Giving Cash Unconditionally in Fragile States
There have been many recent press articles, a couple of potentially seminal journal papers, and some great blogs from leading economists at the World Bank on the topic of Unconditional Cash Transfers (UCTs). It remains a widely debated subject, and one with perhaps a couple of myths associated with it. For example, what is cash from UCTs used for? Do the transfers lead to permanent increases in income? Does it matter how the transfers are labelled or promoted? I am particularly interested in whether UCTs could be a useful instrument in countries with low institutional capacity, such as fragile and conflict-affected states (FCS).
Why UCTs in FCS? UCTs present a new approach to reducing poverty, stimulating growth and improving social welfare, that may be the most efficient and feasible mechanism in FCS. A recent evaluation of the World Bank’s work on FCS recognized, “where government responsiveness to citizens has been relatively weak, finding the right modality for reaching people with services is vital to avoiding further fragility and conflict”. Plus there is always the risk of desperately needed finances being “spirited away” when channeled through central governments. UCTs may present a mechanism for stimulating the provision of quality services, which are often lacking, while directly reducing poverty at the same time. As Shanta Devarajan’s blog puts it, “But when they (the poor) are given cash with which to “buy” these services, poor people can demand quality—and the provider must meet it or he won’t get paid.” We should explore more about this approach to tackling poverty: where and when it has worked, what made it work, and whether we can predict whether it will work in different contexts.
There is already a large literature on conditional cash transfers (CCTs) that I will not attempt to cover here, so let us instead consider the potential benefits for making transfers unconditional, rather than conditional. First is feasibility. Many FCS countries simply do not have the service infrastructure in place to condition transfers. For example, conditioning transfers on attendance in school is only feasible if there are enough places in schools to accommodate all the potential students, without a detrimental impact on the quality of education. However, as Devarajan suggests, providing unconditional transfers may catalyze service delivery by private providers, and provide the right incentives to these providers to maintain quality. Second is targeting. By making transfers unconditional we may be able to increase the likelihood that we reach the recipients who would most benefit from the transfer – not just the ones who face the lowest costs of reaching conditions, or who would have met conditions anyway. Often, the poorest households live furthest away from schools and healthcare centers. Conditioning the transfer on specific outcomes may mean the poorest are less likely to receive the transfer and miss out on its long-term benefits. Third is transparency. By making the transfers unconditional the process of allocating the transfers will be simplified, increasing the scope for the use of automatic electronic transfer mechanisms (e.g., the use of m-Pesa in Kenya or pre-loaded ATM cards for Syrian refugees in Lebanon). Electronic transfers create a paper trail enabling better tracking of the cash to recipients and onto purchases, which could be useful for reducing leakage, detecting corruption and learning about the consumption of the recipients.
Furthermore, there are arguments for re-thinking the targeting of transfers. Recent studies have shown inaccuracies in the use of proxy indicators to target poor people. In Indonesia, a proxy-means test mimicking the government’s standard practice incorrectly excluded 52% of truly poor households and incorrectly included 20% of non-poor households, based on their consumption levels. In addition, these methods of identifying the recipients are often costly and reduce the amount left to distribute. The standard features of CCTs, targeting and conditionality, have been estimated to account for 60% of the administrative costs of PROGRESA, 49% of the costs for RPS in Nicaragua, and 31% for PRAF in Honduras. Perhaps it is worth considering universal UCTs in specific geographic locations – for example, rural areas with a high proportion of the population below the poverty line - where the lower costs of universal transfers outweigh the benefits of more accurate targeting. There may also be a case for making transfers universal in fragile situations where any kind of targeting may exacerbate existing tensions.
Despite the potential benefits of UCTs, there are concerns. Will the recipients of transfers use them for productive purposes? Will UCTs be the most efficient and economical way of using aid to reduce poverty? Fundamentally we would like to see the recipients use the transfers to choose investments that give them the best chance of escaping poverty (and hope that this will coincide with maximizing their welfare). However, this is a really difficult problem to solve, and I would bet that many of us well-educated working professionals are not even fully optimizing or on our own production possibility frontiers! Yet, there has been recent evidence that recipients of UCTs use them productively. New research has found that the recipients use them to make investments and improve their monthly earnings, and in another paper focusing on transfers to teenage girls in Malawi, UCTs had an important impact on lowering marriage and pregnancy rates, helping to empower these women. While these papers provide only a partial picture of the potential outcomes of UCTs, their initial positive results suggest that it is an area the World Bank and other development agencies should explore further.
And UCTs need not be implemented in isolation: finding ways to equip recipients with information on their investment choices are important parallel interventions. As Richard Thaler points out, “in some cases (giving UCTs) will work great. When people have a good sense of how to make use of that money.” He is an advocate for creating nudges to help people make the right decision and advises the British Government, which now has its own “Nudge” unit. Simply labelling UCTs with a productive investment choice may be possible approach. A recent paper found that a cash transfer labelled as an education support program was sufficient to increase school participation even though no conditionality was imposed. In Poor Economics, the authors note, “It is not easy to escape from poverty, but a sense of possibility and a little bit of well-targeted help (a piece of information, a little nudge) can sometimes have surprisingly large effects”.
What do you think? Can UCTs provide the resources and, assisted with “a little nudge”, can they work to reduce poverty, spur growth and improve service delivery in FCS?
- unconditional cash transfers
- Cast Transfers
- Fragile and Conflict Afflicted States
- Social Development
- Public Sector and Governance
- South Asia
- Middle East and North Africa
- Latin America & Caribbean
- Europe and Central Asia
- East Asia and Pacific
- Syrian Arab Republic