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Sense and Sensibility – How households respond to public works

Shwetlena Sabarwal's picture
Credit: Arne Hoel 

Sense and Sensibility is not my favorite Jane Austen novel - because sense appears to be the only choice. In the novel, Elinor and Marianne Dashwood are two impoverished sisters. Elinor is sensible; Marianne is an impractical romantic. A key engine of the novel is the inexorable journey of Marianne – towards sense (aka Colonel Brandon).

This vein of implicit moralizing can also be found in development literature, nowhere more than in the question ‘are poor people responding to welfare programs sensibly?’

Recent studies have highlighted the potentially ‘irrational’ and self-defeating behaviors associated with poverty. How the poor might have little self-control for saving/investing.  Possibly, because they have little hope of becoming wealthy, and therefore don’t see the point. Another possibility is that the stress related to perpetual poverty leads to shortsighted decision making.

These ideas potentially feed into fears of what is referred to as welfare dependency. Policy-makers and public discourse worry that safety net programs might create a dependency culture by introducing incentives against work, despite evidence to the contrary. If welfare-recipients are not saving and investing, then what are the chances they will successfully graduate from these programs in a reasonable amount of time?

Visible also is the specter of ‘bad’ decisions. Are welfare-transfers being used sensibly? Or are they fueling ‘other behaviors’ like increased consumption of cigarettes and alcohol, where again, there is no systematic evidence of this?

A public works (PW) program in Sierra Leone shows a different – and entirely more promising - side of this picture. My co-author Nina Rosas and I worked on a randomized evaluation of the Cash for Work (CfW) program in Sierra Leone. The program provided temporary employment to vulnerable youth - 50-75 days of employment, with a daily wage of about $1.80 (an ad hoc market wage).

We found that in the very short-term, PW participation did not discourage work. In fact it encouraged it. PW participation crowded-in labor-market activity over and above program participation. Excluding the PW participant, household labor market activity increased by 24%, or five percentage points. Sensible.
Household income increased by about 29%. What do the households do with it? They increase spending on food, durable goods, and health care. They also increase participation in informal savings groups (by 16%) – and invest in housing improvements (33% increase overall) and existing businesses (39% increase in rural areas). Sensible.

Most crucially, participating households created new businesses. PW participants created new –mostly petty trade - enterprises at four times the rate of control households – 34% vs. 9%. These findings show that, poor households used earnings from a temporary safety-net program to not just improve their current quality of life, but also invest in their future. Sensible!

The catch is that participating urban households also increase the consumption of cigarettes.

Ultimately, how poor people re-optimize in the face of welfare programs is complex and nuanced. They might make many seemingly productive decisions – but they also might give into temptation like cigarettes. At the end of the day, human beings are complex and make complex decisions, which cannot - and should not - be judged simplistically.

Who is to say, when faced with similar choices, any of us would always do the sensible thing? Well, maybe, if you are Elinor Dashwood.

This post is part of an upcoming blog series titled #HumanEcon by Shwetlena Sabarwal. Future posts can be found here.

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