Cash Transfers and Poverty
The importance of evidence versus assumptions.
By far the most popular post on the blog has been Do the Poor Become Dependent on Charity? In the meantime, a great deal of evidence has been published on the benefits of unconditional cash transfer programs. This is not to suggest that cash transfers are a panacea for the problems of severe poverty and underdevelopment. There are, however, several reasons why you may want to consider these programs over traditional charities.
Many Americans consider themselves adherents of free market capitalism. Yet, they rarely apply this logic when addressing poverty. From the perspective of classical economics, most charities waste resources by insisting they know better than the intended recipients how donations should be spent. The issue is not just diverting funds to overhead and administrative costs, but the effectiveness of spending money on personnel to train locals and provide resources for projects that may or may not be needed. In contrast, classical economics argues that the individuals themselves are the best judges of what they need. This logic is behind programs such as GiveDirectly, which hand out cash with no strings attached to individuals in need in Africa.
A common objection to cash transfers is that the poor will waste the money on booze and drugs. A recent meta analysis has throughly debunked this myth. In this paper, David K. Evans and Anna Popova reviewed 30 studies of cash transfers with evidence from Latin America, Africa, and Asia. In every study, they failed to find significant diversion of funds to purchase alcohol, tobacco, or any other “temptation” goods. While any one study may be flawed, when a large number of studies reach the same conclusion, we can be confident in the results.
Another objection is that cash transfers will make the poor lazy and/or dependent on charitable giving. As Chris Blattman argues, studies have repeated shown that “In most of these experiments, people increased their future earning potential over the long term. In some cases, they did not. But in every study, people worked at least as many hours in the labor force as they had before receiving the cash transfers, if not more.”
Studies focused on the impact of cash transfers are similarly encouraging. A paper by Haushofer and Shapiro evaluating GiveDirectly’s programs in Western Kenya found that the transfers allowed poor families to build assets, increase consumption, reduce hunger, increase investment in and revenue from small businesses, as well as many other benefits. Interestingly, they did not find that the transfers improved health or education outcomes over the time horizon of their study. This suggests there remains an important role for more traditional programs in these areas.
Giving money directly to individuals in need may be the most effective means of lifting families out of poverty. But doing so means overcoming assumptions that the poor will waste the money on temptation goods or as a substitute for hard work. The evidence disconfirming these assumptions is overwhelming, but I suspect that convincing people is still an uphill task. I hope readers will at least take away that my support for cash transfers is not based on feelings of what is the “right” thing to do, but relies on conservative economic logic and scientific evidence. At the very least, it is something to consider before making your next charitable donation.