Money to the People

Delivering foreign aid directly to the world's poor by electronic transfer would cut waste and reduce corruption.
  • and Henry Jackelen, United Nations
February 25, 2011 |
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Earlier this year, the $21.7 billion Global Fund to Fight AIDS, Tuberculosis, and Malaria was forced to retract or suspend millions of dollars in aid after rampant corruption was discovered. An audit of a modest portion of selected programs found staggering percentages of money misspent or unaccounted for: 67 percent in Mauritania; 36 percent in Mali; and 30 percent in Djibouti. There were also serious concerns involving millions of dollars sent to Zambia. Even more remarkable, though, was the fund's response to the resulting criticism.

"The messenger is being shot," Jon Liden, the fund's spokesman, said. "We would contend that we do not have any corruption problems that are significantly different in scale or nature to any other international financing institution." It was a remarkably candid statement, one that mirrors the standard criticisms of foreign aid as being needlessly wasteful. Regardless of the hyperbolic attacks on international aid, even the staunchest advocates recognize that it doesn't deliver the proper bang for its buck.

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."

As Jean-Michel Severino, the former managing director of France's international development agency, noted in a paper co-written with Olivier Ray, it "is hard to find other examples of public policies whose performance is assessed so little on the basis of results and so much on the basis of expenses." Rajiv Shah, the administrator of the U.S. Agency for International Development, recently echoed that sentiment. "This agency is no longer satisfied with writing big checks to big contractors and calling it development," he said.

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.

The current shift to electronic delivery will undoubtedly cut the cost of administration and reduce corruption. In Brazil, for instance, the cost of administering Bolsa Família grants was cut from 14.7 percent to 2.6 percent of the value of the grants dispersed from 2001 to 2005. In South Africa, the costs of delivering social security fell 62 percent after the government partnered with banks.

A recent study funded by the Bill and Melinda Gates Foundation detailed the money that could be saved if India shifted to electronic payments. Automating all government payments, the report found, could save the Indian government $22.4 billion annually. About 75 to 80 percent of that amount would come from reducing corruption. The up-front costs of moving to electronic payments, the report said, would be recovered after just one year.

To date, less than one-quarter of government-to-person transfers are delivered into a usable bank account, and initial funding would go to setting up the necessary infrastructure to create simple no-frills bank accounts. The accounts would provide a safe and secure place to receive aid, deposit funds, save, and build wealth over the long-term.

Of course, all this could be politically sensitive. Recipient governments might be hesitant to streamline the aid bureaucracy, and the amount of the transfers could be contentious, as payments that are too large may transform local economies in ways that could have unintended political consequences. There are regulatory challenges as well, especially in delegating transactions to telecommunication firms or agent networks. But while these challenges are not insignificant, they are also manageable.

If donor governments are serious about measuring lasting change, they should consider shifting foreign aid toward programs that deliver funds electronically directly to the poor. Direct transfers are proving not only to be good social policy, they are also an excellent economic stimulus. Under the current system, the poor receive only a small fraction of development funds, but with this shift they would receive the vast majority and be empowered, finally, with the citizenship tools of the modern age.