regulation2point0

Can you guess which countries’ citizens have the greatest access to cell phones? It’s an odd list. The United Arab Emirates, Hong Kong, Saudi Arabia, and Italy are near the top—no surprise, since they’re all rich. But middle-income countries Montenegro, Bulgaria, and Brazil are all in the first 20, ahead of the United Kingdom, United States, Belgium, Japan, France, Canada, and South Korea. Meanwhile, some countries with truly anemic living standards—Guatemala, Ukraine, Ecuador—can all boast more than one phone per person.

Here’s what’s happened: The current generation of telecommunications is not only better in various ways than landlines, but considerably cheaper. So many countries in which landlines were beyond the means of the average worker have been blanketed with cell phones in the last decade, thereby leapfrogging the old technology.

Wait, it gets better. Cell phones are what is often called a “disruptive innovation“—one that has implications for productivity that go far beyond the immediate benefits of cheap, reliable communication. Indeed, a new World Bank study of cell phone use in Kenya suggests that the new technology is democratizing financial markets, opening the door to faster, more equitable economic growth.

In 1999, just 3 percent of Kenyans owned a phone of any sort; today, the figure is 93 percent (not a misprint). Phone use is thus ubiquitous in urban areas and commonplace even in remote parts of the country, generating all the obvious benefits. But the study’s authors, researchers at the World Bank’s Kenya office, focus on a benefit that is far from obvious: Just as cell phone technology bypassed landlines, electronic banking facilitated by cell phone technology is bypassing banking that depends on bricks and mortar.

With the help of Britain’s Department for International Development (and tolerance of Kenya’s central bank), Safaricom, Kenya’s biggest mobile telecom company, introduced a form of E-banking in 2007 that allows phone subscribers to send money by instant message. No bank account is required. Users buy E-cash which is stored on their SIM cards from the same variety of small local shops that sell minutes. The folks at the other end of the text message can then redeem the transfer in the form of paper money from their own local Safaricom agents—or transfer it electronically to somebody else.

E-banking took off at light speed: Three out of four Kenyan adults are now registered to transfer money electronically, and one in four says he makes at least one transaction a day by phone. One reason is that Safaricom’s system (called M-PESA) has three competitors, all of whom have had the good sense to allow cheap transfers across systems. Probably the more important explanation—apart from convenience and cost—the World Bank researchers say, is fear of theft of paper money in a country in which traditional bank accounts, credit cards, and paper checking are out of reach for the great majority.

Mobile money does all the good things for productivity you might expect—among them, reducing the amount of working capital that businesses must maintain and providing financial security for households by allowing instant transfers to family members and friends. But the researchers note one major unexpected benefit, too: encouragement of savings. SIM cards can securely store up to 100,000 Kenyan Shillings—roughly $1,200. System users can also link their E-accounts to bank accounts, which offer the potential for earning interest on savings.

The study found that, other things equal, M-PESA account holders saved 12 percent more than Kenyans without accounts. That’s, of course, exceptionally important for the households involved. But it also has macroeconomic implications, increasing the potential for economic growth without reliance on foreign capital.

What works in Kenya ought to work in other developing countries. And apparently, we’ll soon find out. Vodafone, which developed M-PESA, has introduced it in Tanzania, South Africa, and Afghanistan. In Afghanistan, incidentally, it was initially used to pay policemen. One consequence: The government “discovered” that 10 percent of the people on the payroll didn’t exist.

Economists generally assume that the sources of economic growth in developing countries are very different than those in rich countries. In the former, what really matters is the transfer of workers from unproductive to productive activities—typically from farming to manufacturing and services. In the latter, it’s technological change in which workers become more productive without moving or doing something qualitatively different. The dramatic rise of E-money in Kenya suggests that both sources of growth can drive growth in developing countries—good news, indeed.

(This post was also published in U.S. News & World Report.)