Inconsistent Income Earning and the Importance of Real Financial Inclusion
There are two widely accepted ways to define poverty.
One is called relative poverty, in which a person falls well behind the income of others living in the same country.
The other is absolute poverty (also called extreme poverty), which is an inability to attain a specified global standard of income. Every few years, the World Bank adjusts the international poverty line to reflect global inflation. In 2020 dollars, the current standard for absolute poverty is an income of less than $2.23 per day.
The good news is that the global rate of absolute poverty has dropped from more than 80% in 1800 to 10% in 2015 (the most recent data available). The bad news is that 10% of 2015’s global population still leaves 734 million people suffering.
By today’s $2.23 per day standard, there is essentially no absolute poverty at all in higher-income countries. The vast majority of the people living in absolute poverty reside in Sub-Saharan Africa, South Asia, the Caribbean, Latin America, and the Asia-Pacific region.
That poverty is reflected via both insufficient income and inconsistent income. Inconsistent income means that the income a person receives comes in uneven increments, leaving them in an extremely vulnerable position.
In 2011, Cornell economics professor Gary Fields published an academic paper titled “Poverty and Low Earnings in the Developing World”. The paper outlined numerous relevant points, including that the way we globally measure unemployment and employment is actually a hindrance for lower-income countries, due to the prevalence of informal work.
(Fields uses the terms “developed” and “developing” but we have issues with those terms. Not all development looks the same, which is why those terms are problematic to countries looking to leapfrog cycles and/or looking to build entirely different forms of socio-economic success. For the purposes of this article, we will use “higher- and lower-income,” as well as “emerging” for those countries in high growth stages.)
Two of the biggest income sources of lower-income economies are the agricultural and informal sectors — with the informal economy defined as economic activities that are not protected by government regulations. According to an International Labour Organization metric cited in Fields’s study, “the informal economy comprises half to three-quarters of all non-agricultural employment in developing countries.”
Here’s the problem: Whether a person works in agriculture or the informal sector makes no difference in these economies. In both cases, they will almost certainly have to deal with the perils of inconsistent income. And in both cases, it’s pointless to use traditional unemployment data to gauge the strength of the economy. That’s because people working for inconsistent income don’t have the luxury to go jobless and focus exclusively on looking for work, which is how unemployment is defined in the world’s richer countries.
Agricultural workers make money based on what they produce, sell, or harvest. They often offer their wares on consignment, further elevating the risk of non-payment or late payment. Moreover, the entire structure of their work is highly prone to fluctuation and disruption caused by external forces.
A coffee farmer whose crops get infected by rust disease can lose an entire crop in minutes. When that happens, they lose at least a year of their financial security. Since rust disease can ruin the coffee plant entirely, that means needing to completely replace the plant, which costs even more money and requires a much longer wait, since coffee grows in two- to three-year cycles.
Within the informal sector, people take jobs anywhere they can find them. Unless you’re able to build incredibly close bonds with employers or clients who themselves make consistent income, you won’t be able to predict your economic success over time, and could end up constantly scrambling to make ends meet.
World Bank studies show that women make up the majority of the informal sector, as they often have more trouble existing successfully within the formal sector of lower-income economies. By working in the informal sector, they take on jobs that come with zero benefits and zero protections. So if the job leads to an accident, or a worker gets sick, all medical expenses must be paid out of pocket. All of this for workers who often live on less than $2.23 a day.
In 2009, India’s National Commission for Enterprises in the Unorganised Sector called for a national minimum wage, a minimum social security system, and eight minimum conditions to support informal economy workers. More than a decade later, neither India nor most other emerging-economy nations stricken by absolute poverty have implemented these changes. There simply aren’t enough stable jobs offering stable income to meet demand in these countries.
As Fields noted in his paper, there are multiple theoretical ways that people could get lifted out of poverty in lower-income nations. The government could step in to offer services and support…except governments in those countries are either too cash-strapped to offer much or too corrupt or bureaucratic to make it a realistic possibility. Another option is to get help from family and friends…but if the people around you are also dealing with poverty, that won’t help. Yet another option is to migrate to countries with more resources and better-paying, more stable jobs…but as we’ve seen from the global migrant crisis, many countries are tightening their immigration policies, not loosening them. And in too many cases, migrant workers end up in even worse circumstances, underpaid, passport-less, unprotected, overworked, and even abused.
A more constructive way to address the problem of workers dealing with poverty is to implement financial inclusion. We hear this term a lot today, with banks and cutting-edge fintech companies touting their commitment to creating or enabling it.
Unfortunately, what that often means is that those companies simply want to get people to use their products and services. Their prevailing thought is: How do we bring people to us so we can sell them our credit program or our savings account? That approach doesn’t benefit the world’s most excluded populations in any way.
We need to completely rethink how we give workers access to financial services, especially when they’re living in absolute poverty. We need to create new services that offer a better understanding of vulnerable workers’ financial cycles and their risks. We need to embed our offerings with risk management practices that those vulnerable workers may not even know they should have.
For the past few months, we at Emerge have been working on Omni, our first deployment in the financial services industry and one that will debut later this year. With Omni, we will help banks develop products that will give impoverished workers access to much needed financial services.
Even someone earning $2.23 a day should benefit from emerging technology, a formal financial sector, sound risk management, and feeling seen and heard. Given how badly neglected hundreds of millions of people have been by the financial sector, these are all goals worth fighting for.
