Thursday, 1 March 2012

Money and Human Development

In these exclusive interviews we speak to Prof. Jacques Attali (Former adviser to President François Mitterrand, first president of the European Bank for Reconstruction and Development and ranked as one of the top 100 public intellectuals in the world) and Dr. Tilman Ehrbeck (CEO of the Consultative Group to Assist the Poor - CGAP). We discuss the state of financial inclusion globally and look deeper into how microfinance, technology and other instruments are working to eradicate poverty and bring opportunity to billions worldwide.

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Vikas Shah, Thought Economics, March 2012


It is difficult to underplay the profound importance of money in the human story.

We are a species that is highly social in nature and intricately bound through exchange behaviours (whereby we 'trade' things of scarcity or value to confer mutual advantages between us as groups and individuals). One could consider, in this sense, that money has both a functional and a psychological nature. In the first case we see money as an economic tool which stores the potential for us to acquire the goods and services we need to survive, flourish and achieve our goals as individuals or groups. Over the millennia, different iterations of human culture have experimented with bartering, gifting and even reciprocity of action but money has remained the most successful and efficient means yet discovered to facilitate such exchanges. In the latter case money becomes a manifestation of our individual and cultural instincts. Money is compatible with our need for immediate gratification of self-interest along with our need for security and abstractions such as organisation and social capital. As Stephen Lea and Paul Webley (in 'Money as tool, money as drug', Behavioural and Brain Sciences, 2006) outline, "...one of the striking facts about money is its cultural dominance: it is taken up irresistibly by any human society that encounters it..."

In his 1944 paper 'The Role of Money in Economic History', Wesley C. Mitchell also noted the empowering property of the instrument. "When money is introduced into the dealings of men, it enlarges their freedom. For example, when a personal service is commuted into a money payment, the servitor has a wider choice in the use of his energy and the lord a wider choice in the use of his income. By virtue of its generalised purchasing power, money emancipates its users from numberless restrictions upon what they do and what they get. As a society learns to use money confidently it gradually abandons restrictions upon the places people shall live, the occupations they shall follow, the circles they shall serve, the prices they shall charge and all the goods they can buy. Its citizens have both a formal and a genuine freedom in these respects wider than is possible under an organisation in which services and commodities are bartered..." Mitchell also notes that, "...Adam Smith's obvious and simple system of natural liberty seems obvious and natural only to denizens of a money economy."

In development thinking it holds that "...people at different levels of living tend to hold different views about what 'poverty' means. The critical level of spending that a poor person would deem to be adequate in order to escape poverty is likely to be lower than the level a rich person would deem adequate to avoid becoming poor." (as Ravllion et. al outlined in their 2008 working paper for the World Bank entitled 'Dollar a Day Revisited'). Based on purchasing power parity it would seem (realistically) that where $2 a day are required to cover the most basic survival needs of an individual, around 40% of the world could be considered to be living in absolute economic poverty. Where we argue that survival is not enough and society must allow for health, education and some economic opportunity we may raise that to $10 a day (less than one tenth of the average US salary). On that basis we find that almost 80% of all the citizens of our planet are in economic poverty. So how can we guarantee a better economic deal for the majority of the world's population?

In these exclusive interviews we speak to Prof. Jacques Attali (Former adviser to President François Mitterrand, first president of the European Bank for Reconstruction and Development and ranked as one of the top 100 public intellectuals in the world) and Dr. Tilman Ehrbeck (CEO of the Consultative Group to Assist the Poor - CGAP). We discuss the state of financial inclusion globally and look deeper into how microfinance, technology and other instruments are working to eradicate poverty and bring opportunity to billions worldwide.

Professor Jacques Attali was special advisor to the President of the French Republic from 1981 to 1991. He was also the founder and first president of the European Bank for Reconstruction and Development from 1991 to 1993 and is now president of A&A (an international consulting firm) and president of PlaNet Finance (the largest global institution to support microfinance, advising and supporting institutions in 80 countries). Jacques Attali has been appointed Chairman of the Committee for the Liberation of French Growth by the President of the Republic since August 2007. In 1980, he founded Action Against Hunger in 1984 and launched the European Eureka program (an extensive program on new technologies that gave rise, amongst other things, to MP3). In 1989, he launched an international program of action against the catastrophic floods in Bangladesh and advised the Secretary General of the United Nations on nuclear proliferation threats.

Attali holds a Ph.D. in Economics and is a graduate of the Ecole Polytechnique, the Ecole des Mines, Institute d'Etudes Politiques and the Ecole Nationale de l'administration. He taught theoretical economics at the Ecole Polytechnique, the Ecole des Ponts et Chaussées and Université Paris-Dauphine, has received honorary doctorates from several universities and is a foreign member of the Universal Academy of Cultures. Jacques Attali is also a columnist for The Express and has authored over fifty books, which have been translated into over twenty languages and distributed to over six million copies worldwide. According to the Foreign Policy Magazine (May / June 2008), Jacques Attali is, "one of the hundred most important public intellectuals of the world."

Dr. Tilman Ehrbeck is CEO of the Consultative Group to Assist the Poor (housed at the World Bank), an organisation which is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. Housed at the World Bank, CGAP provides market intelligence, promotes standards, develops innovative solutions and offers advisory services to governments, financial service providers, donors, and investors.

Prior to CGAP, Tilman was a partner with management consulting firm McKinsey & Company, where he held a series of leadership positions in the firm’s global Banking & Securities and Healthcare Payor & Provider Practices. He has worked in Africa, Asia, Europe, and North America. He was part of the leadership of the firm’s Indian operations in 2005–2009. Over the past 10 years, he has advised a number of governments, microfinance networks, foundations, and commercial players on a variety of financial inclusion issues ranging from new products and services aimed at better meeting underlying end-user needs, to new business models significantly lowering operating costs, to enabling infrastructure and policy interventions. Tilman holds a Ph.D. in Economics from the European University Institute, the graduate school and research center sponsored by the European Union, and an undergraduate degree from the University of Hamburg.

Q: What is poverty, and why does inequality exist on such a large scale in our world?

[Prof. Jacques Attali] Poverty is a result of history first of all. Mankind was always 'poor' according to our development standards. Growth has been very high in the last two centuries, but only in the west for a while, and now somewhat more globally... but with great concentrations of wealth in a very small number of people (including the middle class who not considered poor by development measures). An increasing number of inhabitants of our world have not been reached by economic growth.

Inequality is strong because wealth goes to wealth. The economic and political organisations of the world are such that the negotiation power of the poor is minimal if not zero. There are no trade-unions, no capacity to negotiate... even in the US, Europe and elsewhere... the level of concentration of concentration of wealth (even in these developed countries!) is bigger than ever. At a global level, you see this even more as there is no effective transfer system to ensure some kind of social benefit for the poor of the world.

Therefore, inequality which exists within the developed countries because of the weak power of negotiation of the poor is even worse at the world level because they have no power of negotiation or wealth-transfer systems.

Q: Do you feel aid and charity have been effective at dealing with the plight of the world's poor?

[Prof. Jacques Attali] When you consider that wealth transfer internally in western countries is around 15-25% of GDP... and that is not enough to solve the problem of poverty in the west... then you compare that to a transfer of less than 0.5% between North and South... that is just nothing compared to the needs but, of course, it's better than zero (but it's nothing serious...).

The only serious mechanisms which have made progress in this sense are growth, microfinance and democracy. Economic growth will naturally have some spill-over to the poor, democracy helps transparency together with political consciousness and microfinance helps the very poor to develop their own business and allows them to control their own lives without expecting the help of anyone.

Q: What is the role of financial inclusion & financial access within development?

[Dr. Tilman Ehrbeck] Let me start I with an observation. Across the globe the vast majority of poor families live and work in the informal economy. Typically they carry out small entrepreneurial activities, and their business and household needs are intermingled. Poor families in the informal economy are both producers and consumers. In both roles, they need access to financial services at least as much as wealthier producers and consumers. They may even need it more because they have far less regular income and expense streams and less of an economic cushion to begin with. As producers, they need access to financial service to invest, generate incomes, and build assets; as households they need financial services to smooth consumption, meet savings objectives, and manage risks.

Despite these needs, the reality is that more than half of the estimated 2.7 billion working age adults globally are excluded from formal financial services. It doesn't mean they don't use financial services, it just means they use informal financial services that tend to be far less reliable and far more costly. In some sense, poor families, as far as access to financial services is concerned, are doubly penalised. They need financial access more than we do, but they only have access to inferior informal services.

Q: What is financial inclusion and why does microfinance need to exist?

[Prof. Jacques Attali] The key for the development of the poor is to include them in the democratic process as well as in the market economy. Therefore, inclusion is the key for getting rid of poverty. Political inclusion... social inclusion.... environmental inclusion... education and knowledge inclusion... network inclusion.... all these types of inclusion which are taken for granted by people who are inside the growth process.

Financial inclusion is one dimension, but democratic inclusion and knowledge inclusion are also fundamental as well as networks with technology. Financial inclusion is fundamental because if someone has no access to finance- they have no way to finance a business, and therefore nothing is possible. When you know that only around 1 billion people in the world have a bank account and then you consider that without a bank account, an individual can have no hope of obtaining credit for an income generating activity? it's clear that if you can create that inclusion, you can do something. Income generating activities are so important to get people out of poverty, and microfinance is therefore a very important tool.

Microfinance is more than 'microcredit'. Microcredit is for income generating activities, nothing related to consumer loans and so on... Unfortunately spoil the word 'microcredit' by applying it to consumer loans. Microfinance is a much larger concept that includes savings (people need to keep their money somewhere safe, not just under a mattress! saving is fundamental) and micro-insurance... If someone is getting out of poverty but becomes ill and has to finance healthcare? he can easily fall back into poverty. The most common event to push someone back into poverty is illness without insurance. There are many other dimensions. While just 1 billion people have bank accounts, 5 billion people have mobile phones.. We believe that in the future, the phone will be a very important dimension in microcredit. We also have other dimensions such as value-chain projects where you find people in the South who are producing products which could be useful for companies elsewhere, and you improve their bargaining power by improving the quality of their products and negotiate for them. In Ghana, for instance, we help women producing Shea butter to improve the quality of their product, to get rid of useless intermediaries and to increase their revenue through better negotiating with large multinationals who use Shea butter for cosmetics or chocolate!

Very often we quote a Chinese proverb saying that it's better not to give a man a fish, but to teach him how to fish... but that's not enough! If someone knows how to fish, but cannot finance a net, a hook and a stick? he's nowhere.

[Dr. Tilman Ehrbeck] If we start with the assertion that financial inclusion without doubt is beneficial, the question arises as to how we achieve it? What we need is an ecosystem of financial services providers who can reach poor families in the informal economy with the broad range of financial services products that meet the underlying needs.

To many people the word 'microfinance' (incorrectly) means one product, specifically a short-term working capital loan delivered by a specialised entity, the microfinance institution. This is part of the answer, but in practice it sits as part of the ecosystem that is required to reach poor households in the informal economy with the broader range of services and instruments they require.

Q: How is microfinance rolled out in a country, and how does it sit alongside conventional financial instruments?

[Prof. Jacques Attali] There are many different mechanisms. One is to encourage existing banks to develop their own microfinance subsidiaries. We see this where a 'classic' airline may have a low-cost subsidiary. Another mechanism is where you have pure independent microfinance companies developing. They can commercial, virtual, co-operative or NGO based. All forms exist.... more than 12,000 exist in the world today.

Today, there are around 70 billion dollars invested in microfinance worldwide. More than two thirds of this comes from the savings of the poor themselves. Something around 10-15 billion dollars comes from the investment funds worldwide. It's not bad... We run a fund called "Planet Responsibility" which has around 1 billion dollars under management to give credit lines to microfinance institutions. That makes a reasonable return.

Q:Who are the key participants in the ecosystem delivering financial services to the poor?

[Dr. Tilman Ehrbeck] I, and the people I am working with (including our partners and colleagues at CGAP), believe in access to financial services as a responsible market development exercise.

Ultimately, there needs to be a broad range of financial services providers in the local economy who understand low income clients and can meet their needs. In turn, these providers must be trusted by the end beneficiaries. You need a provider ecosystem. That ecosystem itself requires a number of different types of players because the provider economics are so different across products.

Let me illustrate that with credit and insurance as examples. In credit, from a provider-economics perspective, the key is how you extend and manage credit risk at a very local level. The ingenuity of the original microcredit revolution was the innovation of social collateral. That allowed local MFIs to manage the provider economics, and then they could scale and finance themselves in secondary markets. Insurance requires different players. By definition, insurance is a financially inclusive exercise. You want big risk pools. You need entities that can aggregate and manage risk at a regional, national or even global level.

The type of entities that have to come together for a provider ecosystem that works for the poor are very different. You need institutions that are very close to the local community, but you also need well-capitalised and well-regulated entities at the capital markets back-end that can aggregate and manage risk. You also require a payment and transactional backbone to connect various players, ideally as a shared utility.

All this is from the provider perspective. The consumer doesn’t really care. The consumer wants an attractive value proposition delivered conveniently. That’s what we are used to, for example, when you use your ATM card to get cash on a trip. There is a whole ecosystem that delivers that value proposition to you: The bank that issued your ATM card and with whom you have an account; all the people related to the card, perhaps VISA or Mastercard; the ATM network; the data processors; the clearing house and more. There may be ten or twelve service providers who combine (unseen to you) to deliver a value proposition that is convincing to you. That is what we need for the base of the economic pyramid as well. An eco-system of providers where different providers do what they are best at and combine to deliver value propositions that work for poor families in the informal economy.

In the context of a market development exercise, government can play a big, different role: First of all, government is a regulator of financial services providers. Second, government often owns or can create infrastructure such as unique national identities that can be used to lower costs for everyone. Third, government has payment interactions with citizens and can use that to catalyse financial access. In many cases, the government may also own financial services providers. In its capacity as owner, government however shouldn’t be different from private providers. Government-owned institutions also need to understand their clients, be financially viable, follow prudential regulation and consumer protection rules, and so on.

As to foundations and development agencies that want to accelerate the market development to reach more poor people. They have two fundamental roles in the context of market development. The first is to provide public goods such as knowledge, data or infrastructure. The other is to de-risk and support demonstration effects at the level of business model or product innovations, with the explicit objective to crowd-in others who ultimately should deliver financial services on a sustainable basis.

Q: What are the real-world social, economic and political outcomes from microfinance?

[Prof. Jacques Attali] There are a lot of social impact studies which have measured this. The consequences on health are clear.... better health for women and their families... with lower infant mortality. There are also consequences on children's education. The generation after the parents who use microfinance are better educated and often do achieve careers as doctors, surgeons, lawyers and so on!

Usually as people become less poor, they develop into a market economy. When that is poorly regulated, it can increase the debts of the poor... which is extremely dangerous. Microfinance must be strongly regulated and we do our best to do that.

There are also very important political consequences. Microfinance is a clear help to the stability of a democracy. It also creates jobs, which further supports democracy in countries where the concept may be at stake.

[Dr. Tilman Ehrbeck] Economies that have a higher degree of financial inclusion perform better. The depth of financial intermediation is positively correlated with economic growth and is negatively correlated with inequality. There is a rich body of literature that establishes that. At the production level, a financial system allows you to allocate capital to more productive uses and so forth; at the household level, it helps with the management of income, expenditure and risks. There's good theory and evidence for why financial inclusion helps at the macro level plus good theory and, frankly, common sense for why it works at the household level. All of us use financial services all the time. Nobody believes that barter is a superior system. It's pretty clear at the highest level why we should care about this.

Q: Do you see financial inclusion as being necessary to insert alongside other development interventions?

[Dr. Tilman Ehrbeck] Access to financial services and the provision of those services themselves should be delivered in a self-sustainable fashion by institutions (regardless of whether they are profit maximizing or otherwise). It's important to keep that in mind. They have to be able to charge and finance themselves and they have to be regulated according to the risk they present to the financial system and for consumer protection.

This is very different from other developmental interventions where we as society say, "...there should and could be an ongoing subsidy element because we are creating a public good that we value as society". This could include things like primary education and public health interventions. In the latter case, we want all kids to get vaccinated with a full round of vaccinations in the right intervals after they are born and in their first couple of years of life. We want all mothers to benefit from pre and post-natal care. These (and may other) interventions have a public-good component which should be funded out of general budgets or other means. In my own mind, I separate these social policies from the market development exercise for financial services.

Now, I happen to believe that a financial system that is very inclusive and reaches all its citizens allows governments to pay for these public goods in a far more effective and efficient fashion than without such a system. It allows them to switch to the notion of conditional transfer payments and reach the intended beneficiaries much more directly. We have seen evidence of that. In Brazil, for example, there is a social policy programme called Bolsa Família which bundled a number of payments and shifted them onto an electronic payment mechanism. The cost of disbursement of these social payments dropped from 14.8% to 2.1% of the underlying volume. That's a big difference. 12.7 %-points on billions! And these are purely efficiency gains. With conditional transfers, you can also be more effective because you can induce desired behaviours. For example, "...I as a government will make this social payment to you, young parents, if you really send your girl to school...".

Inclusive financial systems therefore offer the big upside of allowing governments to execute other social policy interventions in a far more effective and efficient manner.

Q: What has been the impact microfinance has had to people who are oppressed or marginalised within countries?

[Prof. Jacques Attali] We have a couple of real-world examples of this. One is a programme for street-beggars, where microfinance can intervene to help them find dignity, reshape them in terms of health and put them back into society with an entrepreneurial activity. We do that in Nepal, Tunisia and Egypt and we know other institutions also do that in Bangladesh and Kenya. Another example considers poor people with HIV. It's very difficult for them to get finance, even from microfinance institution. We have developed a specific programme for HIV positive poor within microfinance institutions.

There is often a statistic quoted to state that Women were the primary users of microfinance. This was true in the past, but now microfinance is more and more present in cities. In cities the majority of borrowers are men, while in the countryside the majority are women. This leads to a more balanced uptake of loans now.

Q: How has financial inclusion been affected by the global economic crisis, and volatility in food markets?

[Dr. Tilman Ehrbeck] If you go back to earlier crises, the impact on financial services for the poor in local economies was largely isolated from global events because local economies are somewhat more stable. To the degree that the financial service providers that reach the base of the pyramid are today more and more integrated with their national financial systems, which in turn are integrated with the global financial system, there is a greater vulnerability.

But despite this risk, we haven't seen the reduction in access to finance as one would (perhaps) have expected following the financial crisis of 2008. As a matter of fact, access to finance continued to improve. We published a survey in 2009 and 2010 and found that the number of households with access to credit or savings accounts continued to rise slightly.

If we look at food or other crises: They impact poor people dramatically. If food prices go up, that impacts poor people. Financial services can’t address the root cause but do offer some helpful mechanisms. If agri-income dependent families have access to the right type of financial services including savings, credit and insurance, they may be able to shift from subsistence crops to cash-crops. They may be able to plant more, use more fertiliser, hire more people and increase their income. We have seen randomised evaluations that show this logic chain translate to real welfare gains in the form of fewer school days skipped or fewer meals skipped by the children of the farmers.

Financial services for the poor allow a better reaction to a less favourable environment but they don't change the less favourable environment.

Q: Are there any trends globally with regards financial inclusion?

[Dr. Tilman Ehrbeck] I would return here to the notion that you need a provider ecosystem that reaches poor people. As a starting point, the notion of financial exclusion is more dramatic in Sub-Saharan Africa where 80-90% of working age adults do not have access to formal financial services. In Asia and Latin America this figure is closer to 50%.

If you then consider how you can fill out this ecosystem to reach people, you will find that regions such as Sub-Saharan Africa lack a lot of the physical infrastructure that would need to be leveraged in this regard. In some Sub-Saharan African countries, big progress has been made against financial inclusion objectives by making necessity the mother of innovation and letting (in particular) mobile money progress. In some cases, Sub-Saharan Africa is leapfrogging the rest of the world.

In Latin America, which tends to be more 'middle-income' and has a more sophisticated banking system and retail infrastructure as starting point, they have gone more towards creating access points by allowing for correspondent banking (e.g., let the lottery kiosk become a mini-branch for your bank and so on).

You see differentiation around the world depending on the underlying needs, but also the starting point of infrastructure which can be levered.

Q: What is the role of technology in microfinance?

[Prof. Jacques Attali] Technology is absolutely fundamental to reduce the cost of operations and transfer knowledge. Technology also allows people themselves to engage in this process. We recently launched a website called microworld.org which allows people to make direct loans to poor people and micro entrepreneurs. Without the internet, that simply could not happen.

The use of mobile phones in this regard are just beginning. We're developing mobile banking in Africa, Manila and the Philippines, and we see that it's becoming hugely important in that regard.

Q: Do you think developed countries could benefit from microfinance?

[Prof. Jacques Attali] The big difference is that in the developed world, there is very little risk of financial exclusion. The size of the need is also crucial. In the developing world, there may be 200 million beneficiaries and in France there may be 10,000....

[Dr. Tilman Ehrbeck] If you look at the OECD averages, the percentage of the working age adult population who are financially excluded is much lower (below 10%) but they do exist. The ideas of community-driven provider presence, product innovation, consumer protection, and so on are as relevant to the financially excluded population of developed countries as they are in developing countries.

This is not an area which CGAP is pursuing by mandate, but as an observer, you see a big uptick in the use of informal or very costly mechanisms such as payday lending during the economic crises in the west. This is a very worrisome trend.

Q: What is social enterprise, and how does it relate to microfinance?

[Prof. Jacques Attali] Microfinance is a dimension of social enterprise, and social enterprise goes a lot further. It's what microfinance may finance in terms of co-operatives and other organisations where profit is just a name and not a finality. Whatever is done with ethical trade, equitable trade, environmental processes and- in fact- any activities which are economically viable and also have a social or environment goal... they are all social enterprises. Businesses where finance is a constraint and not a name, where profit is a constraint and not a name.

Q: What do you feel are the biggest challenges facing the developing world?

[Prof. Jacques Attali] Governance and stabilisation of democracy is critical. It's key.... Without that, we will have a disaster.


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Perhaps even more profound than our species' creation of money has the emergence of language. Martin Nowak of the Institute for Advanced Study describes language as, "...the most important evolutionary invention of the last few million years.... an adaptation that helped our species to exchange information, make plans, express new ideas and totally change the appearance of the planet." This is a sentiment echoed by Brian MacWhinney of Carnegie Mellon University who states, " ...Language is a unique hallmark of the human species. Although many species can communicate in limited ways about things that are physically present, only humans can construct a full narrative characterization of events occurring outside of the here and now. Humans are also unique in their ability to fashion tools such as arrow points, axes, traps, and clothing. By using language to control the social coordination of tool making, humans have produced a material society that has achieved domination over all the creatures of our world and often over Nature herself." (Language Evolution and Human Development, 2005)

It takes only a cursory analysis of the above to realise that money and language share many important characteristics. Where language may be seen to represent the instrument for cultural exchange, we see that money is the language by which we exchange resources which present and potential. The transactional conversations which have occurred through the shared language of money have provided the primordial lubricant for society to progress from millennia of subsistence to a state where we have overcome practically every biological and cognitive limitation we have to achieve capabilities which, even a century ago, would have seemed impossible (to the point where our life expectancy, which remained static for most of human history, has now almost doubled).

This growth (experienced by a disproportionately small number of our species) has come at an incredible cost and left billions around the world excluded from the economic conversation, leaving them with the notion that economic and financial inclusion is just 'something that happens in the west'. This systemic failure of modern day capitalism has revealed a wider moral failure by its participants. "It is poverty..." as Mother Teresa of Calcutta said, "to decide that a child must die so that you may live as you wish..." and as Mahatma Gandhi concluded, "poverty is the worst form of violence."

Financial inclusion must be considered as one of the most important human freedoms, and as Walter Cronkite said "There is no such thing as a little freedom. Either you are all free, or you are not free..."


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