In our search for dramatic solutions to poverty, we sometimes miss the small innovations that could make a big difference in reducing inequality.
- By Tina Rosenberg<p> Tina Rosenberg is co-writer of the Fixes column on NYTimes.com and author, most recently, of Join the Club: How Peer Pressure Can Transform the World. </p>
For all the laments we heard this year about inequality and calls to Occupy this or that, very little was actually done to close a wealth gap that, in some countries, has reached Gilded Age proportions. In the United States, the economy sputtered along and the presidential horse race soaked up most of the oxygen, while Europe spent most of 2012 peering into the abyss. In short, it was a year sorely in need of big ideas.
A look behind the headlines, however, finds an abundance of seemingly small ideas that are quietly changing the world in big ways. One comes from Nadim Matta (No. 25 on this year’s Global Thinkers list), whose Rapid Results Institute works around the world to get things done by helping people set wildly overambitious 100-day goals and then meet them. Other innovations also flowered where most people aren’t looking, and they are changing the lives of people who often go unnoticed: the world’s poor.
PAY FOR PERFORMANCE
In foreign aid: Ethiopia wants more of its children to stay in school. The Department for International Development (DFID) wants to help. Normally, the British aid agency would give Ethiopia money for building schools, hiring teachers, or taking other specific steps. Ethiopia would have to provide regular reports about how the money was used. Would the program work? No one would ever know.
This year something different is happening: DFID has decided to pay only when something good comes out. Ethiopia can do anything it wants to increase school attendance, but it will only get DFID’s money when there are measurable results. For every extra student who takes the 10th-grade exam, Ethiopia will get a payment. For every extra student who passes the exam, another payment.
The idea, in the early days of a pilot, comes out of the Washington-based Center for Global Development, which calls it “cash on delivery.” Cash on delivery could make foreign aid work better, allowing countries to do what they think works, rather than following rules made by a faraway donor. It also could raise political support for foreign aid in wealthy countries. Under cash on delivery, foreign aid is never wasted; if a program doesn’t work, taxpayers don’t pay.
With social impact bonds: Many social ills can be prevented, and prevented cheaply. Getting the chronically homeless into supportive housing, for example, both improves their lives and saves money. Other programs are proven to prevent crime or avoid hospitalizations. They, too, are bargains. But governments don’t invest in prevention — they’re too short of cash. It’s a vicious circle, and an increasingly expensive one.
This year New York became the second city, after Peterborough, England, to experiment with a new financial instrument that has attracted attention around the globe: the social impact bond. New York wants to run a program to keep young men jailed at Rikers Island from ever coming back. Investment firm Goldman Sachs is providing nearly $10 million to finance the program. The government will repay Goldman if the program works — if it cuts recidivism. And Goldman can make a profit of $2.1 million if it really, really works. If it fails, the government pays nothing.
Although untested, the model is so attractive that governments all over the world are already scrambling to set up social impact bonds, and development groups are trying to design them to deliver services in poor countries, such as preventing malaria, increasing contraception coverage, or finishing the job of eradicating polio.
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As welfare: This year, the World Bank made a remarkable announcement about the first of the U.N. Millennium Development Goals, which aims to cut extreme poverty in half. Despite the global economic crisis of the last few years, it was achieved — five years ahead of schedule. One big reason is China’s economic growth. But the second most important reason is probably a welfare program called conditional cash transfers, or CCTs.
CCTs started nearly simultaneously in Mexico and Brazil, which are still duking it out for credit. (Mexico, through former Deputy Finance Minister Santiago Levy, had the first nationwide program, but Brazil, thanks to the efforts of former Brasilia Gov. Cristovam Buarque, implemented the idea first.) The idea is to give the poorest people cash to relieve poverty now — but condition that cash on actions that will help the next generation. In Mexico’s Oportunidades program, which covers a fifth of the country, families get cash if they keep their children in school and attend regular medical checkups and health workshops on topics like nutrition and preventing dengue fever. In Brazil, the program has contributed to a stunning drop in inequality.
What’s new about CCTs is their application just about everywhere. Pushed by the World Bank and the Inter-American Development Bank, they are now used in at least 35 countries and cover half a billion people. In many countries, the CCT program is the first social welfare system ever — or the first one that works. CCTs are usually successful because handing out cash is relatively easy for even bad governments to do right. The hard part is that when recipients increase their use of health clinics and schools, countries have to build more of them, and in places that didn’t have them before.
Instead of food aid: When famine occurs, wealthy countries tend to give food, especially the United States, by far the world’s largest donor of emergency food. Shipping grain abroad was designed as a way to help American farmers. But it has always been a lousy system for helping starving people. It is inefficient: Shipping and storage cost as much as the food, and transport costs are now rising with oil prices. It’s also slow: Hungry people need food now, not four to six months from now.
What works better? Cash, or its equivalent in vouchers. The idea is old — it was discussed, among other places, in Amartya Sen and Jean Drèze’s 1989 book, Hunger and Public Action. What’s new is the bear hug it’s finally getting from food donors. The World Food Program is moving away from shipping grain toward using cash — this year a third of its donations will be in cash or vouchers — as are other major donors such as Britain. The holdout is the United States.
In some places where people go hungry, grain is needed because no food can be found. In others, however, the market works — or would work, if people could afford to buy anything.
Cash has other advantages. It allows people to buy the foods they normally eat and helps local farmers and shopkeepers — who are often put out of business when grain comes in from outside. Giving money also eliminates the horrifying scrum to grab a sack of grain thrown off the truck, which robs the weakest of the chance for food, and robs everyone of dignity.
Instead of refugee camps: The more than 100,000 Syrian refugees in Lebanon, like refugees everywhere, get support from U.N. agencies such as the World Food Program and the Office of the U.N. High Commissioner for Refugees (UNHCR). But Lebanon hasn’t set up a camp for them; they get vouchers for buying food in local shops. Refugees from the Iraq war in Lebanon, Syria, and Jordan got bank cards. They took out money from cash machines, bought food, and paid rent. They lived as close to a normal life as they could.
Refugee camps save lives — millions of lives. The problem is that once an emergency is over, the refugee camp persists. The world’s largest refugee complex, in Dadaab, northern Kenya, is 20 years old, and there are people who have never stepped outside it. In many camps, refugees are essentially prisoners — people victimized twice.
The U.S. Committee for Refugees and Immigrants has spent years fighting for alternatives to what it calls the “warehousing” of refugees. Those alternatives are starting to take hold: UNHCR now looks for ways to support refugees outside camps, giving them money and services instead. This method runs best when the money that would otherwise be spent on camps is given not only to refugees, but also to their hosts to pay for the services the refugees use.
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Microinsurance: Microcredit — tiny loans provided to poor people with no standard collateral that were a revolutionary idea when Bangladesh’s Muhammad Yunus first promoted them 38 years ago — is old enough to have offspring. Now those spinoffs are promising to help the poor in ways credit alone can’t.
This was the year of microinsurance, which now covers some half a billion people with small policies to protect their lives, health, crops, and vehicles. Poor people need insurance even more than wealthier people. With insurance, the poor can take important financial risks, such as keeping their children in school or planting their whole field, instead of just a part to save money.
But it was never feasible for insurance companies to write micropolicies; the cost of issuing a $20 policy is the same as that of a $200,000 policy. They needed cheap ways to assess risks and damages, sell policies, and pay claims. Now those channels exist. Crop insurance, for example, is possible today for small-scale farmers because of localized weather data from satellites and computerized weather stations. With information about rainfall, insurance companies don’t have to make costly visits to farms to verify crop damage. And they can sell their policies and make their payouts via cell phone, thanks to the spread of cell-phone banking in Africa.
Microfranchising: Microcredit provides, well, credit. Everything else that goes into a business is up to the borrower. But not everyone wants to be an entrepreneur, and everywhere in the world new businesses often fail. So microcredit begat the microfranchise. Remember the Avon lady? She’s a microfranchisee, a borrower who’s given a business in a box.
There may already be as many as 2,000 microfranchising companies in poor countries, among them Fan Milk, with 25,000 vendors selling ice cream and juice by bike in seven West African countries, and Ruma, with a network of 10,000 vendors selling cell-phone airtime throughout Indonesia. Now, microfranchising is taking on another role: New organizations like Living Goods in Uganda help poor people start businesses selling medicines, nutritionally fortified foods, or water filters to villagers who otherwise wouldn’t know about or be able to buy these products. The new idea with microfranchising is to make it a sustainable distribution channel — one with a known brand, a tested model, training, and inventory bought at bulk rates — for getting life-changing goods into the hands of the poor.
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Three common threads run through these ideas. They all devolve power away from donors, letting poor people decide what to buy with cash or letting poor governments choose how best to combat social ills. They all uncover new resources: Governments are finding private investors to fund programs; insurance makes the poor’s few assets more valuable; cash instead of in-kind donations enlists the energies of its recipients. Finally, all these innovations in one way or another are financial products. Inequality is stubborn because the people at the very top of society resist attacks on their excess. But here’s a big idea: Maybe financial creativity can finally start to help reduce inequality by bringing up the very bottom.