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.
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.
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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.
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 typically offered by telecommunications or Fintech 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.
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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 Global Findex data and microdata are available free online here.