent significant amounts on basic services, the resulting benefits have been captured mostly by the richest 20 per cent of the population, who account for as much as 80 per cent of social spending.
Central to the proposition of this essay is the fact that a series of revolutionary and evolutionary breakthroughs have been occurring around the world that can be combined into a synergistic strategy with the potential to create a new reality far greater than the sum of its parts. These parts or, better said, pieces of a jigsaw puzzle, can combine and fuse into something representing a breakthrough on a scale commensurate with the challenge of raising 500 million households above the poverty line. These households, if successfully integrated into the globalized economy, could represent a growth factor equivalent to two Chinas.
The first revolution: from microcredit to microfinance for the poor
In the late 1970s, two very different initiatives in Asia and Latin America gave birth to a new way of thinking about the problems and potential of the poor. In Bangladesh, the now famous Grameen Bank, which began as a small single-village experiment, resulted in a major global movement based on social mobilization and credit. At the same time and in a similar but very different sense, Acciòn in Latin America was inventing a form of market-interest, unsecured lending to the self-employed poor in a number of countries. These have evolved as the two major forces shaping what was first microcredit and is now transforming itself into microfinance. Today there are several million households and tens of billions of dollars in successful accumulated lending to this unlikely market. In Bangladesh alone there are now over 10 million households receiving credit from hundreds of organizations, Grameen representing only 20 per cent of these clients.
Microcredit was born out of an acceptance of the fundamental paradigm shift, noted above, whereby the poor are seen as rational consumers and clients capable of shaping their own destiny if given fair access to needed services. They thus became worthy of financial services devised to suit their needs. The traditional view was that the poor can’t pay loans at market rates. The era of microcredit has disproved this basic axiom and proved that poor people engaged in economic activity can be reliable and solid clients. It is access, not subsidy, that is required. The poor in general access loans from the informal sector at exorbitant annual interest rates in the hundreds or even thousands per cent annually. Microcredit represents the ‘formalization’ of an ancient service at a fraction of the cost of the traditional forms of finance (albeit extremely high in terms of formal sector lending).
The companion axiom, ‘the poor can’t save’, has proved equally wrong. Evidence from Asia and Africa as well as Latin America shows that poor households seek to develop a ‘cushion’ which allows them to survive the next crisis. The poor also devise informal savings and insurance groups, as well as burial societies, which provide this service. Surprising evidence exists that in poor households affected by malnutrition (therefore in extreme poverty) mothers will often put aside a marginal amount in a continual attempt to create a minimum security cushion.
In addition to the revolution sparked by Acciòn and Grameen, a state-driven case in Indonesia (Bank Rakyat Indonesia) has demonstrated clearly that the poor value appropriate savings services. A major reform of the institution transformed it from a purveyor of subsidized credit with poor recovery in 1984 to what is today a leading example of how savings services are fundamental to the poor. Currently there are 25 million savings accounts and 2.5 million borrowers operating at market rates.
The evolution of microfinance is clearly showing that while a limited number of poor households can benefit from credit services, universal access to savings services would give poor households the means to better manage their financial resources and accumulate the safety cushion they need to make their future more predictable and stable. Moreover, as in the formal market in all countries, savings services can facilitate credit to service the cash flow and seasonal needs of poor households.
The second revolution: conditional transfers as direct investment in human capital
Since the mid-1990s, the idea of direct conditional cash transfers to the poor as a viable policy has been gaining growing support throughout the world. Experience in this regard in Brazil, Mexico and Chile is being viewed as positive. This form of direct transfer supplants a host of different strategies and, as in the case of microfinance, sees the poor as rational consumers able to make the best use of scarce resources at their disposal.
The Brazilian experience has been given much attention, particularly through what is now known as the ‘Bolsa Familia’ programme. Under this programme, mothers, wherever possible, receive ATM cards which allow them to withdraw a stipend of $17 per child per month (up to three children); this is conditional on school attendance and vaccinations being up to date. Bolsa Familia thus challenges the traditional welfare paradigm and requires counterpart commitments that represent real, verifiable efforts on the part of those in receipt of payments.
While there will always be a question about dependence on these programmes, there is another more powerful dimension to the use of these resources, which combines direct investment in human capital with the greater good. Thus, investing in mothers to keep their children healthy as well as in school (which often means losing some level of family income) creates a win-win-win scenario. It is reasonable to posit that these children will have less incentive to become criminals and a greater likelihood of being trained and competent, thus improving productivity overall. If delivery costs are low, the ‘returns’ on these investments can be exceptional, as will be discussed further on.
Using ATM cards to overcome barriers to delivery
A substantial barrier to this type of atomized programme of transfers to millions of households is cost and bureaucracy. The concept may be powerful but the means to implement it yields large bureaucratic structures imposed to manage and control the activity. Under these conditions the attractiveness of such programmes is diminished considerably. In this regard, the Brazilian experience is importance to all countries considering such policies, because it uses sophisticated financial sector technology (ATM cards) adapted to an unlikely market: the extremely poor. Payments to millions of households are made based on centralized lists created and supervised by local committees which ensure that ‘conditions’ are met over time. The Brazilian experience has already shown that the cost of the programme can be less than 3 per cent of capital disbursed. In other words, 97 cents of every dollar reaches the poorest population.
Moreover, it is entirely applicable to the poorest countries in the world. Large regions of this vast and unequal country have challenges equivalent to LDCs, in particular the Amazon basin, the north-east (conditions akin to the Sahel) and the north. The technology employed has proved robust and appropriate in these regions, allowing consideration for use in far poorer countries.
In Brazil, it is expected that in the coming years more than $3 billion will be transferred annually to some 8 million households (approximately 40 million people).
Encouraging results so far
The results to date are encouraging. The four-digit password has not posed the problem once imagined. As in all things, the poor have displayed creativity and resilience in finding solutions. Illiterate mothers have proved themselves able to use the passwords. Those with problems have used their own children to help. The fact that the individual transfers are a small sum of money does not create an incentive to steal, so financial institution employees do on occasion help the poor to receive the transfers.
Nor is the pattern of expenditures in communities surprising. The single largest expenditure is food followed by school supplies. In poor communities these transfers are beginning to have ‘upstream’ economic effects in that the consumption generated very often benefits local shops and merchants. The grassroots economy, which is largely an informal sector often consisting of survival activities of the poor themselves, is thus strengthened. These new levels of demand then feed into a virtuous cycle in which more goods that meet basic human needs are available at the grassroots level, generating more efficient supply and presumably more competition.
Moving away from food baskets
Conditional transfers as described above represent a radical paradigm shift from the concept of cestas basicas (food baskets), which has been the traditional method of providing in-kind support to poor people. Like other countries, Brazil has experienced massive problems with this type of programme due to the nature of the bureaucracies and contracts needed to select eligible products, purchase the items, and deliver them on a reliable basis.
The lists of abuse and corruption in these programmes are extensive in rich and poor municipalities. The incentive for corruption is great in both instances; what varies is the scale. Equally troubling in these programmes is the physical contact between beneficiary and benefactor. Few politicians can resist the photo opportunity of being a part of these handouts, with obvious political messages and intentions. Moreover, these programmes are often defended as necessary on the basis that food items need to be selected because poor people would otherwise consume the wrong items. This type of thinking is best represented in the Brazilian word coitadinhos, which is a word that transmits pity for helpless victims.
The third revolution: technology, systems and management
A new generation of powerful, integrated systems platforms, combined with a radical reduction in hardware costs, are creating possibilities of benefiting the poor which could not have been contemplated before. Platforms such as these are able to manage millions of accounts and billions of transactions at a cost as low as a thousandth of what would have been the case ten years ago.
Associated with these new technologies is the well-known revolution in cellular telephony which is taking hold throughout the developing world. This technology carries with it the ability not only to connect voices but also to connect to systems and services. Here again, the poor have surprised the major companies in this field with their ability to afford and acquire what was once thought of as a luxury. Moreover, it is now accepted that this technology allows countries to bypass the need for massive public investment in traditional telephony and to leapfrog into achieving the same or better results through a much smaller investment on the part of the private sector rather than the public sector. Thus the cost of phone access has gone from often $1,000-$2,000 to $40-$70 per person, with prepaid cards allowing access at very limited costs. This revolution is deepening and reaching the poorest parts of the planet, allowing them to be included in a synergistic strategy.
All these technologies allow new business systems in which a local store or post office can be a purveyor of financial services at an extremely low cost. This in turn offers an important new possibility: ubiquitous financial systems able to provide a limited (ie non-credit) but vital set of financial services for the poor.
The evolution of capital flows and remittances
The rapid growth of private capital flows merits mention as an evolving phenomenon with revolutionary potential. From the 1970s to 2000, net private flows to developing countries grew more than tenfold, totalling over $150 billion during the year 2000. This figure dwarfs ODA or development support from the north to poor countries, which has averaged between $30 billion and $60 billion per year, and which has recently been registering closer to the lower end of this range. These flows, even concentrated in a small number of countries, have affected all countries in terms of building the financial infrastructure to participate in the global economy.
More important is the phenomenon of remittances from migrant and non-resident workers which, according to World Bank estimates, totalled over $120 billion in 2004. It is further estimated that 500 million people are sending or receiving remittances and it is widely believed that an equal if not greater amount of remittances go through informal channels, which would mean total annual remittances of $240 billion or more.
Any study of how the poor access financial resources inevitably concludes that the first source is family and relatives. The hundreds of millions of immigrants who send, or would wish to send, resources to their families in their home countries constitute a major market which is being targeted by many financial operators.
The importance of these remittances to developing countries is well known but not completely understood. While there are several studies in Latin America on the topic, it is perhaps more instructive to consider the case of Saudi Arabia. Millions of immigrant workers in Saudi Arabia during the 1980s and 1990s annually remitted to a limited number of countries (Bangladesh, Philippines, Pakistan and Yemen in particular) a sum equivalent to the World Bank’s annual disbursements globally ($12-16 billion). Most importantly, there are grounds to think that, if the costs of transfers could be reduced, many more immigrants would remit smaller monthly amounts which would be more affordable and appropriate to the needs of their family, friends and relatives.
The central proposal: savings as a universal human right plus global conditional transfers
In today’s globalized world in which capital flows are rapidly evolving, immigration and remittances have the potential to increase. In poor villages in practically every country of the world one can find evidence of households or groups that have made improvements in their lives based on receiving money from friends and family in other countries or regions. I would therefore propose one simple, fundamental question: should it be a universal right, akin to having a birth certificate, an identity card or a passport, to have an electronic account which allows all people to receive and accumulate money, as well as to pay obligations?
The central proposition of this essay is that there are three mutually reinforcing revolutions:
- the vast knowledge acquired regarding the power and potential of the poor as financial clients in microfinance;
- conditional transfers as a major breakthrough in creating an efficient, cost-effective means of eradicating poverty;
- the radical reduction in operating costs for (non-credit) financial services for the poor through the breakthrough in systems, technology and business models;
and that together these can yield a synergistic strategy resulting in universal savings accounts in all parts of the developing world.
Guaranteeing the right to economic citizenship through the basic instrument that allows participation in a global economy on an affordable basis, an electronic account, is a revolutionary concept. This basic empowerment would allow the poor to accumulate a minimum safety cushion which would then allow them the minimal security to plan for their future. Above all, conditional grants should allow for freedom from hunger and full participation in a society in which the poor are often excluded or outcast.
This empowerment can also have a radical impact on the self-esteem of the poor. From the very early days of Grameen Bank through the conditional transfers with ATM cards in Brazil, it has been clear that the poor consider this financial access as a major boost to their self-esteem. An electronic account will register the financial lives of individuals or households, record their existence, and prove their ability to accept and discharge responsibilities.
In the developing world, a very small minority has access to basic banking services. The concept of a current or savings account is alien to the vast majority of the world’s 500 million poorest households. Among these households it is common for immediate family or close relatives to migrate for work both within their own country and abroad. There are an estimated 180 million workers who have migrated across borders. To this number should be added a very large number that migrate from their homes within their home country and support their families from a distance. The Universal Electronic Account would cause a radical reduction in the costs of point-to-point transfers, as these costs are often tied to the identification and receipt of funds by those receiving them.
The collateral benefits of this new account to local communities and macroeconomies would be substantial. Transforming the poor into basic minimum consumers (through conditional cash transfers at a cost less than 5 per cent of value transferred) would create demand and support the creation and growth of grassroots enterprises in what would be a virtuous cycle of a better educated and healthier population and growing businesses.
In terms of the Millennium Development Goals, an average transfer of $25 per month per household would result in annual transfers of $150 billion. This proposal could be a critical complement to the proposals in the reports led by Professor Jeffrey Sachs, which advocate an additional spending of $70 billion per annum, and would bring it more into line with the ideas of the Marshall Plan since it would mean a massive boost in consumption.
The Universal Electronic Account advocated in this essay could be the basis of a radical change in attitudes, strategies and behaviour. If the 500 million poorest households on the planet are able to maintain a minimum level of subsistence all year round, the grotesque images of constant famines that plague the poorest parts of the world could be a thing of the past. More important, the many millions who wish to save and invest in economic activities that can lift them out of poverty would have a reliable means of building their businesses and creating a basic financial record of their existence and potential.
1 There are several ways to do this. In Brazil, 2.5 million poor people have accounts which bear no cost for the first six transactions every month. This allows the poorest to benefit from access at no cost, while those who have greater monetary needs are able to use and pay for services.
Henry R Jackelen is presently UN Resident Coordinator and UNDP Resident Representative in Paraguay. For the past 20+ years he has been working on issues of microfinance and enterprise development. The views are strictly those of the author. Email firstname.lastname@example.org