Fighting Poverty with Unconditional Cash

Rather than building schools and clinics, or donating solar lights and cows, is the best way to fight global poverty simply to give poor people money? That’s the question a group of smart economists are testing, and their answers could stand the multi-billion dollar aid industry on its head.

In an effort to unpack the promises and challenges associated with unconditional cash transfers (UCTs), I hosted a conversation at the Council on Foreign Relations last month with Paul Niehaus, an assistant professor at UC San Diego, and the co-founder of GiveDirectly, an innovative NGO implementing and evaluating a cash transfer program in Kenya; and Chris Blattman, an assistant professor at Columbia University and popular blogger whose research is also breaking new ground on cash transfers.

The most common concern about UCTs is that recipients will squander the money on detrimental activities such as drinking, gambling, and prostitution. To test this theory, Blattman conducted a field study in Liberia and selected participants not known for financial responsibility - drug addicts, former combatants, criminals, and the homeless. The preliminary results defy expectation: the Liberian recipients did not blow their cash on guilty pleasures. Instead, they spent it on useful things like clothing and shelter, and bought wholesale goods to start their own small businesses. Few of the criminals-turned-entrepreneurs succeeded in keeping their businesses afloat -- likely due in part to the tough economic conditions in the post-conflict country, and the fact that, as microcredit programs have shown, not everyone is cut out to be an entrepreneur. Still, even with no strings attached, the Liberian participants generally made good efforts to invest in and improve their quality of life.

One of the main arguments for UCTs is that they allow poor people to spend money on what they actually need, not what outside aid experts assume they need. Niehaus (who was just recognized as one of Foreign Policy’s Leading Global Thinkers of 2013) noted that metal roofs are one of the most common purchases of GiveDirectly recipients in Kenya – something he admits he did not anticipate. Metal roofs turn out to be a high-return investment – they are sturdier and last much longer than thatched roofs, improve families’ security and health, and allow inhabitants to collect rain water. UCTs empower the poor to prioritize their own investment decisions to chart their rise out of poverty.

Both Blattman and Niehaus agree that UCTs are not a cure-all - conditionality can be an important element of some poverty alleviation efforts. For example, aid conditional on school attendance for girls can help boost enrollment in places where cultural and economic barriers limit girls’ education. In other cases, pairing cash with skills training and support can lead to better results. But Blattman and Niehaus’ studies are – appropriately – examining just how much these additional services cost.

Blattman’s work in Northern Uganda sheds light on this topic. To start, the team gave unconditional cash grants to women and observed that many became petty traders and nearly doubled their earnings within eighteen months. When social workers added follow-on services – visiting the women to hold them accountable and provide technical advice – the results were even better, but not so much better to justify the cost of the services. Blattman’s bottom line: “just give more women more cash.” Based on his work with aid organizations, Blattman estimates that hand holding can cost around $500 per aid recipient – typically more than three times the amount of the actual cash transfer. Although recipients who receive training and follow-ups do somewhat better than those who do not, the alternative for the same amount of money is helping more people and leaving them to their own (productive) devices.

So far, UCT programs have been conducted on relatively small scales – but that could soon change. Advances in technology have made it easier than ever to efficiently identify the neediest households and distribute cash to people in remote places. In Kenya, GiveDirectly cost-effectively uses satellite images to identify families with thatched roofs (a sign of poverty) and safely and efficiently delivers cash to them through M-Pesa, the country’s mobile-phone-based banking system (those without cell phones were given them).

As I discussed in a previous blog post, the results of a recently released GiveDirectly impact evaluation are positive. Unconditional cash transfers led to increases in assets and incomes, up 58 percent and 33 percent respectively, and improvements in food security and women’s empowerment. Spending on alcohol and tobacco, meanwhile, did not increase. The study also shows significant improvements in recipients’ mental health. As Niehaus noted in a recent National Public Radio interview, “being poor is really stressful and that can make it hard to . . . plan and make good decisions.” At the recent CFR event, he emphasized that mental health benefits could be one of the most important long-term gains to come from UCTs – something his work will continue to study.