By Michelle Kempis and Jonathan Morduch
As the current pandemic pushes the global economy to the brink, we decided to take a look at what surveys say about how well households plan to deal with big emergencies.
The only truly global data we know are from the World Bank’s Global Findex survey. The Findex reports on household surveys from 140 countries, and it greatly enriches what we know about financial inclusion. One section is devoted to asking how respondents would cover a large emergency equivalent to 1/20th GNI of per capita. It’s an under-exploited resource—but see this and this —and a bit tricky to interpret.
In this post, we try to get a sense of the magnitude of 1/20 of GNI per capita. How big is that for typical households? It turns out to be a big sum. We translate magnitudes by converting the money amount into equivalent weeks of income for an average worker. We then follow up on questions asked about respondents’ coping strategies. The bottom line is that a lot of people said they would have little way to come up with the money in an emergency—and, more worryingly, their preferred tools are unlikely to hold up during the emergency we find ourselves in today. Thinking ahead, we wonder whether, when this is all over, people might fundamentally rethink how they plan for emergencies.
The Findex question is related to a high-profile question asked in the United States. In 2013, the US Federal Reserve started reporting data on how Americans feel about their economic lives. The 2013 finding that grabbed the biggest headlines was that half of households surveyed said that if they had to come up with $400 in an emergency, they couldn’t (or wouldn’t) rely on cash on hand or withdrawing savings. By 2017, things had improved, but still 41% of Americans said that they would cope by borrowing, selling assets, or using related strategies. $400 was a non-trivial sum for a large share of Americans—a sobering fact given the scale of today’s job losses and income declines.
FINDING A GLOBAL MEASURE FOR AN EMERGENCY COST
In 2017, the World Bank’s Global Findex survey took on this same topic, asking people in 140 countries if they could come up with the funds to cover an unexpected emergency. The World Bank team faced the methodological challenge of finding a sum that made sense across countries. In the US, one can easily imagine what $400 could cover; an ambulance ride, tire replacements, or a plumbing repair. In other words, it would cover a cost that was neither overwhelmingly large nor trivially small, but somewhere right in that sweet spot in the middle. Finding a similar figure for every country in the world was always going to be challenging. Ultimately, the World Bank settled on 1/20 of gross national income (GNI) per capita in local currency.
That figure, it turns out, is rather large. In the US, it comes out to about $3,000 USD, closer to the cost of buying a used car than a set of tires. The World Bank figure is probably larger than a typical unexpected cost; however, these aren’t normal times. As lockdowns continue, billions of people are entering their second month without income, or with very little.
To better understand the Findex numbers, we translated them into weeks of income based on the ILO’s measure of the mean monthly income for an elementary worker. The results varied a lot. In the UK, the FinDex’s “emergency cost” was equivalent to five weeks of pay, whereas in Cambodia only two. The figure below gives the results for a sample of countries, together with the PPP equivalents of the Findex’s shock size (1/20 of GNI per capita).
FinDex Emergency Cost Translated into Weeks of Pay for an Average Worker
The varied results suggest that for typical households, 1/20 GNI per capita means different things in different places. While the sums differ, though, the data still allow us to relate people’s answers to actual crises of varying length and severity.
In most countries we looked at, over half of the lower-income households (the poorest 40%) would not be able to cover an emergency cost equal to several weeks of pay; in many countries the percentage was closer to two-thirds.
Percentage of People Unable to Cover an Emergency Cost
In Rwanda, where 40% of low income households would be unable to cover 5 weeks worth of lost income, the government just eased a six-week lockdown, during which a majority of the population was prevented from working. In Cambodia, where lockdowns have been in place since April 10th, 70% of poor households apparently would not have the funds to cover just two weeks of lost income.
Across the world, better-off households were unsurprisingly more prepared to deal with a shock of this magnitude, although the percentage of wealthier households that said they could cover the shock varied widely among countries. For instance, 90% of top earners in the UK had the funds to cover a shock equivalent to 5 weeks of income, but in Costa Rica, only 36% said they could manage.
DIFFERENT COUNTRIES; DIFFERENT WAYS OF DEALING WITH SHOCKS
For those people who said they could cover the shock, the Findex team then asked what strategies they would use.
Even in countries where emergency costs would support individuals for roughly the same period of time, people had very different strategies. For example, both Rwandans and Britons could cover approximately six weeks of basic wage income with the amount of local currency the World Bank asks them to produce in the Findex. However, people in the UK would primarily cope by drawing on savings, whereas Rwandans would rely more heavily on income or help from family and friends.
In Indonesia and Brazil the value of the Findex emergency cost is equal to two months of income. In Brazil, both income groups would first turn to family or friends, although this reliance is more pronounced among low income earners. There is a stronger divergence in Indonesia, where the poorest 40% would overwhelmingly rely on family and friends and the richest 60% could draw on their income.
THE IMPORTANCE OF SAVINGS IN THE PANDEMIC
The top earners in most countries are more likely to draw on savings than their lower income counterparts. While the divergence in reliance on savings may not be surprising, it is more important than ever during a pandemic. Family and friends may not be able to provide the support they once did, as they are likely to be hit hard by the virus too. Working harder is also a limited possibility—lower-income households have been disproportionately affected by Covid-19 related lay-offs.
As Leora Klapper, an architect of the Findex, noted before the pandemic: “Vulnerable groups such as women and the poor are less likely to have access to savings and employment opportunities when times are tough.” In most cases we analyzed, fewer than 20% of lower income earners view their savings as their primary defense against such shocks.
Will the pandemic push more people to shift coping strategies toward individual protections like saving—and away from traditional solidarity strategies with family and friends? Evidence from RCTs in Kenya, together with a longer literature on “kin taxes,” shows that one difficulty people have when saving is protecting money that would otherwise be shared with social networks. It’s not obvious that relying on private saving is always better than establishing strong protections through family and neighbors. But it is evident that trying to save while being an active participant in social networks often creates conflicts, especially when resources are strained.
Ultimately, the Findex survey results paint a world ill-prepared for any large, widespread shock, let alone a global pandemic. It is one where a majority of people would have no immediate plan to support themselves through weeks of unemployment or a similar sized shock.
We were thinking of these results when reading a recent interview with Jenny Gramo, a shopkeeper in the Philippines:
Q: What are your immediate goals, or things you wish to do after the quarantine ends?
A: I think because of the situation, what I personally learned is the importance of having enough savings and an emergency fund. After this, I will be more particular in preparing for situations like this as we all have to be prepared and not rely on the government.
The fact is that public action is urgently needed. Helping citizens cope with widespread shocks is what governments are there for. Still, as the pandemic continues, it will also be important to understand how people have fared and how they tried to get by—with public resources and with their own resources.
What resources are they pulling from? Which did they wish they had access to before the pandemic? Some researchers, like Stuart Rutherford, are already providing some answers and showing how important savings have been for those who have it. Hopefully, we can emerge with lessons that lead to better strategies to cope with whatever the future brings us. How people react now will also be important for understanding future choices. The Great Depression had long-term effects on people’s financial choices, and we should expect that the Great Pandemic will too.
We’re grateful for access to the Findex data, freely downloadable at https://globalfindex.worldbank.org/. Earlier work with Andrew Yan helped us get a start on interpreting the data.