How the World Bank Should Help the Planet's Poorest: Pay Them

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Bloomberg

Last weekend the World Bank issued a report on the dramatic rise in global access to financial services. From 2011 to 2014 alone, 700 million people worldwide opened a bank account or joined a mobile money service.

The World Bank hails this improvement in the lives of the world’s poorest. What the report doesn’t mention is the challenge it poses to the World Bank itself. Beyond opening the way for a massive reform of national poverty relief programs, from India to Kenya, the spread of financial services suggests there may be a far more effective way for donors to end global poverty than by funneling resources through World Bank projects.

From 2011 to 2014, a global population more than twice the size of the U.S. gained access to modern financial services. In India the proportion of adults with an account climbed from 35 percent to 53 percent — and it will have increased even more since then. The country’s universal biometric ID system (based on fingerprints and iris scans) has already covered 790 million people and is forecast to reach 1 billion by December 2015. It’s being used to provide secure identification for customers opening new bank accounts. From August 2014 to March 2015 alone, more than 135 million accounts have been opened.

That’s having a dramatic effect on the delivery of government aid to the poor. India is moving from a system of subsidizing goods — from food and fuel to housing and education — to providing cash payments into bank accounts instead.

Direct payments in the country total about $280 billion a year — more than 4 percent of the country’s gross domestic product, according to the government, equal to about $225 per person. These subsidies are incredibly inefficient at reaching poor people and avoiding the waste and corruption that comes with subsidized goods. The $15 billion kerosene subsidy program, for instance, loses 40 percent of subsidized gas to “leakage,” and less than half of what’s left flows to the most impoverished households. On the whole, the bottom 30 percent of India’s population is aided by less than 30 percent of the benefits from subsidized goods.

Using the massive increase in financial access, the Indian government has started moving away from subsidies and toward direct payments: More than 100 million households that previously were eligible to buy subsidized cooking fuel have traded in that right for a cash transfer into their bank account. That’s created the largest direct benefit transfer scheme in the world, and it will save the government as much as $6.5 billion a year in leakage. The new system isn’t perfect — some bank customers have complained of being asked to pay bribes to open accounts, and many of the poorest people still lack financial access. But compared with the failings of the old system, these appear manageable problems.

For those worried about poor people wasting the cash transfers, it’s worth noting that food, fuel, and housing subsidies were originally designed as ways to increase the consumption of poor people without requiring that they worked more. Poor people don’t waste cash — those living on less than a dollar a day might spend about 3 percent of their income on alcohol and tobacco, but they spend the considerable majority on investments with high returns, including better nutrition. And the idea that a daily transfer of a dollar or two per person would encourage lassitude among India’s poor is supported by no empirical evidence whatsoever. People in poor countries tend to work longer hours than people in rich countries, and they would still be extremely poor by any global standard after such transfers. There’s no fear they would join the ranks of the lazy rich.

Beyond the potential for massive subsidy reform in other countries, there are some global implications of India’s cash-transfer experiment. Imagine the World Bank achieves its goal of universal financial access by 2020. Under those circumstances, you might wonder why an institution dedicated to ending the extreme poverty of those living on less than $1.25 a day around the world wouldn’t think of a new approach. It could ditch the complex process of negotiating with governments over investment projects that, if they work, might help poor people five or six years from now. Instead, the bank could simply wire that same money directly to the countries’ poorest people.

The World Bank might argue that its current model carries higher returns: that supporting governments’ investments in education and infrastructure provides a sustainable path out of poverty. But a number of countries where the World Bank has been working for decades still have a considerable majority living in absolute poverty — Malawi, Zambia, and Madagascar still see 70 percent of their populations living on less than $1.25 a day, for example. In those cases, at least, direct transfers might have a significantly larger impact.

The potential of universal financial access presents a substantial challenge to governments and donor agencies alike: Can you demonstrate that your complex subsidy schemes and your armies of consultants, procurement experts, and engineers really deliver a bigger impact than simply giving money to citizens?