Get out, stay out: how financial resilience helps end poverty

poverty

(Zeyn Afuang, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Leora Klapper, Lead Economist, Development Research Group, World Bank


Hundreds of millions of people around the world live in extreme poverty. Global development work mostly focuses on helping those poor people become prosperous. Policy-makers generally support financial inclusion because it creates opportunities for poor people to build income by investing in business, education and other opportunities.

But the escape from poverty is not always a one-way trip. Once you climb out, there’s no guarantee you won’t fall back in. An equally vital but less well-understood development goal is to prevent people from becoming poor in the first place.

Alongside the global poor is a much larger group of people who are just an emergency away from the poverty line. Minority groups, women and the poor are at greater risk to financial emergencies than the rest of the population. For them, the climb out of poverty tends to be steeper and harder. It doesn’t need to be: policy-makers should concentrate on the importance of financial resilience for sustainable development and the ways that inclusive financial technology can get families more of the money that they need when they need it.

One estimate found that medical bills pushed 100 million people into poverty in the year 2010. Those in low-income economies are especially vulnerable, but so are those in wealthier places. In the United States, millions of people became poor during the global recession.

Financial resilience refers to the ability to maintain spending and living standards during an economic emergency. To measure it, the Global Findex survey asks people if they could come up with emergency funds equivalent to 5% of per capita gross national income in local currency within the next month. The survey also asks people where they would get the money.

Emergency funds

Financial fragility is a global problem. In the US, only 47% of poorer adults say they could come up with emergency funds – the lowest share among the major advanced economies of the G7. Wealthier US adults are nearly twice as likely to report being able to find the money. No other G7 country has an income gap of this magnitude.

The share of adults who say they could cover an emergency expense varies globally, as does the source of money. On average in high-income economies, three-quarters of adults report that it would be possible, compared with half in developing economies. In wealthier economies people mostly rely on savings, while in poorer economies they are more likely to pick up extra shifts at work, get a loan from an employer, or borrow money from friends or relatives. Vulnerable groups such as women and the poor are less likely to have access to savings and employment opportunities when times are tough.

The source of emergency funds can be a determining factor in whether people bounce back from an economic emergency or wind up in poverty. A study in Andhra Pradesh, India found that households often turn to expensive informal money lenders to pay for emergency medical bills. The combination of health costs and debt is devastating.

“[I]t is the interaction between these two factors…that is most significantly associated with a previously non-poor household’s descent into poverty”, the author writes.

Mobile money

People are more likely to ask friends and relatives for money than they are to take out a loan. A good way to improve financial resilience is to lower the cost of moving money through social networks. One of the most exciting innovations in this regard is mobile money technology, which allows people to send and receive money using text messages on simple mobile phones. Mobile money accounts are offered by telecommunications companies rather than traditional banks. They are most common in sub-Saharan Africa, but are gradually spreading to other regions, as the Global Findex shows.

Here’s an example of mobile money’s cost-cutting ability. In 2008, the average mobile money transfer in Kenya went to someone 124 miles away from the sender. A bus ride of that distance would cost about US $5, whereas the mobile money transfer fee would be only US $0.35. That’s a big reason why research has found that mobile money users are better able than non-users to collect money and maintain consumption levels during an emergency.

Remittances

Cross-border money transfers can play a similar role. People who have access to international remittances from migrant relatives are less likely to take out bank loans during a health crisis. One study found that on average, Mexican households doubled their debt burden when faced with serious health emergencies – but there was no such effect on households who got remittances from a relative in the US.

Using technology to reduce costs is one of the keys to improving financial resilience. Migrants blow roughly $25 billion annually on remittance fees, resulting in wasted opportunities for development. Banks charge almost 11% on average per remittance transaction, making them the most expensive service provider. Mobile money operators are the cheapest, at roughly 3% – which is the target outlined in the UN’s Sustainable Development Goal 10. Letting new service providers operate through telecommunications companies and banks could help bring down costs and improve the benefits of remittances.

Remittances, whether domestic or international, can play a big role in building financial resilience. Savings accounts and safety nets are among the other factors that can prevent people from falling into poverty. Policy-makers should draw on all these tools, and pay more attention to the importance of financial resilience for sustainable development.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

While EU Open Days 2013 discuss the 2020 strategy, Microsoft shares a glimpse of EU 2060

We must help developing countries escape commodity dependence

EU Commission accuses Germany of obstructing growth and the banking union

Social, cultural diversity ‘an enormous richness, not a threat’ Guterres declares calling on investment for a harmonious future

Venezuela migrant crisis begs a ‘coherent, predictable and harmonized’ response: UNHCR

Accountability for atrocities in Myanmar ‘cannot be expected’ within its borders – UN investigator

Backed by UN agency, countries set to take on deadly livestock-killing disease

Internet of Things: a Force for Good or Evil?

How to stop plastic pollution at source

World must avoid a new Cold War, UN chief tells economic forum in Russia

Why the 33,000 staff European Commission did not have a real contingency plan for the refugee crisis?

EU Parliament: A catastrophic crisis management by European leaders

Baku forum to push back against ‘rise of hate’ with strong call for cultural and religious tolerance, says UN official

Margrethe Vestager, EU Commissioner in charge of competition policy, during a recent press conference in Brussels / Berlaymont. (Copyright: EU, 2018 / Source: EC - Audiovisual Service / Photo: Jennifer Jacquemart)

EU opens investigation into Qatar Petroleum over potentially restrictive gas contracts

Grexit no longer a threat but how to manage a “tutti frutti” government if not with fear?

More than 3,400 classrooms damaged or destroyed by Cyclone Idai in Mozambique, says UN Children’s Fund

Is it true that the G20 wants to arrest tax evasion of multinationals?

DR Congo: Insecurity and attacks mean Ebola will keep spreading, warns world health agency

Commerce is on the cusp of radical change. Is your organization ready?

Elections in Europe: No risks for the EU, leaders readying to face Trump-Brexit

An economist explains how to value the internet

Main results of EU-Japan summit: Tokyo, 17/07/2018

FROM THE FIELD: Murals help heal wounds of bloody conflict in Guatemala

This is what the world’s CEOs really think of AI

Commissioner sings “Volar-e” but the European driver no “Cantar-e”

Copyright: European Union , 2017; Source: EC - Audiovisual Service; Photo: Frank Molter

EU hits deadlock on the future of glyphosate a month before deadline

UN chief sends condolences to families of Malawi flood victims

Draghi drafts a plan to donate more money to bankers, the era of ‘money for nothin’ is flourishing

Cancer is a growing global threat and prevention is key, UN study shows

6 facts to know about EU alternative investment funds

Wednesday’s Daily Brief: Syrian detainees, Zimbabwe hunger crisis, Kabul attack, Mexico disappearances, new tech to feed the world

UN chief condemns deadly attacks in Afghanistan

Hopes for Palestinian State hit by ‘facts on the ground’ : senior UN official

European Commission reacts to the US restrictions on steel and aluminium affecting the EU

Do the giant banks ‘tell’ Britain to choose a good soft Brexit and ‘remain’ or else…?

The London City-EU connection holds despite of Brexit and the ban of LSE-Deutsche Börse merger

MEPs and EU ministers agree on closing information gaps to enhance security

Want a fairer society? This economist says he has the answer

Future EU farm policy: Agriculture MEPs urge fair funding, no renationalisation

Eritrea sanctions lifted amid growing rapprochement with Ethiopia: Security Council

Big world banks to pay $ 4.95bn for cheating customers; Is it a punishment or a gentle caress?

“We need to use the momentum globally to ensure that corporations pay their fare share of taxation”, EU Commissioner Valdis Dombrovskis outlines from the World Economic Forum 2017.

93 million children with disabilities ‘among the most likely to be left behind’: UN rights chief

Education remains an impossible dream for many refugees and migrants

New rules on drivers’ working conditions and fair competition in road transport

Did Draghi ask the Germans to accept a drastic change of austerity policies?

More funding needed to tackle child labour in agriculture says UN, marking World Day

Would you let an AI vote for you?

This crisis cannot be confronted with statistics

Annual UN women activists’ summit opens with focus on services, infrastructure

Who is to pay the dearest price in a global slowdown?

EUREKA @ European Business Summit 2014: Innovation across borders – mobilising national R&D funds for transnational innovation in Europe

These are the world’s most future-proof cities

We can save the Earth. Here’s how

School closures triple in Central and Western Africa as education comes under fire

This Japanese company pays its employees to get a good night’s sleep

5G in Russia: a local and global view on the way forward, in association with The European Sting

Three steps we must take to secure the future of our forests

These are the top countries for travel and tourism in 2019

“We have to do a better job of creating alternatives to violent extremism”, US Secretary of State John Kerry from Switzerland; the Sting reports live from World Economic Forum 2015 in Davos

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s