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

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

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

Syrian crisis is ‘clearest example’ of foreign investment in terrorism, Deputy Prime Minister says at UN

Can agroforestry save India’s rivers and the farms that depend on them?

UN Security Council ‘utterly failed’ Syrian detainees; a victim voices her plea to ‘end impunity and stop this horror’

Why sustainable packaging is good for profits as well as the planet

Cohesion Policy: EU invests €880 million to improve Poland’s railway system

Ethical education as an obligatory course in medical curriculum

UN human rights chief denounces grave ‘assaults’ on fundamental rights of Palestinian people

Is this 3D-printed building the future home for astronauts on Mars?

Terrorism and migrants: the two awful nightmares for Europe and Germany in 2016

UN space-based tool opens new horizons to track land-use on Earth’s surface

UN chief praises Japanese climate resilience, as Typhoon Hagibis cleanup begins

This AI outperformed 20 corporate lawyers at legal work

Refugees now make up 1% of the world’s population

It’s getting harder to move data abroad. Here’s why it matters and what we can do

A Sting Exclusive: “Our ambition is by 2020 Indonesia to become an emerging power of World’s Maritime Access”, reveals the Chargé d’Affaires at the Embassy of Indonesia in Brussels, treating WEF, ASEAN and EU-Indonesia relations on the eve of the World Economic Forum East Asia 2015 in Jakarta

Vegans in France are using extreme tactics to stop people eating meat

ECB is about to lend trillions to banks

These are the world’s most future-proof cities

Sudan: UN chief deplores excessive force used against pro-democracy protesters, calls on military and civilian leaders to ‘stay the course’ in negotiations

UN ‘determined to lead by example’ on disability rights: Guterres

Germany and France only care about keeping their borrowing cheap

EU Parliament semi worried over democratic deficit

Is co-living an answer to the affordable housing crisis?

Will Eurozone be able to repay its debts? Is a bubble forming there?

ILO warns of widespread insecurity in the global labour market

EU car manufacturers worry about an FTA with Japan

WEF Davos 2016 LIVE: Banking moguls continue brandishing financial Armageddon to intimidate us all but in Davos they worry about the very distant future

UN chief welcomes start of Church-mediated national dialogue in Nicaragua

World Food Programme accesses Yemeni frontline district for first time since conflict began

Humanitarian Aid: additional €50 million to tackle drought in the Horn of Africa

Microplastics have been found in Rocky Mountain rainwater

Citizens to be the cornerstone of the Conference on the Future of Europe

Is sub-Saharan Africa ready for the electric vehicle revolution?

Syria: Thousands of children ‘hemmed in’ by ‘brutal and gratuitous’ spike in violence

Changing the EU copyright law won’t bring us much closer to Digital Single Market

5 futuristic ways to fight cyber attacks

IMF to teach Germany a Greek lesson

Here’s what keeps CEOs awake at night (and why it might be bad news for your next job)

EU: Huge surplus in the trade of services with the rest of the world

Europe’s dirty air kills 400,000 people every year

Here’s a reason to feel cheerful – the world is full of Good Samaritans

UN Member States overwhelmingly support end of US embargo against Cuba

Mergers: Commission approves acquisition of L3 Technologies by Harris Corporation, subject to conditions

4 things President Trump could learn from Jimmy Carter

Reconciliation helps ‘repair fractures’, enable lasting peace, Security Council hears

EU Visa Policy: Commission welcomes agreement to strengthen EU visa rules

Guinea-Bissau: Upcoming elections vital to prevent ‘relapse’ into instability, says UN envoy

230 Junior Entrepreneurs and over 70 guests attended the International Congress on “Entrepreneurial Skills for Youth”

Manufacturers Get Smarter for Industry 4.0

Iraq protests: UN calls for national talks to break ‘vicious cycle’ of violence

The clothes of the future could be made from pineapples and bananas

Obese people more likely to smoke, says new gene research: WHO

This is why AI has a gender problem

UN chief hails victory of ‘political will’ in historic Republic of North Macedonia accord

Can self-charging batteries keep us connected for ever? A young scientist explains

Climate change and health: creating global awareness and using earth resources wisely

UN envoy says he ‘is ready to go to Idlib’ to help ensure civilian safety amid rising fears of government offensive

UN rights chief welcomes new text to protect rights of peasants and other rural workers

Anti-terror measures against youngsters’ online posts ‘linked to spike in child detention globally’

Tax evasion and fraud threaten the European project

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