How is the biomarker ID aid plan going in India?

One of the most important positive developments of our time – both underpublicized and underappreciated — is our growing ability to send and receive money securely across space.  It’s not just Paypal or Bitcoin in the West, as the truly significant gains from payment systems are coming in the developing world.  In particular, the efforts of the Indian government to set up a biometrically-based payments system are improving the lives of many millions and may go down as one of the most impressive achievements of contemporary times.

In 2009, the government of India set out to create unique, biometric-linked IDs for all 1.2 billion Indian citizens, based on fingerprints and a digital photograph.  Once the identities of these persons are tagged, the government will use the new system to deliver direct cash payments as a form of welfare aid.  To the extent the system works, programs with waste and leakage rates of 40% to 80% will become much more efficient.  Imagine instituting a direct cash transfer in lieu of a low productivity make-work job or sending welfare payments directly to beneficiaries rather than channeling them through corrupt local village officials, who take a cut off the top.

When the biomarker idea was proposed, it was far from obvious it would succeed.  The Indian government has failed at many basic tasks of infrastructure, such as good roads or clean water, and in general the quality of governance is not reliable.  Furthermore conditions in India seemed less than ideal for such an endeavor, as for instance about half of India does not have even a bank account.

There is now a major formal study of how well this new program is going and the results are strongly positive, as shown in “Payments Infrastructure and the Performance of Public Programs: Evidence from Biometric Smartcards in India,” a new NBER Working Paper by Karthik Muralidharan, Paul Niehaus, and Sandip Sukhtankar (ungated copies here).

The authors look at one Indian state, Andhra Pradesh, and rely on a large-scale experiment which gave some people the new service and others not, on a randomized basis.  The results are impressive.  The average household was able to receive 23% more in aid, and more quickly, while the government’s rate of “leakage” – lost or misdirected aid – declined by over 12%.  Overall the new method cost no more than the old, and there were no additional problems of access.  The authors estimate that the benefits in time savings to beneficiaries, taken alone, are larger than the costs of creating the new payments system.  For poor people, those gains represent major life improvements.

No less importantly, the beneficiaries strongly favored the new method of aid by margins of eighty to ninety percent.  That means a recent Indian Supreme Court decision, ruling against making the new system mandatory for privacy-related reasons, is unlikely to stop its ultimate success.

Despite many obstacles and imperfections, the logistics of the system seem to be coming together.  After two years of roll out, the share of Smartcard-enabled payments in the relevant studied districts is running at about fifty percent.  It now seems plausible to imagine that most eligible Indian citizens are in some way connected to the system within the next ten years.  Liberals may prefer to think of this as a boost in “state capacity,” whereas conservatives can see it as a paring back of government programs which were not working and as replacing corrupt and paternalistic in-kind aid with direct cash transfer, as had been suggested by Milton Friedman.

The nature of this Indian innovation has been the combination of modern (but not cutting edge) information technology with the use of labor on a very large scale for implementation.  The process of registering so many Indians, and recording their biodata, has required the mobilization of an immense army of labor in a manner which is only possible in a low-wage country, albeit one with a fairly active bureaucracy.

One broader lesson here is that developing nations are not merely copying and applying the inventions of the West, but innovating on their own.  But a lot of their innovations take labor-intensive rather than capital-intensive forms, and thus they do not always look like innovations to our sometimes ethnocentric eyes.

China too may be a more innovative nation than it at first appears.  Sometimes the Chinese contribution to a production process is dismissed as merely adding to a single stage of production, such as finishing off an iPhone to be shipped out.  The deeper truth is that China offers not only cheaper wages but also a very large pool of skilled workers, including engineers, which can be mobilized in large numbers with extreme rapidity.  To create such a talented labor pool on such a scale is an unprecedented innovation and it is one which the West has not managed to match.

The bottom line is that today I have good news to report.


Comments for this post are closed