Friday, February 25, 2011

Changing international aid with electronic transfers

We have talked before about how mobile banking can provide a wealth of benefits for those in poverty. An article that we found today introduces us to the possibilities that electronic banking technology can have for international aid.

It is now possible for donor governments to deposit their aid directly into the accounts of those on the "bottom of the pyramid" Electronic transfers can save the donor governments a lot of money and paperwork. The transfers also can cut down on corruption as the money goes through less people who could grab some of it.

From Slate Magazine, writer Henry Jackelen and Jamie Zimmerman introduce us to the possibilities.

Recent breakthroughs in mobile technology, such as biometric IDs and point-of-sale devices that act as portable registers for banking transactions, offer a simple but radical way to reform foreign aid: Donor governments could deliver electronic payments directly to the world's poor. With the click of a mouse, massive amounts of aid could be delivered directly to the poorest, quickly and accountably.

Today, foreign aid is typically measured not by the amount of aid that actually reaches the poor, but by merely adding up the amount spent. While there have been unquestionable successes, more than $2 trillion of aid has passed from rich to poor countries over the last half-century, and as William Easterly wrote in 2002, there has been remarkably little change in the "bureaucratic characteristics" of delivery, regardless of "numerous attempts at reform."

Two remarkable shifts happening inside developing countries suggest why delivering aid directly to the poor, via electronic transfer, is so promising. Starting around 15 years ago, Brazil, Mexico, and several other countries began to move away from paternalistic policies where the poorest citizens were given commodity aid such as food, and replaced them with a new kind of transfer: direct donations of cash. Many of these programs conditioned the transfers on children attending school, receiving vaccinations, etc., leading to a "created demand" for health and education and, in turn, pressure on governments to improve the quality of these services.

In a parallel shift, throughout the developing world countries are now moving away from cash payments delivered by armored car, post offices, or state lottery offices, to electronic payments directly into recipient bank accounts or through other methods like charge cards and mobile-phone payments.

Breakthroughs in mobile banking, branchless banking—that is, using retail shops as banking surrogates—debit cards and ATMs, and point-of-sale devices, used in conjunction with biometric identification tools such as iris and fingerprint scanners, hold the potential to enable massive, if not universal, provision of cost-effective and highly accessible bank accounts even to some of the most remote, economically excluded populations.

These two changes have already had a revolutionary effect. In Mexico, social transfers have been correlated with reducing poverty by 8.2 percent and closing the poverty gap, or the average wealth of the poor below the poverty line as a percentage of the poverty line, by 23.6 percent. In Brazil, where more than 12 million households receive an average of $55 a month under the Bolsa Familia program, these transfers help to explain the country's GDP growth and the rapid drop in inequality over the last decade. In many countries, recipients can receive their transfers electronically through ATM cards, mobile phones, or via direct deposits into bank accounts.

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