Cash or Cow?

When it comes to helping the poor policy-makers have three basic options to design transfers. They can provide in-kind transfers, such as food, medical care or farm animals, transfer cash directly to the ones in need or remit money under certain conditions, e.g. aid only for households, which send their children to school. Behavioural economics has taught us that people are no homines oeconomici. We only partly act rationally and are influenced by the present bias, which describes our tendency to value smaller payoffs in the present or near future higher than long-term rewards. Correspondingly, discussions on foreign aid have pointed out the allurements cash may have. If people are impatient and make irrational decisions conditional and in-kind transfers can ensure that government aid and private donations are spent in the best possible way. The underlying assumption is that direct cash transfers will rather be used for gambling, alcohol or luxury goods instead of saving for education, buying fertilizer or making house adjustments.

However, the crucial point many discussions on development aid are lacking is actual evidence. Neither the neoclassic nor the behavioural economic thought system serve us well if real-life evidence contradicts them. Eventually, our policies are meant to work in the real world. So: Are people maybe better than we think? Do people actually know best what they need? Or do we really live in a world of potential gamblers?

An interesting approach to this question comes from Johannes Haushofer and Jeremy Shapiro’s paper “Policy Brief: Impacts of Unconditional Cash Transfers” from 2013, in which they study unconditional cash transfers made by the NGO Give Directly in Kenya. The organisation, which inter alia is supported by Google and Facebook co-founder Dustin Moskovitz, focuses on unconditional money transfers and argues that cash is a straightforward measure, which stands in contrast to costly and non-transparent NGO structures.

In Give Directly’s program poor rural Kenyan households received money transfers via a mobile money system with the instruction to spend it as they like. The only criterion for being considered for a transfer was living in a thatched roof house, which was defined as a sign of poverty as wealthier families usually live under an expensive but also more enduring iron roof. Among these eligible households cash recipients and control group were chosen randomly. The money transfer was conducted in two different ways. Either the households received a single lump-sum payment or nine monthly instalments. Additionally, the size of the transfer amounted to either $300 or $1100.

The program showed a significant impact on many different areas of life. Firstly, the transfers allowed households to build assets. The number of iron-roofs increased, which implies that money was spent on long-term investments. Similarly, transfers increased consumption, especially expenses on food, medicine and family events such as weddings and funerals. The raised food consumption of 20% correspondingly lead to a decrease in hunger. The next finding was that transfers increased investments and revenue from livestock and small businesses. Additionally, the authors show that happiness and life-satisfaction improved while stress levels were lowered. However, what the study did not find was any change in the consumption of alcohol and tobacco. Neither did the transfers have any long-term effects on health and education.

Generally, small and large transfers both showed an effect. Households receiving a lump-sum transfer were more likely to build assets, while the recipients of monthly transfers increased their food consumption relatively more. This finding may imply that unconditional cash transfers can be designed individually in order to target different problems.

An interesting characteristic of the program is that at least the high transfer sum amounted to more than a yearly average income of the participants. Hence, the program and the following study come close to a basic income experiment. As a matter of fact, Give Directly has announced to start an actual basic income program in Kenya.

When discussing the paper at hand we have to keep in mind that Jeremy Shapiro co-founded Give Directly. However, its reception in the scientific world was rather positive and critique did not point out subjective influences. Surely, this study is only one observation of the impacts of unconditional cash transfers and cannot serve as a general recommendation or proof of the effectiveness of similar measures. Additionally, the paper only addresses the micro level and does not deal with the impact individual transfers have on a macro level. Likewise, the paper does not identify long-term effects. We can assume that cash transfers to individuals will not lead to better infrastructure or a functioning financial sector in the whole country. But on an individual level cash transfers may be a direct way to help people relieve the financial pressure on their daily lives and enable them to undertake investments. Having enough money to eat three meals a day is an instant improvement while building a road to the next city, which will enhance trade possibilities and can increase income in the long run, takes years.

My personal conclusion is that unconditional cash transfers may be a justified measure and can bring positive effects. People in desperate need can use money wisely and enhance their life standard. Finally, we have to ask ourselves if we really know better which expenditures can improve the lives of others than they themselves.

Sources

Haushofer, J. and Shapiro, J. (2013). Policy Brief: Impacts of Unconditional Cash Transfers. Available at: https://www.princeton.edu/~joha/publications/Haushofer_Shapiro_Policy_Brief_2013.pdf (Accessed 26th May 17)

Goldstein, J. (2013). Is It Nuts to Give to the Poor Without Strings Attached? The New York Times,  13th August 2017. Available at: http://www.nytimes.com/2013/08/18/magazine/is-it-nuts-to-give-to-the-poor-without-strings-attached.html (Accessed 26th May 17)

Levitt, Steven (2013). Fighting Poverty with Actual Evidence. Freakonomics. Available at: http://freakonomics.com/2013/11/27/fighting-poverty-with-actual-evidence-full-transcript/ (Accessed 26th May 17)

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