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.

the sting Milestones

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

A Sting Exclusive: “Regional Policy: a fully-fledged investment policy”, Commissioner Cretu reveals live from European Business Summit 2015

G20 starts to tackle inequality

This UK footballer just won free school meals for kids in the summer holidays

UN chief hopeful for Libya, after Quartet meeting in Tunis

Lithuania finds the ways to maintain its energy security

Climate change could be making forests shorter – this is how

Why carbon capture could be the game-changer the world needs

Covid-19 crisis shows supply chains need to embrace new technologies

Greece @ MWC14: Greek-born mobile champions at MWC 2014

Can we crack the hydrogen puzzle this time around?

The von der Leyen Commission: for a Union that strives for more

Is our brave new world about to burst?

More women in Latin America are working, but gender gap persists, new UN figures show

What the car industry has done to help fight climate change – and what it needs to do next

Only a few months away from the single European patent space

How the gender commuting gap could be harming women’s careers

Simple Technology Saving Lives: Remote Auscultation

How technology is driving a fourth wave of environmentalism

Why we need to solve our quantum security challenges

State aid: Commission approves Danish public financing of Fehmarn Belt fixed rail-road link

Home or office? Survey shows opinions about work after COVID-19

How AI is serving up aces at Wimbledon – and what the technology means for the future of sport

A lack of affordable homes is forcing young Britons to live with their parents

The benefits of a cashless society

Mergers: Commission refers acquisition of newly created joint venture by Telefónica and Liberty Global to the UK competition authority

In Tunisia, budding entrepreneurs can take a year off their job

This South Korean city once had the biggest coronavirus outbreak outside of China. Now it’s reported zero new cases

8 top stories from the week in Davos 2020

This is how much data we’re using on our phones

Palliative care and health coverage: informing is also universalizing

Mental Health in times of a pandemic: what can each individual do to lessen the burden?

MEPs call for new EU strategy to promote democracy in Russia

Russia is ready for its Phase 3 evaluation once it fulfills high-priority recommendation

Budget MEPs approve €104.2 m in EU aid to Greece, Spain, France and Portugal

What has COVID-19 taught us about decarbonized electricity grids?

The technologies – and thoughtful collaborations – that can build resilience in the food system after COVID-19

Foreign Affairs Council (Trade) of 22/05/2018: EU relations with key trading partners

Geopolitics and investment in emerging markets after COVID-19

Globally, youth are the largest poverty-stricken group, says new UN report

The UN’s unyielding effort to tackle sexual abuse and exploitation: our quarterly update

UN condemns Syrian ‘war on children’ as up to 30 reportedly killed in clashes

Road use charges: reforms aim to improve fairness and environmental protection

The EU’s Response to COVID-19

Nearly a third of the globe is now on Facebook – chart of the day

October’s EU strong digital mix: From Safe Harbour to Net Neutrality, Roaming and Snowden

Afghanistan: Civilian casualties caused by IEDs has reached ‘extreme levels’, UN warns

What is the biggest benefit technology will have on ageing and longevity?

After the George Floyd protests, what next for racial justice in the US?

How businesses can help solve society’s workforce problems

European Union: From financial consolidation to deeper political division

Why gin made from peas helps the environment

‘Severe’ new US asylum restrictions will put vulnerable families at risk, UN refugee agency says

MEPs demand safe and clean travel

European Semester 2018 Spring Package: Commission issues recommendations for Member States to achieve sustainable, inclusive and long-term growth

Q&A on extraordinary remote participation procedure

Earthquake: Monte Dei Paschi Di Siena

Big tech cannot crack down on online hate alone. We need to fund the smaller players

Governments and non-state actors need to take urgent action to meet Paris Agreement goals

Security Council should ‘nurture’ Colombian consensus against return to violence, top UN official urges

Palliative care and Universal Health Coverage: how to advocate for the inclusion of palliative care in UHC

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

%d bloggers like this: