The Genesis of Cash Transfers
In the wake of Mexico’s economic crisis in the 1990’s, Santiago Levy, a government economist, proposed to replace the slew of Mexican subsidy programs with deposits of money to the poor on the condition that they send their children to school and bring them in for health check-ups. Instead of giving things to the poor like a cow or a shovel, which involves substantive administrative costs, why not just give them money? Presumably, people know what they need the most and would be able to use the money in the most effective way. Not to mention giving money directly would infuse money into their economy, rather than disrupting it…
Thus was born the cash transfer epic of the last 30 years.
What are Cash Transfers?
Broadly considered, cash transfers are rather simple. A donor gives a sum of money to a poor family with the intention that the poor family will invest in activities that will break the cycle of poverty. Traditionally, these activities have centered on education, health, and employment.
These sums of money have mainly been given in three different ways:
Unconditional Cash Transfers (UCTs) are when a sum of money is given with “no strings attached.” Typically, these are one time deposits without requirements to receive the money. Chris Blattman, Professor in the Harris School of Public Policy at the University of Chicago, talks about the outcome of UCTs here.
Conditional Cash Transfers (CCTs) are when the sum of money is given conditionally. For example, a family might be eligible to receive $5,000 over three years on the condition that they report a certain number of health check-ins, school attendance, and efforts at employment. This method requires evaluation and monitoring done by the donor agent. This study found great success of CCTs in Mexico. And this article talks about the cost of evaluation.
Label Cash Transfers (LCTs) are a type of hybrid between the previous two. Instead of having an explicit condition, LCTs send strong messaging with the money. For example, the money will be given with a picture of a child sitting in class. In this way, the content is strongly suggestive about the intent of the money being given without actually requiring any condition be met. This circumvents the need to evaluate and monitor recipients. This study shows that it works just as well as CCTs.
All too often, a donor agent, with a genuine heart to love the poor, ends up hurting that community because of giving what they thought was needed rather than consulting the impoverished individuals themselves or enabling the community to rise out of poverty on their own. We hear that people are starving in Haiti. We dump 90,000 tons of food in Haiti. Cash transfers present an alternative method of meeting those immediate needs coupled with longer-term benefits. Michael Faye, President of GiveDirectly, explains, “Cash grants are cheaper to administer and effective at giving recipients what they want, rather than what experts think they need.”
This four-country study conducted by the International Food Policy Research Institute shows that 44,769 (18%) more people could be reached at no additional cost if cash were given instead of food aid. Why? The researchers point to a variety of factors that increase the cost of giving food: identification of storage facilities, food storage rental costs, transportation to local facilities, storage maintenance, transport to villages, ration preparation, food distribution, security, and insurance. Likewise, associate professor of economics at University of California, Paul Niehaus, along with aforementioned economist, Chris Blattman, explain the inefficiency of giving cows, which often cost “no more than a few hundred dollars each:”
“In West Bengal, India, for example, the nonprofit Bandhan spends $331 to get $166 worth of local livestock and other assets to the poor, according to a report by the rating agency Micro-Credit Ratings International. Yet even this program sounds like a bargain compared to others. In Rwanda, a study led by the economist Rosemary Rawlins found that the cost of donating a pregnant cow, with attendant training classes and support services, through the charity Heifer International can reach $3,000.”
Alternately, cash can be given at a fraction of the cost with relative ease due to technological advances and streamlined processes. From there, the recipient can purchase what they need directly.
Giving cash instead of goods stymies the paternalistic trend of aid by respecting the dignity of the poor to meet their own needs in the most efficient way possible. To give cash is to say, “I trust that you know best how to meet your family’s needs better than I.” These funds will be spent in their local economy rather than displacing local producers with goods given for free.
Traditional aid packages can also create a cycle of dependency in the local community where individuals expect the goods every time a crisis comes or a need persists, stunting their aspiration to create their own solutions to poverty. Because cash transfers are typically one time deposits, the recipient knows it will run out, breaking the “sit around and wait for a handout” system while still meeting real needs.
“But won’t they just spend the money on drugs and alcohol?” Actually, no.
As could be expected, one of the main concerns with cash transfers is that the funds will be spent on “temptation goods” and that it seems like a short-term solution that will have no value once the money is gone.
Regarding temptation goods, this study shows that after receiving a cash transfer, the poor do not notably increase spending on products such as alcohol and tobacco. They do find, however, that sometimes when the cash is first received, there is a slight increase in spending on things such as chocolate or cookies.
Regarding cash transfer’s short vs. long-term impact, this study in Uganda found that after 9 years, the poor who do not receive cash transfers have “caught up” with those who did receive cash transfers. Nevertheless, the recipients still had immediate needs met sooner and had a jump start toward a positive trajectory. Importantly, even in these instances, the money running out does not result in the poor person plummeting back to the depth of poverty they were at when they received the cash. More on this study later.
Does It Work?
Cash transfer programs have been run in over 60 countries, covering millions of people since that 1990’s trial in Mexico. There’s no shortage of opinions, reports, or studies on their efficacy. In general, the consensus is that cash transfers work well on a limited basis internationally, but they are rather ineffective within the U.S.
Most cash transfer advocates do not think that cash transfers will end poverty. They do, however, believe that cash transfers serve as an incredible means of meeting short term needs efficiently and in such a way that families pursue education, health, and employment which will help the family to flourish long-term. As a team of researchers for Manpower Demonstration Research Corporation (MDRC) write, the intention is to provide “cash assistance to low-income families to reduce immediate hardship, but condition that assistance on families’ efforts to build up their ‘human capital’ to reduce the risk of longer-term and second-generation poverty.”
As this mega study comparing 75 reports shows, cash transfer programs do in fact increase enrollment and attendance in school, and this study shows that people work more and earn more because of cash transfer programs. The World Bank’s study in Nigeria found cash transfers had significant, positive impact on business creation and growth.
The myriad of studies done on cash transfers suggest that they can be more effective than one would initially surmise. With that being said, cash transfers are severely limited when it comes to long-term development and suffer from the same philosophical errors that befall most traditional aid schemes.
While research is ongoing, so far, studies have shown that cash transfers may have a role to play in the fight to end poverty. That said, it is important to recognize the limitations of what cash transfers can provide.
As mentioned above, the programs tried in the United States found rather dismal outcomes in comparison with the success found in the many international programs. Some hypothesize this is because primary education is rather accessible in the United States, and immediate needs often do not reach the same depth as they do in certain international contexts. Because of these factors, the needs that cash transfers meet internationally may not manifest in the same way within the United States.
We must remember that material needs are only one dimension of poverty, and cash transfers only meet the immediate need, serve as a gateway to employment opportunities, and incentivize school attendance. Returning to the Uganda study mentioned above, this article reports on this study showing that, after four years, cash transfer recipients had a 57% increase in business assets, a 17% increase in work hours, and a 38% increase in earnings. Nine years later, however, the control group had caught up to the recipients, suggesting that the program does not provide recipients with “real, sustained earnings potential.” These short-term leaps are important to poverty alleviation but ought not be conflated with long-term solutions.
Indeed, George Ingram, senior fellow in the Global Economy and Development program at the Brookings Institution, writes, “Even ardent promoters of cash transfers are clear in articulating that cash is not a panacea for development, nor a simple substitute for key actions across the development ecosystem.” Cash transfers are no substitute for the institutions of justice: property rights, rule of law, etc. These are what provide the foundation for true flourishing.
Better than Traditional Models but Still Problematic
While cash transfers are a young experiment in the world of development, they have been tested and have demonstrated success. Determined to restructure inefficient systems of aid that harm the recipient, cash transfers present a creative means of empowering the poor to flourish by lowering administrative costs, respecting people’s agency to spend money the way they think is best, and improving some health, education, and employment outcomes. If the choice is between traditional aid and cash transfers, cash transfers outperform their predecessors.
Though they surpass traditional aid, cash transfers still prove problematic. While they are less paternalistic than traditional aid, cash transfers still position the poor as the dependent instead of the active protagonist in their own story of development. Not only does this demean the dignity of the poor, it is inherently unsustainable. When flourishing terminates within years of receiving assistance, that is not enduring development. Individuals still need the institutions of justice within a free market to sustainably rise out of poverty.