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The Benefits of No-Strings-Attached Cash

by Isobel Coleman
November 7, 2013

A man uses the M-PESA mobile banking system in Nairobi, Kenya, May 2009 (Courtesy Reuters/Noor Khamis). A man uses the M-PESA mobile banking system in Nairobi, Kenya, May 2009 (Courtesy Reuters/Noor Khamis).

What if I suggested that the best way to fight poverty is simply to give money to poor people, no strings attached? You’d probably say I was crazy. Just dropping cash on the world’s poorest might result in a temporary improvement in their quality of life, but only until the money runs out and then they would be back where they started. Or maybe you’d be skeptical of even that short-term improvement, since you’d think the lucky recipients would just blow the money on guilty pleasures like alcohol, tobacco, or worse.

But over the past decade, lots of studies suggest that cash transfers are in fact an efficient way of actually tackling poverty. In the late 1990s and early 2000s, governments in Brazil and Mexico led the way with large conditional cash transfer (CCT) programs that provide small, steady sums to families (typically the mother) on the condition that they send their kids to school and take them to doctors. As health and education went up, so too did incomes; poverty rates went down.

The newest twist on this idea is that perhaps cash transfer programs could be just as effective – and cheaper to implement – without any conditionality. GiveDirectly, an innovative new NGO, set out to test that theory. Working in Kenya, it has distributed cash grants to poor families through a mobile-phone based banking system called M-Pesa. GiveDirectly then commissioned a study to better understand the impact of these programs, and recently released the results. Evaluators Johannes Haushofer and Jeremy Shapiro of the Massachusetts Institute for Technology, in partnership with Innovations for Poverty Action (IPA), tracked GiveDirectly recipients in rural Kenya who had received an average of $513 each between 2011 and 2012. GiveDirectly has monitored results before, but this study used a rigorous research design to more accurately assess the program’s impacts. In the words of David McKenzie, an economist at the World Bank, the study was “very well designed.”

The results seem promising: researchers found that there were significant improvements in the recipients’ financial and psychological well-being. For some, assets and incomes increased by 58 percent and 33 percent respectively. Food security and consumption levels of goods increased while spending on alcohol and tobacco stayed constant. In addition, the program seemed to improve the mental health and lower stress and depression levels of recipients. Researchers also found that there were positive spillover effects that boosted women’s empowerment, both in households participating in the program and in the community as a whole.

Such short term gains are hardly surprising (presumably, windfall cash makes most people happier), but the long-term effects of unconditional cash transfer (UCT) programs remain unknown. Although the study found that spending on healthcare and education increased slightly, overall levels of health and school attendance did not change. According to The Economist, CCTs have their drawbacks, but “usually do a better job” than UCTs in reducing poverty because their health and education requirements benefit the next generation.

Amanda Glassman of the Center for Global Development, however, makes the interesting observation that although CCTs in Latin America have led to higher school enrollments, “no program can find an impact on learning as measured in standardized tests.” Her bottom line is that requiring parents to send their kids to poor-quality schools doesn’t necessarily translate into the increased learning that is associated with greater wages in the labor market. I also think back to the important point that Harvard Professor Lant Pritchett made last year – that the purpose of conditionality in Brazil’s and Mexico’s CCT programs was not really to get more kids in school (school enrollment was already above 95%) but rather to make those programs more politically palatable.

So where does this leave us on evaluating UCTs versus CCTs? Because unconditional cash transfers are a relatively new development tool, we still don’t have enough information to determine if these programs can actually get at the root causes of poverty or merely treat its symptoms. Regardless, the results of GiveDirectly’s study challenge the assumption that only conditional cash transfer programs are effective in improving living standards for poor communities. When given the choice, many poor people spend wisely, defying the stereotype that they will behave irresponsibly with cash and that donors and governments must make choices for them. And with an expense ratio of approximately 7% (significantly lower than most NGOs)  GiveDirectly’s unconditional cash transfer program at a minimum sets a new efficiency bar for poverty alleviation schemes.

Post a Comment 3 Comments

  • Posted by Eugene Nzeribe

    Based on current (2013) political-socio-economic conditions in most of sub-Sahara Africa, Unconditional Cash Transfer (UCT) is not the best approach for achieving improved living standards for poor communities. In my organization, ICAfrica (www.icafrica.com), a Canadian NGO providing poverty alleviation support in Africa, we have found that CCT (Conditional Cash Transfers) produces the largest improvement within recipient families and their communities in general. Additionally, targeting those who are most likely to succeed is not very difficult and that also helps boost success rate. ICAfrica targets the poorest of the poor women entrepreneurs who are already struggling to make more profit in their micro-businesses but are being handicapped by lack of capital. Often they operate with less than $50 in capital and return home daily with less than $7 a day to feed 4 to 6 people. We offer business coaching, field supervision and a mild conditional assistance of between $100 & $200 in the form of a very low interest loan, at the rate of 1% to 5% which subsidizes the cost of field support work. All the women that received our assistance since the start of this program 4 years ago, have moved their families above the poverty line. Their social status have increased tremendously and their communities are much better off today. To achieve the maximum impact, you can’t just spread money and pray that it falls on fertile soil. If you select those who have already taken the initiative to create income generating activities for themselves but are lacking the usual small capital required, you will be working with people who already know how to grow the money you give them. They are most likely to rise up faster and pull their communities along.

  • Posted by Marcos Méndez

    At the end of the day, these new studies are revealing something that most of us already knew: we, as donors, have no chance of getting how a poor really lives and therefore we should avoid conditionality. Ethics play a role here too. You can take a look at this recent piece by World Bank’s Jishnu Das on the issue: https://blogs.worldbank.org/futuredevelopment/new-york-times-ethicist-better-economist-economist Thanks.

  • Posted by Eugene Nzeribe

    Hello Marcus, thank you for your post. It is interesting how you said that “we, as donors, have no chance of getting how a poor really lives ..” The charities that we donate to should have the answer and we should encourage them to work towards empowering the recipients to be self-sustaining. My submission was from the perspective of what I already know from immersing myself within the poor communities of sub-Sahara where ICAfrica works and understanding how things work for the recipients. Maybe at some point in the future of this debate (on how to eliminate poverty, the rich world would open their pause strings and allow reasonably adequate money to flow to poor communities. At that juncture, Unconditional CT could make sense.
    While this debate goes on, millions of people are dying of hunger and malnutrition. If we can’t spread money on all of them now, what can we do today to reduce the number of casualties, with inadequate donor funds? I don’t think that it is a one size fits all solution. A majority of the poor people (living below the poverty line) are already very busy trying to create viable economic income sources for their families. Go to the markets and or along major streets in any town in sub-Sahara Africa and you will find them, hustling for pennies in profits. Their problem is lack of capital, often not more than $500. At the same time, there are other poor people that welfare would work for.
    Any solution would consider both sides. In the meantime, charities and socio-economic support organizations like mine, would continue to manage with very limited funds and in that case, it would be irresponsible to not justify investing in the recipient most likely to make the largest improvement on the development scale. This becomes conditional.

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