Financial Markets

Today on my blog, I discuss how mobile money stands to reduce poverty by making financial services more inclusive and accessible--as well as the obstacles to fulfilling this possibility. As I write: If mobile banking is to meet its potential for the world’s poor, it must supplant the cash economies that still constrain too many livelihoods. You can read the full post here.

This week on my blog, I featured a two-part series on mobile technology in the developing world. On Tuesday, I wrote about how mobile phones are enabling people in the developing world to access banking services and obtain life insurance. On Thursday, I discussed how mobile technology helps NGOs extend resources and aid to those in need—and how it helps evaluate the impact of these projects. As I write in Tuesday’s post: In the past, one reason why banks did not court the poor as clients is because the cost of processing their small transactions outweighed any advantage to the bank; but mobile technology is significantly decreasing transaction costs. You can read part one here and part two here.

This article is from Vishnu Sridharan, program associate with the Global Assets Project of the New America Foundation. Sridharan analyzes efforts undertaken so far to link cash transfers for low-income families to financial services, such as bank accounts. This approach promises large development gains, he argues, but early experience is mixed. Perhaps unsurprisingly, one of the most successful ways to fight poverty in a variety of contexts is to give low-income households regular cash payments. Though this may sound simple, as late as 2004, seasoned aid workers described the fear of giving money to beneficiaries as “almost pathological.” Since then, however, a “quiet revolution” has taken place against “giving aid to government bureaucrats and consultants.” Instead, programs are increasingly giving cash “directly to poor people so they can pull themselves out of the poverty trap.” One way that many countries have approached direct cash payments is through a social contract, in which families receive “conditional” cash transfers in exchange for ensuring that their children attend school and regular health check-ups. As a result, these payments not only ensure a basic level of consumption among recipients but help facilitate investment in the human capital of the next generation. Since the advent of Mexico’s first conditional cash transfer program PROGRESA (now known as Oportunidades) in 1997, social policymakers from Nicaragua to Nigeria have adopted similar models for alleviating poverty. In fact, the New America Foundation’s Global Savings and Social Protection Database--which currently focuses on Latin America, Africa, and Asia--has identified over 90 cash transfer programs in 45 countries in the developing world, with over half a billion beneficiaries. Of these programs, as the map above shows, 15 have been started, expanded or redefined in the past 3 years alone, which shows how rapidly the landscape of cash transfer social protection is evolving. As successful as these programs have been, one persistent critique has been that they foster dependency on behalf of beneficiaries because they do not enable them to save money in the medium term. Recent research by the New America Foundation’s Global Assets Project shows that breakthroughs in payment technologies, among other trends, has made addressing this critique all the easier. By linking payments to formal financial services--like bank accounts--beneficiaries can more easily store funds, be prepared for emergencies, and invest in opportunities that could lead to economic security. Cost-saving innovations like mobile telephones and biometric IDs are revolutionizing how government-to-person payments are taking place, with more and more governments, aid agencies, and multi-laterals making the switch from cash payments to electronic. To take two examples: from 2009 to 2011, Colombia invested in advanced payment infrastructure so that it could cut the number of individuals receiving cash payments from 76 percent to nine, and, on the financial institution front,  the Fijian government committed to shifting all social welfare payments from vouchers into a bank accounts to promote savings in 2010. What are the results of these trends? Electronic payment systems are clearly more convenient for beneficiaries, as they are able to access their funds at the time of their choosing and without crowds at distribution points. And although initial investments are often necessary to build out payment infrastructure for electronic transfers, governments do benefit from a subsequent decrease in administrative costs and an increase in transparency. But results are mixed in the incorporation of low-income households into the formal financial sector. The central challenge is not necessarily in teaching low-income households to save more money: from the work of Stuart Rutherford, founder of the microfinance organization SafeSave, as well as the pioneering efforts of the Gates Foundation, it’s clear that poor families do want to save, and they often do so in ingenious (and risky) ways.  Instead, the challenge is in encouraging families to make full use of financial tools. Countries such as India have seen that simply providing the poor with ‘no-frills’ bank accounts is insufficient--up to 90 percent of them remain dormant and unused. As a result, countries are now experimenting with how to raise awareness of the benefits and safety of bank accounts while at the same time incentivizing their participation. Over the past couple of years, Colombia has conducted an extensive impact study on which approach to promoting savings works best. In 2008, Colombia started making payments for its social protection program Familias en Accion through deposits in savings accounts, and it attempted to promote a culture of savings through a pilot program called Programa de Promocion de la Cultura de Ahorro (PPCA, or Culture of Savings Promotion Pilot). The impact study was incorporated into the design of the pilot, with some participants receiving financial education, others receiving a cash incentive for savings, and some receiving both. The good news was that the provision of accounts did lead some cash transfer recipients to save. What’s more, evidence suggested that the greatest savings occurred among those who received both financial literacy education and a cash incentive to save. On the other hand, early results showed little difference between different treatment groups on whether or not the recipients withdrew their entire monthly payment at once, with an overwhelming 91 percent choosing to do so. The reasons for the withdrawals varied: not knowing that accounts allowed for savings, fear of losing eligibility, distrust of bank fees, and even transportation costs. Regardless of their particular reasons, however, the beneficiaries’ collective experience showed that introducing households into the formal financial system is far from straightforward. Cash transfers have demonstrated a remarkable ability to both protect households from extreme hardship and promote long-term development. As the emphasis on helping beneficiaries graduate from poverty increases and electronic payment methods become more widespread, there is a great potential to enhance the impact of these transfers even further by linking them to savings opportunities (and eventually to other financial services such as insurance and loans). The potential of this linkage, in the eyes of many in the field, presents a “transformational opportunity” to take conditional cash transfer programs to the next level. Early experience, however, suggests that there’s a lot left to be done before we get there.

This is a guest post by Jim Sanders, a career, now retired, West Africa watcher for various federal agencies. The views expressed below are his personal views and do not reflect those of his former employers. Last month at the World Economic Forum on Africa in Addis Ababa, Ethiopia, the Africa Progress Panel’s 2012 Africa Progress Report highlighted the threat to Africa of "rising inequality and the marginalization of whole sections of societies."  Experts warned that "inequality in sub-Saharan Africa could threaten political stability and growth after a decade of rapid economic expansion.” While inequality is rising, the movement of money out of emerging markets bodes ill for Africa.  Michael Aronstein of Marketfield Asset Management told me that even though Wall Street continues to make emerging market investments (because of recent success,) the big emerging markets—Brazil, Russia, India, and China—have had a bad eighteen months, and their fundamentals are shakier than previously realized.  Their GDP levels alone do not tell the whole story, Aronstein advises. These countries are important investors in Africa.  Similarly, as Rob Arnott (chairman of Research Affiliates and manager of Pimco’s All Asset Fund) explained to Fortune magazine: "Everyone sees emerging markets as the growth engine for the world economy.  If so, why are they trading at a big discount to the parts of the world that are not the growth engine?" For Nigeria, such trends could make a bad situation worse.  A confluence of political-class infighting, (most recently, it appears, over the independence of the central bank) substantially lower oil prices, (Brent dipped below $100/bbl recently), a tragic airplane crash, which drew attention to systemic governance failures, and an ongoing insurgency in the North, portend more disorder, not less. Regional developments are also inauspicious. The real threat posed by Mali to Nigeria may not be so much one of terrorist contagion, although it is receiving much attention in the international press.  Instead, it may be that Boko Haram insurgents may draw strength from the example of the collapse of an ineffective civilian government run by entrenched political elites, disconnected from the realities faced by ordinary people, and increase their efforts.  While, on the other hand, ordinary Nigerians, particularly youth, may begin to act on their frustrations in a more organized way, a la Mali’s Collectif Action Verite and its billboard campaign. Globally, democracy is at risk.  Arguably, that of Greece has collapsed.  West Africa is not immune.

According to the Nigerian press, funding for the fuel subsidy has run out, with seven months left in the year. Further, the press quotes the executive secretary of the Major Oil Marketers Association for Nigeria (MOMAN) as saying that the government has made no payment toward the fuel subsidy in 2012. In other words, it is substantially in arrears. Apparently, oil imports have continued, with a spokesman for the Nigeria National Petroleum Corporation (NNPC) stating that there is enough in the country: "But the product will not be for too long and we shouldn’t wait until we have a crisis before we start looking for a solution." The danger is that imports of petroleum—upon which the country is dependent—will stop. That would lead to fuel shortages in a country in which most goods move by road. The Ministry of Finance estimated daily fuel consumption at 19 million liters daily. But, according to the press, NNPC says that actual consumption has been 33 million liters. A way out would be for the National Assembly to increase the appropriation for the fuel subsidy. But President Jonathan and Ngozi Okonjo Iweala, the Minister of Finance, have said that their goal is to eliminate the subsidy altogether because of its costs and the distortions it causes in the market. However, the National Assembly may not be happy. In January, when President Goodluck Jonathan tried to abolish the fuel subsidy, the country faced a general strike. Jonathan backed down, and restored part of the subsidy. But in the aftermath, the House of Representatives established an ad hoc committee to look into the fuel subsidy led by Farouk Lawan. It uncovered massive fraud in the operation of the subsidy, and, according to the press, it calls for the overhaul of NNPC and the Petroleum Product Pricing and Regulatory Agency (PPPRA.) The committee’s report has political traction. For example, lecturers at Ahmadu Bello University in Zaria are calling for President Jonathan to act on the report. Though Nigeria is one of the world’s larger oil producers, it is dependent on importing gasoline and other petroleum products because of a lack of refining capacity. The fuel subsidy is very popular because it is the only means by which most Nigerians benefit from the country’s petroleum. I am told that civil organizations and trade unions have contingency plans in place for strikes and demonstrations should the government seek to eliminate the fuel subsidy altogether, as it might be tempted to do in light of the current fiscal shortfall. That puts the government between a rock and a hard place, given its apparent shortage of revenue.