Feeding the hungry with freely transferrable bank accounts

"We used aid money to buy arms," says Aregawi Berhe, a former Ethiopian militant when speaking to the BBC recently.  As much as $95 million of the $300 million raised for the victims of the 1984 to 1985 Ethiopian famine is alleged to have been spent on funding conflict.

A CIA report in 1985 concluded that, "Some funds that insurgent organisations are raising for relief operations, as a result of increased world publicity, are almost certainly being diverted for military purposes."

This practice isn’t a one-off.  The World Food Programme are facing allegations that cash destined for food aid is being used by Islamist militants in Somalia as well as by rebels in southern Sudan to finance their ongoing conflicts.  The WFP has a budget of $2.2 billion for sub-Saharan Africa and almost 30% of that goes to Sudan.

All of this scrutiny is concentrating minds around better ways to provide aid to the world’s destitute.

The thing to remember is that the world’s poorest are not victims of failed capitalism or banking crises.  They are not participants in the global economy at all.  They do not work in its factories or produce any goods sold anywhere.  They tend to be either semi-nomadic or pastoral peasant farmers.  When civil society collapses and gives way to endemic conflict and corruption they lose access to their land and water.  Poverty is a result of the failure of the state.

The world’s biggest aid donors, particularly the United States, have recognised that giving money to illegitimate governments simply sustains that corruption.  So the US provides almost $2 billion worth of grain instead of cash.  That causes its own problems.

When free goods arrive in a market it immediately displaces local production.  Whether it is clothing donated via Oxfam, or grain donated from the WFP, local production stops.   Europeans now prefer to give cash which the WFP uses to buy grain from local farmers to support a local economy.

Unfortunately, free money in a corrupt economy is even more dangerous.  At best, free money results in tremendous inflation.  At worst, it attracts the sorts of sharks who use the cash to buy weapons.

What is an aid organisation to do?  Give goods and destroy local production while creating long-term dependency.  Give cash and cause untold inflation and sustain corrupt leaders.

A recent book by Jonathan Morduch of New York University, entitled “Portfolios of the Poor: How the World’s Poor Live on $2 a Day”, may have some ideas.  Morduch’s team of researchers spent a year with villagers and slum dwellers in Bangladesh, India and South Africa, tracking the ways in which the absolute poor survive.

“The biggest surprise was how active peoples' financial lives are,” he says.  There are a wide variety of ways in which people save and borrow; from group lending, to remittances paid to family in rural areas, to “pay to save”.

The last is an indication of how important having the ability to save is for the very poor.  Even a small saving is insurance against adversity.

Low-cost banking is an expensive business.  It requires extensive infrastructure, stable rule-of-law and a comprehensive branch network.  Such things are impossible in unstable countries.  However, new technologies like the M-PESA mobile-phone-based money service in Kenya point to a way.

Numerous governments are considering providing a bank account to every citizen as a fundamental right.  This is a tremendous idea but runs the risk of entrenching existing banks.  People don’t tend to change banks because of the difficulty.

My suggestion is that, like mobile phone accounts are separate from service providers, bank accounts be separated from specific banks.

If the poorest can be given access to a safe bank account out of the reach of armed bandits, government flunkies and bank bosses then a channel will be open to support the most vulnerable with direct aid.