Global Economics
For Fighting Poverty, Cash Is Surprisingly Effective
June 03, 2013
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Worldwide, richer people express fears about handing money to poorer people. Giving poor people money is no way to stop them being poor, the thinking goes: Surely they will just waste it. Instead, we design complex, bureaucratic programs like SNAP, the supplemental nutrition assistance program (formerly known as food stamps), to help poor families buy food and only food. That way, they can’t buy a trip to Disney World with our tax dollars.
A growing number of studies suggest that this is wrong-headed, that just handing over cash even to some of the world’s poorest people actually does have a considerable and long-lasting positive impact on their incomes, employment, health, and education. And that suggests we should update both our attitudes about poor people and our poverty reduction programs.
In 2008, the Ugandan government handed out cash transfers worth $382, about a year’s income, to thousands of poor 16- to 35-year-olds. The money came with few strings—recipients only had to explain how they would use the money to start a trade. Columbia University’s Chris Blattman and his co-authors found that, four years after receiving the cash, recipients were two-thirds more likely to be practicing a trade than non-recipients, and their earnings were more than 40 percent higher. They were also about 40 percent more likely to be paying taxes.
In a second study, Blattman and colleagues looked at a program that gave $150 cash grants to 1,800 of the very poorest women in northern Uganda. Most began some sort of retail operation to supplement their income, and within a year their monthly earnings had doubled and cash savings tripled. The impact was pretty much the same whether or not participants received mentoring; business training added some value, but handing over the money it cost to provide would have added more.
Most cash-transfer programs do impose conditions—like requiring kids to go to school or get vaccinated, which does improve school attendance and vaccination rates considerably. But Blattman’s research suggests conditions aren’t necessary to improve the quality of life of poor families. In fact, while analysis by the World Bank’s Berk Ozler shows that making cash transfers conditional on kids being in school has a bigger impact than a no-strings-attached check, even “conditionless cash” considerably raises enrollment. Conditional programs increase the odds of a child being in school by 41 percent; unconditional programs, 23 percent. Other studies of cash transfers in developing countries have found a range of impacts that had little or nothing to do with any conditions applied:lower crime rates, improved child nutrition and child health, lower child mortality, improved odds of kids being in school, and declines in early marriage and teenage pregnancy.
These studies all suggest that if you give poor people money they’ll use it to make themselves a little better off. That’s not necessarily a pathway to wealth—after all, microenterprises of the sort started by Blattman’s Ugandan entrepreneurs are usually a last resort for poor people, who would much rather have a steady job. And cash transfers may improve nutrition and school attendance, but they can’t make up for a dysfunctional state that can’t provide public infrastructure or decent services. But what they can provide is at least one or two rungs on the ladder out of poverty.
This holds true outside of the developing world. Back in the 1970s, the U.S. federal government experimented with a “negative income tax” that guaranteed an income to thousands of randomly selected low-income recipients. (Think of today’s Earned Income Tax Credit, only without the requirement to earn income.) The results suggested that the transfers improved test scores and school attendance for the children of recipients, reduced prevalence of low-birth-weight kids, and increased homeownership. Early analysis of a 2007 cash transfer program in New York City suggested that transfers averaging $6,000 per family conditional on employment, preventative health care, and children’s educational attendance led to reduced poverty and hunger, improved school attendance and grade advancement, reduced health-care hardships, and increased savings.
Findings from around the world suggest that giving cash over goods or in-kind transfers is cheaper and more cost-effective, too. Economist Jenny Aker has found that cash transfers are better used than food vouchers in a comparison in the Democratic Republic of the Congo. Unsurprisingly, giving people a food voucher means they purchase more food than they do if you give them cash. But give them cash and they are able to save some of the money and pay school fees, all while consuming as diverse a diet as those who got vouchers. And the cash-transfer program is considerably less expensive to run.
It is comfortable for richer people to think they are richer because of the moral failings of the poor. And that justifies a paternalistic approach to poverty relief using vouchers and in-kind support. But the big reason poor people are poor is because they don’t have enough money, and it shouldn’t come as a huge surprise that giving them money is a great way to reduce that problem—considerably more cost-effectively than paternalism. So let’s abandon the huge welfare bureaucracy and just give money to those we should help out.
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