As an author of a recent impact evaluation looking at the effects of purely unconditional cash transfers in rural Kenya, and as a co-founder GiveDirectly, the organization that facilitated the cash transfers, I have been paying close attention to the research in this area. Much of it has been highly rigorous, and the evidence suggests that transfers do considerable good: reducing poverty, inequality and allowing poor families to accumulate assets. This is not to say cash transfers are a panacea, but all-in-all cash transfers can meaningfully improve the lives of the poor. So, where do we go from here?
Beyond simply alleviating the poverty of many households, I believe cash transfers can play a transformative role in the aid industry. First, cash transfers can serve as a benchmark for the industry. The idea of using cash transfers as a performance benchmark is not new, but I believe it is limited from a practical standpoint, and more value may come from viewing cash transfers as a preference benchmark. Second, cash transfers are a uniquely low-risk and scalable solution to reducing poverty, which is no small thing in an industry that is prone to search for silver bullets with only a risky chance of truly solving poverty.
The cash transfer benchmark
One potential role of cash transfers is as an “index fund” for the development industry. Index funds offer the lowest management fees and cash transfers offer a method of transferring resources to the poor with the lowest overhead. Moreover, actively managed mutual funds strive to earn their management fees by beating the index, and aid organizations can “earn” their overhead by doing more good than simply giving away their budget.
As appealing as this notion may seem, it is more complex than it first appears. There are fundamental differences between investment and poverty alleviation that limit the ability of cash transfers to serve as a performance index for poverty reduction programs. The reason we can judge an actively managed mutual fund, such as one specializing in pharmaceutical stocks, against an index fund is because the measure of value is the same. The pharmaceutical fund seeks to maximize returns to investors, and the index fund is measured with the same yardstick. In contrast, when the objective is poverty reduction, many things matter beyond purely monetary returns on investment: health, nutrition, happiness, education and so on. So we would be faced with the herculean task of translating every outcome into a monetary equivalent. In the absence of a good way of doing this, it remains difficult to make trade-offs. For example, is it better to allocate aid dollars to a program that reduces infant mortality by 30 percent or one that reduces domestic violence by 50 percent?
It is a reasonable, useful and under-utilized rhetorical technique to demand that aid organizations justify why their programs are better than simply giving away cash. But even if we compare each possible use of aid dollars to the benefits of simply giving cash, we don’t necessarily know which option is “better” in a scientific sense. Moreover, any program should also be better than the next best alternative, whatever that may be. It is data collection and measurement that permits us to make an assessment about what aid programs work best, something that is not unique to cash transfers.
What is unique to cash transfers, however, is who decides what programs have value. Though the index fund analogy implies cash transfers are a performance benchmark, cash transfers provide a unique index of preferences. If making people less poor means enabling them to get more of what they value, then giving people money and seeing how they spend it provides very valuable information. It’s true that people might not be able to purchase everything that makes them better off (for example, if adequate health care is not available, transfer recipients can’t buy health services even though they might wish to). However, this approach does provide a robust view of the priorities of the poor - and this in turn can inform aid allocation and drive accountability among donors and implementing organizations.
A low-risk scalable solution
Cash transfers are also a remarkably low-risk poverty reduction strategy. If we focus just on the monetary dimension of poverty, the clearest path to alleviating poverty is not microfinance or healthcare, which may or may not result in greater business activity or labor productivity, but just to give people cash: by definition they will no longer be poor. Though it may be low risk, is it actually affordable to eliminate poverty through cash transfers? Currently something like 1.2 billion people live on less than $1.25 a day. Giving all of them $1 per day would cost $438 billion annually, an enormous amount of money. But put in perspective, it’s about 0.6 percent of the world GDP (and 1.3 percent of US and EU GDP) and works out to an average contribution of $0.17 per person per day (or $1.45 per US/EU resident). Current development assistance, by comparison, stands at approximately 0.2 percent of GDP for the US and up to 1 percent for European countries.
Various factors affect the cost of providing cash transfers to the world’s poorest people: adjusting for purchasing power parity reduces the cost, while delivery costs increase it. Further, while universal cash transfers are the least risky approach to eradicating global poverty, there are risks – such as potential inflationary effects or increased corruption as transfer volumes increase. Finally, there are massive practical and political challenges in actually implementing such a program. The point is simply that universal cash transfers are presently our lowest risk option for ending poverty, and the cost of doing so is not unthinkable, although the practicalities around it may be.
The aid industry is aligned on the goal of a world where everyone lives on more than $1.25 or $2 per day. The historical focus has been on seeking the “best” way to achieve that goal with limited resources, which can require pursuing high-risk investments in the hopes of large poverty impacts. A different, potentially transformative approach, is to ask what is the least risky way to reach the goal, and to determine if it is worth the price tag.