Financial Inclusion and Growth - is that Possible?

There is a big push by governments to promote financial inclusion among the poor. Countries like India are trying to ensure that every household in India has at least one bank account. Other countries, like Bangladesh, are promoting the use of mobile money in the remotest corners of the country. Financial inclusion is seen as a means to reduce poverty and promote sustainable development in many parts of the world.

Now, could that be true. Can simply providing access to banks help the poor out of poverty? Unused bank accounts will not have any effect on poverty alleviation. I believe that they can be one of the means to help reduce poverty, but financial inclusion needs to be bundled with other services so that the poor can get the most out of it. Having a bank account or mobile money can benefit the poor - it could in theory encourage savings, provide a safe place to save money and reduce transaction costs by eliminating the need to carry cash to purchase goods and services. So governments need to promote these activities, along with financial inclusion, so that the poor are encouraged to open and use their bank accounts.

One way to promote the increased use of bank accounts or mobile money is to educate people the many benefits of saving money in a bank. Encouraging women to have access to bank accounts could encourage them to save more and to promote their rights within a family. Teaching family how easily financial transactions can be done can encourage people to open and maintain bank accounts.

Government too can help the promotion of financial inclusion. Instead of paying cash for different conditional cash transfer programs, the governments can directly deposit the payments directly to the bank accounts of the beneficiaries. This can ensure that the full amount of cash reaches the beneficiaries.

The government can also encourage the spread of financial inclusion by reducing transaction costs. The government can set up infrastructure so that payments for different government programs, such as paying electric bills or taxes, can be made by the people directly from their bank accounts. This can save a lot of resources of the poor as they do not have to wait for hours to pay for different government services. The private sector can also play a part. They can also be encouraged to accept payments from bank accounts or mobile money, and this will help to reduce transaction costs.

Promoting financial inclusion can save the poor millions by reducing transaction costs. It can help to improve their standard of living substantially. Thus governments should link financial inclusion with other services so that the poor are encouraged to use bank accounts.

Helping First Generation University Students

Recently, I saw this article on the New York Times and reminded me of an incident I faced as a college professor:

I was walking back to my car after teaching and met a woman standing outside my building. She asked me when the tour was supposed to end. I said I had no idea, I teach here, but the tours are administered by the Admissions Office. She then proudly said her daughter is currently touring the campus and would like to attend school here. They drove 12 hours to reach the campus for a college tour. I was happy, and being a person promoting my place of employment, asked why didn't she join the tour? A lot of parents do. She said, rather solemnly, that she didn't want to embarrass her daughter by asking any irrelevant questions, so she would rather wait outside and let her daughter take the tour so that the daughter does not get embarrassed by her mom.

She went on saying how she worked two jobs and save up so that her daughter can go to college. I looked at her, smiled, and wished her and her daughter the best of luck. I said that eventually a college degree would pay off and their family would be much better off.

We say a lot of things about ensuring more students attend college. As society, we think that giving students from poor background a full-ride is enough for them to have a great career. However, as the article shows, there are many obstacles that these first-generation students face when they set foot in college. Many have to work to pay for their books and food, while their wealthier friends can afford not to work and study or socialize instead. Many feel some degree of social stigma of admitting that they are first-generation and come from a low-income background. As the article notes:

"Ana Barros grew up in a two-family house built by Habitat for Humanity, hard by the boarded-up buildings and vacant lots of Newark. Neither parent attended college, but she was a star student. With a 2200 on her SATs, she expected to fit in at Harvard. 

Yet here she was at a lecture for a sociology course called, paradoxically, “Poverty in America,” as a classmate opened her laptop and planned a multicountry spring break trip to Europe. (Ms. Barros can’t afford textbooks; she borrows from the library.) On the sidewalks of Cambridge, students brush past her in their $700 Canada Goose parkas and $1,000 Moncler puffer jackets. (Ms. Barros saved up for two years for good boots.) On an elite campus, income inequality can be in your face." 

It can be difficult for a student to blend in. In many cases, the first-generation students feel world apart from their fellow peers.

Thus, universities and colleges should ensure that the campus is inclusive and allows first-generation students feel at ease. For example, when I was in undergrad, I had some friends sneak in and stay in the halls during Spring Break (the halls were officially closed during the break) because they could not afford to go home. Just keeping the dorms open during Spring Break could solve this issue. First-generation students need additional resources to help them succeed. So, giving all the resources to first-generation students after they set foot on campus could help them succeed in their post-graduation career.  

Importance of Remittance in Developing Countries

Remittance is the transfer of money from an individual to family members/friends who reside in another part of the same country or in a different country. International remittance has become an importance source of money for many in developing countries. Remittances are an important source of earnings.  One advantage is that it reaches the direct beneficiaries, and the other is that it is fungible, meaning that it can be used by the recipients any way they like. One disadvantage is that most of the transfers are small amounts, so they cannot be used by the families to do large-scale investments.

Nonetheless, millions of people become temporary migrants in search of increased earning potential abroad, and then send money to their families back home. Examples are the millions of South Asians working in the Middle Eastern countries. The amount these migrants send home is huge. The World Bank notes that the top recipients of remittances among developing countries are:

India - $71 billion

China - $64 billion

Philippines - $28 billion

Mexico - $24 billion

Nigeria - $21 billion

Egypt - $18 billion

Pakistan - $17 billion

Bangladesh - $15 billion

Vietnam -- $11 billion

Ukraine - $9 billion

However, as a share of GDP, it is usually the smaller countries that rank at the top:

Tajikistan - 42 percent

Kyrgyz Republic - 32 percent

Nepal - 29 percent

Moldova - 25 percent

Lesotho and Samoa - 24 percent

Armenia and Haiti - 21 percent

Gambia - 20 percent

Liberia - 18 percent

A large part of it goes straight to families, and few is lost due to corruption. For many countries, remittance outpaces the amount of foreign direct investment or foreign aid that they receive in a given year.

It is evident that such large amounts that the families get collectively helps to increase economic activity in developing countries. Families that receive remittance get richer, poverty decreases. However, it also increases the risk potential migrants are willing to take to reach other countries. Recently, we have noted how Rohingyas are being stranded on boats in sea, trying to reach Malaysia. Similarly, people are risking their lives traveling on boats across the Mediterranean to teach Europe. Recently, thousands of people died while trying to cross the Mediterranean. Although a large number of those migrants are escaping their countries because of humanitarian reasons, some of them are economic migrants. 

People will want to migrate, temporarily or permanently, to better their lives. Governments and international development partners can ensure that such migration happens in a safe way. Migrants can be a win-win situation for the sending- and the recipient- countries. The sending-countries benefit from receiving remittance and by reducing pressure on the domestic economy to create job opportunities. The recipient-countries benefit by getting cheaper workers who benefit the economy by increasing economic activity in those countries. 

In addition, governments of migrant-sending countries must also ensure that the migrants, when they return home, get the necessary training and resources to integrate back to the local economy. The sending countries can provide the returning migrants with capital and they can use the technical know how they learned abroad to set up business in their home countries. 

Panel Discussion on Forced Migration

On March 4, 2015, a panel discussion was held on the campus of Elon University, where the topic of forced migration was discussed. A number of professors teaching at Elon University shared their ideas about the causes and consequences of forced migration. I talked about the economic forces that can force a person to migrate to another place. It was a very informative session that discussed the economic, social and political factors that can influence forced migration.

Forced migration is seen in many parts of the world. One glaring example is the migration from Bangladesh to countries in South-East Asia. Newspaper articles have shown how people are trafficked and employed in slave-like working conditions in Thailand and Malaysia.

Ending Extreme Poverty

The World Bank has embarked on an ambitious target of eliminating extreme poverty by 2030. This means that the World Bank is looking to bring the proportion of people who live below the $1.25 poverty line from 18 percent in 2010 to 3 percent in 2030. Currently, there are about 1 billion people in the world who live below the $1.25 poverty line and a third of them live in India. In fact, around 60 percent of the extreme poor live in just five countries – India, China, Nigeria, Bangladesh and the Democratic Republic of Congo. Thus focusing on reducing extreme poverty will require targeted approach to assist the poor in a few countries.

Although the world made some impressive progress in reducing the proportion of extreme poverty since the 1990s, extreme poverty has actually increased in absolute numbers in Africa. The number of people in extreme poverty has increased from 358 million in 1996 to 415 million in 2011. Some of the reasons given in a Brookings report are: high population growth, high inequality, and mismatch of where growth is happening and where the poor live in Africa. Africa’s reliance on commodity exports also can make it vulnerable to fluctuations in world’s commodity prices. Thus, special focus needs to be placed on Africa to achieve this goal.

Some of the steps that will be promoted by the World Bank to reach this goal are: making the world economy grow faster, invest more in health and education, provide social safety nets to the poor, increase agriculture productivity, build infrastructure and promote trade.

Such large-scale development projects can help to lift millions out of poverty. However, to ensure that the extreme poor permanently leave their extreme poverty status, development institutions and national governments should partner with local NGOs to promote inclusive growth and shared prosperity. Local NGOs can tailor development projects according to the needs of the local regions, and their expertise about local culture and environment can be a valuable resource to development agencies in implementing their goals. 

Development institutions can also promote the use of mobile technology to bridge the communication gap, and to expand mobile banking to the remotest parts of the world. This can increase financial inclusion, which could help the poor in saving and in carrying out transactions. Finally, providing the poor with access to microfinance can help to improve their living conditions. 

Persistence of Poverty

Recently, Doris Entwisle, Linda Olson and Karl Alexander have written a book called “The Long Shadow,” which summarizes their study of 790 inhabitants of the city of Baltimore over a span of over 30 years. They looked at 790 children of different socio-economic background, aged 6 in 1982, and tracked their lives for over 30 years. The results they find is that the socio-economic status of the parents largely predict the socio-economic status of their children in their adult lives. Studying this cohort, they find that white males without a college degree fare better than African-American males without a college degree. White males are better at finding jobs through social networks. Only four percent of children from the low socio-economic status obtained a college degree, as opposed to 45 percent of children who grew up in a higher socio-economic household. The book show that the neighborhood a child grows up can significantly affect their socio-economic status in their adult life.

Similar research, such as Aaronson (1998), Datcher (1982), and Islam (2013) have shown that the neighborhood where a child grows up can have significant impact on their earnings in their adult life. And, as this interactive map on Upshot shows, the county where a child grows up in the US can have a big effect on their adult income. Thus, to fix the problems of poverty, one has to look at developing the community.

I show my students this video and ask them how to develop this community that is on the other side of the road. One side of Delmar Boulevard in St. Louis is an affluent community, while the other side is a poor community. Prosperity has not diffused from one side of Delmar to the other. This is not unique to St. Louis; we find this feature in many cities and towns across America. Local, grassroots development projects are needed to develop these disadvantaged communities. Otherwise, these pockets of urban disadvantaged neighborhoods will continue to exist and will continue to perpetuate poverty among the residents of those neighborhoods for generations. 

Inclusive Growth

One of the prime roles of the government is to ensure that the citizens of the country lead a life with improvements in the standard of living from one year to the next. One of the aims thus is to ensure that income of individuals in all income groups – from the rich to the poor – is increasing. A pro-poor policy is where the government has programs that are designed specifically to improve the income and well-being of the poor. If the government simply aims to increase GDP per capita over time, it may not be pro-poor. An example of this is given below:

GDP, or Gross Domestic Product, is defined to be the market value of all the goods and services that are produced within a country over a given period of time. It is also the total income earned by all the individuals residing in a nation. As a simple example of the importance of inclusive growth, let there be two countries, Country A and Country B, and each country has just two individuals.

In Country A, person 1 earns 100 and person 2 earns 200. So the average income is 150.

In Country B, person 1 earns 140 and person 2 earns 160. Here too, the average income is 150.

In Country A, income is much more dispersed than in Country B, although average income (GDP per capita) is the same between the two countries.  Now next year, assume the income increases to the following:

In Country A, person 1 earns 90 and person 2 earns 240. So the average income is 165.

In Country B, person 1 earns 150 and person 2 earns 170. So the average income is 160.

Now, the average income of Country A is higher than that of Country B. However, in Country A, the rich got richer while the poor got poorer. In Country B, both the rich and the poor got richer.

If we just focused on GDP per capita, then Country A did much better than Country B, because GDP per capita grew more for Country A than Country B. However, if we look at the poor, we find that the poor in Country A got worse off over time. This shows the need to promote inclusive growth in a country – economic growth should be such that all segments of the population sees their incomes grow from one year to the next, instead of favoring a few specific groups.