Incentivizing public sector employees: The role of digital technology in enhancing the carrot and the stick

Government expenditure can be a poor indicator of the quality and quantity of public goods citizens receive, especially in low- and middle-income countries. Corruption and ineffective program implementation often claim large portions of public resources, also known as leakages. These leakages are difficult to quantify due to limited data but existing evidence shows that leakages can represent over half of the total budget. For example, in Tanzania, a 1997 Public Expenditure Tracking Survey (PETS) found 57 percent leakage in education and 41 percent in health spending; and in Ghana, a 2000 PETS found 50 percent leakage in education and 80 percent leakage in health. 

Leakages are particularly concerning when it comes to social welfare programs, such as cash transfers, as these programs usually target vulnerable groups. Evidence shows that 87% and 78% of benefits for some social assistance programs did not reach intended beneficiaries in Uganda and Indonesia, respectively. Such leakages in social welfare programs directly impact the intended beneficiaries by reducing the amount of resources they have access to, with potentially substantial consequences on their lives. It also leads to mistrust of the government, which can have further downstream effects on electoral participation, civic engagement, and tax compliance.

Why do leakages arise? 

Leakages in public expenditure can arise due to a number of reasons. Weak institutions, inadequate payment infrastructure, and poor accountability can make it easier for local officials to divert money from the intended beneficiaries. Differences in information available to stakeholders—the beneficiaries receiving the grant, the local official implementing the grants, and the government officials overseeing the grant - could also contribute to leakages.

• Without a strong ID or identification system, it can be difficult for government officials who oversee the system to know if the payments are being distributed to real people or to made-up, “ghost” beneficiaries. In such a situation, local officials could inflate the number of individuals on the list of beneficiaries and keep the additional benefits for themselves. The result would be a long list of beneficiaries who receive payments, when in reality these individuals don’t exist and the benefits are going directly into the pockets of a few implementing officials. 
• It is difficult for beneficiaries to keep implementers accountable when they have limited information about what they are entitled to and questionable records of the transactions. Implementing officials may skim off benefits from each genuine beneficiary and keep a percentage of the transfer for themselves. The lack of information and awareness from the beneficiary allows the implementing official, with perverse incentives (obstructive motives), to misreport and take advantage of beneficiaries. 

The role digitization can play in curbing leakages 

Rapid technological innovation and increasing connectivity present new opportunities to fight corruption and leakages in social programs. Digitization has the potential to reduce leakages by: reducing officials’ discretion through improved monitoring and auditing; cutting out intermediaries by automating processes; improving payment infrastructure and improving identification and authentication through the use of digital identification or biometrics. 

A study in India, for example, found that technological improvements in monitoring, through the use of biometric data, not only discouraged local officials from engaging in corrupt behavior due to improved availability and accessibility of information but also improved last-mile service delivery and welfare outcomes for beneficiaries. Another study found that the digitization of social protection payments and the use of fingerprint biometrics as a tool to authenticate beneficiaries assisted in reducing payments to ghost beneficiaries. 

Potential challenges

The application of digital solutions to social protection payments isn’t guaranteed to curb leakages, especially if the solution does not directly address the source of fraud. 

For example, in India, researchers found that the implementation of biometric authentication in a subsidized food program not only led to serious exclusion problems, where beneficiaries were prevented from receiving their entitlements despite meeting eligibility criteria, but more importantly failed to reduce leakages. This was because the main source of leakages in this case was not identity fraud, but “quantity fraud,” whereby local officials gave beneficiaries a little less than beneficiaries were due and kept the rest for themselves. Implementing biometric authentication did not address this problem, and thus had little impact on leakages. This highlights the importance of collecting local data, understanding local contexts, and the need to combine digital identification with other mechanisms, such as digital payments, to appropriately address issues prior to implementation. 

Furthermore, even if digitization manages to reduce leakages in welfare programs, the continued use and effectiveness of these solutions can be weakened if they are contested by government officials or local officials. More precisely, digital reforms run the risk of being subverted if they: threaten the rents (illegitimate benefits) of officials; punitively increase the administrative burden for officials, or are not aligned with the realistic expectations of work behavior given the context. This indicates the importance of the political economy challenges in determining the success of digitization within social welfare programs. 

In conclusion, it is important that a holistic view is taken when evaluating the potential impacts digitization will have on leakages, as well as the quantity and quality of service provision given a region’s specific economic and social context. While there is some evidence on the extent of leakages in some public programs in Africa, little is known about to what extent digitization will help curb leakages in different contexts. 

The Digital Identification and Finance Initiative in Africa (DigiFI Africa) is exploring whether and how digital ID and payment systems can reduce corruption and leakages, while improving the overall efficacy of social welfare programs. Learn more about DigiFI Africa. 
 
Authors Note: This is the fifth blog in the DigiFI Africa series on the various aspects of their research and policy priorities. The next blog will focus on one of the barriers to public service delivery, namely on the importance of aligning incentives. 

“We must focus on the infrastructure to digitize, direct and deliver this economic support to the women who need it most.” -Melinda Gates

The G7 Partnership on Women's Digital Financial Inclusion in Africa, of which J-PAL Africa’s Digital Identification and Finance Initiative (DigiFI Africa) is a participant, recently held its first annual event focused on Catalyzing Digital Financial Services for Women Across Africa: Supporting Recovery, Resilience, and Innovation During COVID-19. 

The session brought together Melinda Gates; H.M. Queen Máxima of the Netherlands; Cyril Ramaphosa, President of South Africa; H.E. Nicolas de Rivière, Permanent Representative of France to the United Nations; as well as a panel of leaders in the public, private, and academic sectors to discuss financial inclusion and economic resilience for women in Africa. 

The event highlighted how the COVID-19 pandemic has disproportionately impacted women, particularly across the African continent, and the need for African governments and donors to accelerate investments in digital financial inclusion to support women, many of whom are among the most marginalized. 

Queen Máxima, attending in her capacity as the UN Secretary-General's Special Advocate for Inclusive Finance for Development, highlighted the importance of prerequisite infrastructure to facilitate women’s economic empowerment. 

Melinda Gates spoke about the way that women’s economic empowerment is linked to digital financial services. In particular, she highlighted the importance of emergency cash transfers to women as a government response during the pandemic—with digital payment systems and digital IDs at the core—to ensure that these transfers end up in women’s pockets, not their husbands or other male family members. 

Commitments were made from South Africa’s President Cyril Ramaphosa to ensure women’s digital financial inclusion. South Africa made a commitment of $500,000 to the South African Women Impact Fund, which seeks to empower women financially. In addition, the President announced that 40 percent of all public procurement will be reserved for women-owned businesses. 

A strong country contribution was echoed by the H.E. Nicolas de Rivière, who made a call to action for the donor community in the women’s empowerment space. 

Digital money plays an important role in poverty alleviation and economic resilience.

Based on her seminal work on digital money and poverty and recent study on the impact of digital cash transfers, Tavneet Suri, DigiFI’s chair, highlighted key research findings on digital money. She discussed her work on mobile money (MPESA) in Kenya, which finds that MPESA strengthens the ability of households to overcome unexpected adverse events, for example a drought, floods or a child falling ill. In addition, when a household is less vulnerable to these adverse events, they make higher return investments because they know they are protected against the unexpected risk. 

On average, the researchers saw an overall reduction in poverty with effects larger for female-headed households. These gender effects were driven by women switching occupations, largely moving from farming to small-scale retail. 
Similar resilience effects have been documented in Uganda, Mozambique, Tanzania and Bangladesh. 

Tavneet also spoke about her work in the context of COVID-19 in Kenya. Early findings of her research show that individuals receiving digital transfers through mobile money were able to improve their food security, and physical and mental health, prior to and even in the wake of the pandemic.

In order to financially include women, governments, and service providers need to focus on access, quality of usage, and value-add for women.

As Dr. Benno Ndulu, co-director of the Pathways for Prosperity Commission and member of the World Bank’s ID4D High-Level Advisory Council, highlighted, governments must design digital public goods and regulations based on women’s needs. 

Dr. Ndulu illustrated his points by featuring the needs of cross-border traders, who are mostly female. In order to trade in a different country, traders need a widely recognized ID, and digital transactions should be easy to understand and convenient. Her transactions can be made wherever she does business, facilitated by a low-cost payment system that can work across vendors, and the transaction needs to be reliable and secure.

Despite its devastating effects, COVID-19 has also opened the door for innovative and lasting solutions—accelerating new digital approaches across the continent.

Many African countries have expanded their government social transfer programs to limit the economic hardships caused by the pandemic. 

Cina Lawson, Minister of Posts, Digital Economy, and Technical Innovation for the Republic of Togo, detailed the success of the country’s recent emergency cash transfer program, Novissi. This transfer was 100 percent digital and was targeted to households in the informal sector. 

In order to serve women successfully, she highlighted the importance of gender disaggregated data, digital ID, and social registry systems. She emphasized the need for governments to establish trust with the recipients through value-add services, consistent communications, and a redressal mechanism to address grievances.  Novissi used the national voter ID database from the February 2020 elections, which included location and occupation of voters, to identify beneficiaries of the program, and early next year the government is looking to roll out a national biometric ID, with links to mobile money wallets, to assist with a more sustained system of identification to better target social protection programs in Togo moving forward. 

A regulatory environment that protects consumers, interoperable payment systems, and inclusive financial regulations and policies are critical to reducing the digital divide and safeguarding the use of new technologies.

Having the right regulation and consumer protection policies in place are essential to mitigating risk. In addition, there is a need to garner consumer trust, and help guarantee that the use of and access to digital financial services does not further gender inequity. 

With nearly 90 percent of women in sub-Saharan Africa working informally, often across borders, Dr. Eyob Tekalign Tolina, State Minister, Ministry of Finance, for Ethiopia emphasized the importance of accelerating the use of digital interoperable payment infrastructure that considers cross-border traders and merchants and enables them to transact with others, regardless of the service provider.

Cross-sector collaboration is essential for developing innovative digital solutions.

Patricia Obo-Nai, CEO of Vodafone Ghana, underscored the need for more cross-sector collaboration to broaden the digitization of services and expand mobile networks. 

In particular where financial inclusion rates are high, Ms. Obo-Nai emphasized the importance of the role governments can play to support greater usage by encouraging wage digitization, digitizing government services, and delivering value to consumers through access to affordable credit.

DigiFI Africa is excited to be a pillar of the G7 partnership and looks forward to unpacking more evidence on the impacts of digital financial services on women in sub-Saharan Africa.

Watch the full event recording below, and contact us to learn more about our research agenda and the potential for collaboration. 
 

As of December 2018, two-thirds of total global mobile money transactions were driven by users in sub-Saharan Africa (SSA), with values exceeding US$25 billion. In 2017, the region recorded roughly 135 distinct mobile money implementers, and 338 million accounts. Mobile money has been touted as a revolutionary tool for expanding access to financial services in low resource environments. With just a mobile phone, users are able to quickly transfer money at low cost and, typically, without needing access to an existing banking account. 

Low resource settings—where families and friends financially support each other, even when geographically distant—are particularly well-placed to realize the benefits of this technology. The amount remitted by migrants from SSA reached US$48 billion in 2018. In Nigeria, remittances reached US$25 billion in 2018—almost four times more than foreign direct investment and official development assistance combined. In Lesotho, remittances amounted to 16 percent of the country’s gross domestic product. Prior to Kenya’s recent growth in mobile money services, household members had to find creative ways to send money to loved ones who lived across the country. These informal processes—such as sending physical cash with friends or bus drivers—were very expensive, caused delays, and created uncertainty that the money would reach the anticipated destination both from a logistical and security perspective. Mobile money offered a solution with direct person-to-person transfers. 

But does this technology live up to its promises? What are the impacts on the households who use mobile money?

Mobile money can generate financial resilience

A growing body of research is emerging with a consistent finding: households are able to better respond to unforeseen difficulties when they have access to mobile money. When an unexpected negative event—such as a flood or a child falling ill—occurs, households with mobile money are able to rely on the easy and affordable transfer of money from family and friends even if they are living far away.

In Kenya, a study that uses a difference-in-difference technique has shown that the impact of mobile money on a household’s resilience can be sizable. Households who had access to M-PESA (Kenya’s mobile money platform) during a negative event—such as unexpected extreme weather or illness in the family—were better able to respond and did not have to reduce their spending on food and related goods in response to the event. This is because mobile money helps risk-sharing among the community or family irrespective of location, strengthening these informal insurance networks.

In related work that also uses a difference-in-difference methodology, researchers looked at the effects of a health shock and found households who used M-PESA were able to spend more on health-related expenses while keeping up with other household payments. Households who didn’t use M-PESA financed their health-related expenses by cutting down on non-food expenses, including withdrawing their children from school. Similar results have been found in other contexts using randomized control trials in Mozambique and Uganda,  as well as in Tanzania and Bangladesh where difference-in-difference and instrumental variable estimation strategies were used respectively. 

Mobile money can facilitate higher savings for households

Mobile money can also be helpful for financial resilience as it facilitates saving. In Kenya, mobile money accounts for women were used to easily (and securely) allocate and label money for savings. The researchers found that labeling an account, such as encouraging women to use the account for emergency expenses and savings, along with a one-on-one activity eliciting savings goals and weekly SMS reminders on the savings goals especially increased the amount saved. This amount accrued helped women respond to unplanned expenses and made them less reliant on existing networks for support. 

Also in Kenya, researchers used instrumental variables to find that mobile money use led households to save more. Households with mobile money accounts were 16–22 percent more likely to save and their average household savings increased by 15–21 percent, the equivalent of US$2.7 to US$3.7 per month.

Mobile money facilitates transparency and formalization

Mobile money electronically records all transactions, which improves the security of payments as well as their transparency, the consequences of which could be far-reaching on the economy. Greater transparency of earnings, transactions, and remittances could greatly improve tax collection. A mature mobile money system could also foster formalization of the economy, integrating informal sector users into formal banking and insurance, and allowing for stronger links to the government through social protection schemes, tax collection, and other government programs.

In the long run, mobile money can affect occupation decisions 

Mobile money and the ability to easily and safely receive money from social networks at a distance has been found to change the way that individuals within households make decisions around their occupation. In Kenya, researchers used a difference-in-difference methodology to examine the long-run effects of M-PESA usage and found that higher access to mobile money changed occupation choices, especially among women. The study estimated that approximately 185,000 women moved from agriculture to small-scale retail as a result of access to M-PESA. 

Similarly, access to mobile money led to a shift from farm-based work to self-employment in Uganda and migration from rural to urban areas where the income is higher in Mozambique. The latter was because mobile money increased individuals’ trust that they could easily and safely remit money to their families in the rural areas. 

Long-term effects on poverty and women

Non-RCT research from Kenya found that access to mobile money increased per capita household consumption and savings, and therefore reduced the rate of poverty. This increased consumption translated to a movement of 196,000 households out of extreme poverty—equivalent to 2 percent of all households in Kenya. Long-term effects are examined in this study by running a follow-up survey in 2014 for households that saw relatively large increases in agent access between 2008 and 2010. The effects were largest in female-headed households, which highlights how impact can be amplified when technology is given to female household leaders. The researchers posit that mobile money could give women in male-headed households, who are also usually secondary income earners, more financial independence. Agent density—the number of agents operating in a specific area—played a key role. Increased agent density was linked to 3 percent of women in both female- and male-headed households taking up business or retail occupations over-farming.

While mobile money holds promise, it is not a silver bullet

As described above, the long-run effects of mobile money on poverty reduction, and the consistent cross-context findings of its ability to mitigate the effects of negative events, are impressive. However, there are a number of pre-conditions required for these impacts to be achieved. These factors include: 

• Developing a strong profitable network of agents to deliver the mobile money system, including cash-out services;
• Making the registration/use of the technology simple and trouble-free for the consumer;
• Investing in infrastructure to scale from the start; and
• Creating a strong regulatory environment once the technology has been developed. 

At a more fundamental level, individuals must have access to mobile devices and they must understand how to use the mobile money product. For example, in the roll-out of mobile money in Mozambique, information was disseminated to individuals and agents in an intense mobilization process. This is seen as an important part of the success of the program implementation. 

With all the promise that mobile money holds, it is not without its challenges and risks. 

• Infrastructure challenges: Mobile money requires telecom infrastructure which can require significant up-front investment. A lack of broadband infrastructure on the continent—25 percent coverage as of 2018—means there will be limited integration with other digital financial products. Mobile money is often reliant on SMS-based technology which makes it difficult to link mobile money with internet-based digital financial products. 
• Operational risks: Evidence also suggests that mobile money opens avenues for fraud. Research shows many mobile money companies are vulnerable to data breaches due to improperly encrypted communications, potentially allowing an attacker to steal money. 
• Regulatory challenges: Finally, many policymakers and private sector companies still struggle with how to regulate mobile money to protect against these operational risks, encourage its use, and build a network of agents. There are also unanswered questions around how to design mobile money platforms and networks, link these to digital identification systems, and leverage the spread of mobile money to create stronger financial markets.

Open questions

So far, the use of mobile money has been concentrated in the person-to-person (P2P) payments space as well as in certain regions/countries. Person-to-business payments, business-to-business, and government-to-business payments are rarely transferred through mobile money. In addition, even for countries with a high mobile money penetration in the P2P space, there is limited evidence on whether it has transformed financial markets or the use of physical cash. 

Although there has been significant work on the impacts of mobile money on households, and some work on the impacts on microenterprises, questions remain around how to increase the take-up of mobile money in countries with low penetration. The possible benefits for governments to use mobile money for person-to-government (P2G) payments, for example, as a tool for tax collection, also remains largely unexplored. While there is a large potential to use mobile money for P2G payments, this still needs to be rigorously explored. You can read more about this and many more unexplored policy and research questions in the Digital Identification and Finance Initiative’s (DigiFI)’s framing paper.

Authors Note: This is the third blog in the DigiFI series on the various aspects of their research and policy priorities. The next blog will focus on one of the barriers to public service delivery, namely targeting.