Tackling Poverty Through Cash Transfers

Tackling Poverty Through Cash Transfers

In recent years, direct cash transfers have taken the development world by storm. A large group of development economists — now dubbed cashionistas — argue that direct monetary assistance is the most promising way to tackle extreme poverty. Rather than having international aid donors dictate what assets or skills training are needed to lift people out of poverty, cash transfers provide those living in poverty with agency over their spending.

The nonprofit GiveDirectly has been at the forefront of the cash transfer revolution, collecting donations and transferring them to families living in extreme poverty. Since 2009, The organization has delivered over $300 million in mobile cash payments to half a million families in Kenya, Uganda, Rwanda, Liberia, Malawi, the DRC and Morocco. 

A large body of evidence supports the idea that cash transfers can help to tackle poverty. A 2009-2011 randomized control trial in northern Uganda provided one-time cash grants of UGX 300,000 (Approx $190 CAD) and basic skills training to 904 participants to encourage the development of non-farm businesses. Those enrolled in the program saw a 67% increase in monthly incomes and were more likely to be participating in non-farm businesses than their un-enrolled peers. A 2004 randomized study in Kenya exploring the effects of cash transfers on household decisions and productive activities found that households who received cash transfers saw a 12.3% increase in animal product consumption and a 15.4% increase in livestock ownership. A metastudy by the Overseas Development Institute examining 56 cash transfer programs in 30 low and middle-income countries found that across the board, cash transfers reduced the monetary poverty of recipients. This study also found that under certain circumstances, cash transfers led to increased school attendance, improved dietary diversity, and increased decision making power amongst women. 

GiveDirectly routinely conducts randomized control trials to assess the impact of their unconditional cash transfer programs. As a result, are currently ranked as one of the most effective charities in the world. The organization uses public data to identify target communities living in extreme poverty, and then enlists local field staff to enroll individuals into a mobile based payment system. GiveDirectly typically transfers $1000 USD per household, an amount they estimate to cover a year’s worth of expenses in low-income communities.

While there exist ongoing debates regarding the effectiveness of conditional versus unconditional cash transfers, GiveDirectly chooses to provide unconditional cash transfers, citing the high administrative costs and a lack of agency associated with conditional cash payments. Overall, the organization has found that their cash transfer programs help increase household incomes, consumption levels, and food security. 

In spite of promising evidence, neither GiveDirectly nor the rest of the cash transfer movement has not gone without criticism. World Bank Economist Berk Ozler has criticized the widespread enthusiasm surrounding cash transfers as a “clumsy attempt to usher in a new era in development aid”. Ozler argues that little attention has been paid to the spillovers that accompany cash transfer programs, and specifically, the possibility that cash transfers directed at one subset of a population may lower the levels of consumption, investment, and psychological well-being in the other. Referring to GiveDirectly’s work, Ozler argues that the nonprofit “focuses only on income effects to increase household welfare now and [leaves] it to others to address market failures and externalities.” Ozler further argues that there is not enough evidence to determine whether cash transfers reduce poverty in the long-term. If cash transfers cannot break generational cycles of poverty, or target the systemic roots of wealth inequality, are they really as groundbreaking as the cashionistas claim?

In an effort to address some of the long-term uncertainties and spillover effects of direct cash transfers, GiveDirectly is pioneering a long-term universal basic income study in rural Kenya. Across 44 villages, the nonprofit is providing unconditional cash transfers of $0.75 per day to 4,966 individuals living in poverty over the course of twelve years. For comparison, 7,333 individuals across 80 villages will receive monthly cash transfers for just two years and another 8,548 individuals across 71 villages will receive a one-time lump sum of cash. A final group of 100 villages will also be monitored, and not given any payments. The study began in 2017, and will be the longest and largest randomized study to date assessing the efficacy of long-term cash transfers. 

The aim of GiveDirectly’s 2017 venture is manifold. First, by comparing individuals who receive a consistent cash flow for two years versus twelve, GiveDirectly hopes to assess the long-term implications of cash transfers. Do the benefits reaped after the first two years remain a decade later? And are the results after two years and after twelve years drastically different? In conducting the twelve-year study, they will be able to investigate whether the promise of a steady future stream of income propels those living in poverty to migrate to new areas, invest in small enterprises or take financial risks. By comparing individuals who receive a lump sum versus individuals who receive monthly instalments, they will also be able to assess whether steady cash transfers reap different benefits from one-time cash transfers. In addition to measuring changes to various economic indicators, GiveDirectly will also assess changes in psychological well being, nutritional health, mental health, social integration and much more.

While questions remain surrounding the impacts of cash transfers, the promising findings so far certainly indicate that they merit further study. GiveDirectly’s 2017 study will hopefully shine light on some of the current gaps in the literature regarding the uncertain long-term effects of cash transfers and their possible spillover effects.

Despite the fact that comprehensive results have yet to be published, GiveDirectly’s work thus far has importantly countered the myth that poor people spend their money ineffectively. Rather, they have found that cash transfers are overwhelmingly spent on food, medicine, school fees, farm assets, housing equipment, and business investments. A 2017 meta-study by the World Bank echoed these findings, and found that both unconditional and conditional cash transfers reduced rather than increased spending on temptation goods, such as alcohol and tobacco. Even if cash transfers are not the ‘holy grail’ cashionistas have made them out to be, they are certainly an effective short-term solution, and a step-forward in providing those living in extreme poverty with greater agency over their livelihoods. 

Edited by Sarah St-Pierre.

Photo credits: “Assorted Bank Notes” by Annie Spratt, published November 2019, licensed under Unsplash. No changes were made.

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