Taking Cash on Delivery Aid One Step Further with Financial Inclusion

This month marks the ten-year anniversary of the famed Millennium Development Goals and not a single target has been achieved. In 2009, official development assistance (ODA) given to poor countries amounted to $120 billion, a 35 percent increase in development assistance since 2004 and yet 60 percent of child mortality deaths in the developing world are from malnutrition, 115 million children (of primary school age in 2001) did not attend school, and 2 million deaths occur every year in child birth and labor.  Regardless of whether you’re in the ‘anti-aid’ camp with Easterly or the ‘more aid is better’ camp with Sachs, these statistics should incite a standard reaction – the poor need better results. This has led scholars and practitioners to progressively test results-based aid approaches, like conditional cash transfer programs, output-based aid, and cash on delivery aid, to address deficiencies in the traditional aid system.

But despite these forward looking solutions to aid effectiveness, the role of financial inclusion strategies are left out of the picture. With mounting evidence linking asset-building to improvements in health and education, the need to foster and engage productive society members have prompted developing countries to deliver financial services to unbanked populations. Governments globally are beginning to understand that with assets, those living at the bottom of the pyramid can invest in their future well-being - education, health, or small enterprise - they can draw on their bank-protected savings as a cushion during economic hardship or household disaster, in other words, with assets they can grow out of poverty rather than momentarily alleviate their problems. Therefore, integrating financial inclusion strategies with results-based aid approaches makes good policy sense and it can make aid even more effective in promoting sustainable livelihoods development at a household level.  

Take Cash on Delivery (COD) aid, one of my favorite examples of results-based aid. COD aid, an idea developed by the Center for Global Development’s Nancy Birdsall and William D Savedoff, focuses on funding a recipient government for an outcome, or measure of progress, as opposed to inputs, which according to them, should presumably shift aid recipients’ attention to producing results.  However, like most forms of results-based financing, COD aid focuses largely on health and education programs, which undoubtedly create sustainable impacts on households’ wellbeing, but leave asset building and household economic growth largely to the imagination. 

Although COD aid has not funded government-supported financial inclusion projects, government institutions are showing us that they have the capacity to use results-based financing to promote asset building and positive behavioral change, indicating the potential for COD aid to do the same. Mexico’s savings-linked conditional cash transfer program, Jovenes con Oportunidades, is a perfect example. In order to incentivize advancement in education and asset building among low-income youth, the Mexican government deposits “points” into an individual savings account for every year a student completes middle school. Only upon graduation from high school, are the points converted into $336 cash. Today, graduation rates are up and over 330,000 youth have opened a savings account, with funds that can be used to invest in higher education, start a micro-enterprise, or rely on in case economic circumstances take a turn for the worst.

Mexico led an impactful financial inclusion policy initiative, but its ambition to bring financial services to the poor and create long-lasting economic improvements in livelihoods is shared by India, Zambia, and Pakistan, among several other countries. For example, the Bayelsa State Government in Nigeria has launched the first government-funded youth savings policy in a developing country. With the support of the Global Assets Project at New America Foundation, the Nigerian government will randomly select 1,000 low-income youth between the ages of 11-15 and provide them with a seeded savings account that will be matched by 2:1 with their deposits. Of course the condition is that in order to be eligible and retain their eligibility in the pilot, students must remain in school. With the savings they have accumulated, the possibilities are infinite.

As an initiative prompting government agencies to build capacity and produce results, COD aid is perfectly suited to meet this developing country demand for financial inclusion. And with an eye to reducing, not just alleviating poverty, COD and other forms of results-based aid should consider incorporating financial inclusion strategies to create sustainable and effective advancements in development assistance at a household level.