Rapid advances in digital payments and identity technologies are creating new possibilities for governments to interact and transact directly with their citizens. A government official in New Delhi or Nairobi can now deposit money directly into the account of a citizen in a distant village, bypassing layers of intermediaries. This government-citizen payment link can be combined with fast-improving biometric technologies to ensure governments pay only uniquely identified recipients, curbing corruption and leakage of funds.
While governments are increasingly using payments and identity technology to shift their cash-based transfer payments into digital channels, they have only begun to exploit the full range of policy levers enabled by these technologies. In a new Centre for Global Development paper, Digital Payments as a Platform for Improving State Capacity, we argue that the biggest impacts of payments and identity technologies will stem from new policy levers that become available once these systems are in place. Below, we describe three such levers that can improve public service delivery and reduce poverty.
1. Reducing costly fuel subsidies while helping the poor
The IMF estimates that governments spent $333 billion in 2015 subsidizing fuel prices — more than double the $132 billion governments spent on foreign aid. Fuel price subsidies are not only a huge burden on some public budgets; they are also highly regressive. In 2010, the IMF examined fuel subsidies across 20 developing countries and found that the richest 20 percent of households capture six times more fuel subsidies than the poorest 20 percent (43 percent of benefits versus 7 percent). This is money that could be spent on health care, education, or simply direct payments to the poorest households; instead, it is primarily being used to encourage wealthy households to consume more fossil fuels.
Unfortunately, fuel subsidies are stubbornly difficult to remove because citizens — particularly those in weak capacity states — often see cheap fuel as one of the few tangible benefits they receive from the state. Governments in India and Iran have found a politically feasible pathway to fuel subsidy reform: They reduced fuel subsidies while re-directing a portion of the savings into direct payments to citizens. This made the reforms politically palatable, as many citizens prefer freely usable cash to cheaper fuel. Payments-linked fuel subsidy reforms can encourage more efficient use of fuels, create fiscal space for higher-return public investments, and trigger meaningful gains in household welfare by putting more money into the hands of a country’s poorest citizens. It is estimated that Iran’s payments-linked fuel subsidy reforms reduced the poverty rate in rural Iran from 37 percent to 17 percent, while reducing urban poverty from 8 percent to 3 percent.
2. Taxing dirty fuels and encouraging green energy use
The world urgently needs to find a politically feasible way to price energy correctly. But doing so requires more than phasing out subsidies; it also requires taxing fuels to pay for their social costs, such as illness and premature deaths caused by local air pollution. The IMF estimates that the taxes which should be imposed on dirty fuels to pay for their social costs amount to $4.9 trillion — 15 times greater than the $333 billion governments spend on fuel subsidies.
As with fuel subsidies, the primary barrier to fuel taxes is political. But India and Iran have demonstrated that fuel price increases can be bundled with cash transfers to make the reforms politically palatable. There is no technical reason why cash transfers cannot be applied to fuel taxes too. We can envision governments taxing dirty fuels and passing on a portion of the revenues to citizens in the form of “green dividend” payments. If payment connections provide a politically feasible pathway to tax dirty fuels, the impacts would be enormous. The IMF estimates that pricing energy correctly through appropriate taxation would raise government revenues by $2.9 trillion (3.6 percent of global GDP), cut global CO₂ emissions by 20 percent, and reduce premature air pollution deaths by 55 percent.
3. Boosting government transparency and accountability
Political economists have long argued that building a responsive state requires a broad base of citizens, including those living in poverty, who feel financially invested in the quality of public services and put pressure on government to improve those services. Todd Moss and Stephanie Majerowicz at the Center for Global Development argue that governments can start to build this fiscal contract among the poor by taxing government-citizen payments at source, such that citizens receive a government transfer, minus a small tax. Citizens would receive, through an SMS or other digital channel, an electronic tax card which tallies their monthly transfers and the taxes they have “paid” in a given year. Critically, even with a tax, the transfer would be perceived as a net gain to the end recipient, so informal workers outside the tax net would have incentive to formally register to receive their benefit.
As shown in the table below, the e-tax card could be combined with “transparency technologies” promoted by Vivek Srinivasan at Stanford University. These technologies provide a breakdown of how taxes are spent in their village, along with prompts for citizens to report whether they received their payment in full or were asked to pay a bribe. They could be combined to make it harder for corrupt officials to divert public funds, give poor citizens visibility into how taxes are spent in their community, and make clear to citizens that they too are part of a government-citizen fiscal contract.