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The benefits of no-strings-attached cash

By Devex Editor08 November 2013

Cash transfer via M-Pesa, a mobile phone-based banking system. In Kenya, M-Pesa is used to distribute cash grants to poor families. Photo by: Erict19 / CC BY-NC

EDITOR’S NOTE: Conditional cash transfers are proving to be an efficient way to tackle poverty, but can unconditional cash transfers work even better? An analysis by Council on Foreign Relations senior fellow Isobel Coleman.

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 percent (significantly lower than most NGOs)  GiveDirectly’s unconditional cash transfer program at a minimum sets a new efficiency bar for poverty alleviation schemes.

Edited for style and republished with permission from the Council on Foreign Relations. Read the original article.

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