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How to help the poor have more money? Well, you could give it to them

In 2007, people in the Western Province of Zambia lost their homes, their livestock and their crops when heavier-than-normal flash floods swept through their area. USAID’s office of disaster assistance stepped in with $280,000 worth of with seeds and fertilizer, training for farmers, and emergency relief supplies.

Two NGOs working in Zambia, Oxfam GB and Concern Worldwide, tried a different approach: they handed out envelopes stuffed with cash—from $25 to $50 per month per affected family, with no strings attached. An evaluation found that common fears about cash transfers—that the cash infusion will cause inflation in the market, that the money will be squandered, or that men will take control of the money—were unrealized.

What did people buy with the money? The list includes maize, beans, salt, cooking oil, meat, vegetables, clothes and blankets, paraffin, transport, soap and body lotion, and lots of other mundane household items. They also loaned it to friends, used it to pay back debts, purchased health care, education and transport, and rebuilt their homes. Only a very small fraction of the money (less than .5%) was spent on “unproductive” items, like liquor for the men.

Unconditional cash transfer programs can be fast and cost effective. With no technical experts’ salaries to pay, and no trans-Atlantic shipping costs for US-produced food aid, more of the cash can go straight to the recipients (in the case of the Concern Worldwide project 27% was spent on program administration, while 73% was distributed in the cash transfers.)

Cash transfers also acknowledge that poor people are capable of making good economic decisions without the help of outside experts armed with needs assessment checklists. An evaluation of another Oxfam cash transfer program, this one in Vietnam (summary here), found that villagers made sophisticated investment decisions, choosing whether to invest in seeds and fertilizer, family coffins and tombs, cows and buffalo, home improvements, debt repayment, and /or community roads.

As Duflo and Banerjee document in their study on the economic lives of the poor, the rich often assume that poor people have few choices about where to spend their money. And this notion allows aid agencies to assume the paternalistic role of decision-maker for the poor. Yet Duflo and Banerjee note that subsistence accounts for a lot less than 100 percent and the “poor do see themselves as having a significant amount of choice.”

Cash transfers have plenty of potential drawbacks, as these studies also point out. Handing out large amounts of cash comes with its own set of logistical hurdles and could invite theft or corruption. And what if this approach puts women and children at a disadvantage, while men take and spend the cash? There are improvements to be made, in targeting the right population, and equipping people with better tools (like financial training and savings accounts) to help them make the most of the money. Two studies by Innovations for Poverty Action and the Poverty Action Lab at MIT in Morocco and Indonesia (both ongoing) should shed more light on when and how cash transfers can be most effective. (See also studies collected by the UK-based Overseas Development Institute).

When USAID provides blankets, seeds and fertilizer to flood victims, they are doing their best to decide for the victims what their most urgent needs are. With the cash transfers, the people can decide for themselves how to meet their most urgent needs. This gives people who have lost their livelihoods, belongings or loved ones a new feeling of control over their lives, builds money-management skills, and restores to them their power to make economic decisions. If you were in their shoes, which would you prefer?

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19 Comments

  1. zulusafari wrote:

    A few random thoughts. First, I’m personally VERY surprised about the data over cash handouts. .5%? I would have been surprised by any number under 20%. As pointed out, I think it largely depends on the community and the situation on the ground.

    A local story (USA) was when we experienced our largest internal displacement in recent history following the hurricane in Louisiana. When they arrived in Houston and Dallas they were given clothing, blankets and free rent in apts, but the most important item was the dept card loaded with cash. Unfortunately, individuals stood in lines multiple times with different names to receive more than their fair share, money was squandered on diamond rings, TVs, liquor and more.

    My personal reason for never handing out cash on the street was always fearing it would be spent on liquor and such. I’ve been challenged to rethink this idea given my new location (rural & urban E. Africa) and the circumstances of my surroundings and still have not come to a conclusion.

    My last thought is giving away vs. micro lending. I know that the idea behind micro loans is for starting up/expanding small businesses. But isn’t that the idea behind the cash handouts. It’s getting people back on their feet. Buying seeds to plant to sell, buying a bull to plow a field, and other equipment in managing agriculture, whether in the field or in the home. Of course if they turned it into loans the infrastructure (and cost) would double. But at least it would not be a straight up hand out.

    But as you pointed out, assuming you have the generosity, and the true handout is what’s best for the situation, why not?

    Posted May 19, 2009 at 3:35 am | Permalink
  2. Matt C wrote:

    I’m not surprised the poor know perfectly well how to spend extra money, to think otherwise would be quite patronising.

    There is a significant concern though that (and this would not register in short term randomised trials) that the recipients would be able to count on foreign intervention whenever times are tough.

    This could crowd out more sustainable attempts to shield themselves from shock. Wouldn’t it be more optimal to provide an insurance scheme that the poor would have to pay into?

    Posted May 19, 2009 at 5:17 am | Permalink
  3. Tord Steiro wrote:

    @ Laura:

    Whether I would prefer cash or stash, depends ultimately on the market infrastructure and available goods and services. If homebrew was extremely cheap, and the supply of other goods and services where scant, then I believe cash hand-outs would make me worse of.

    @ Matt:

    An insurance scheme is a good idea. In Europe we call it social security, and we pay the insurance premium over our tax bill. In the US, I believe, the system is a bit different. As far as I know, most European systems function reasonably well. After investigating the US system after Kathrina, I am not so sure about how it works there.

    If any these are feasible in poor countries with poor governance, thin markets, and high information and transaction costs, is, however, a rather different question. In theory, insurance schemes – private, governmental, and communal – should be ridden with problems concerning adverse selection and distorted incentives. I see no reason why this should be a lesser problem in Zambia than in Europe or the US. Rather the opposite.

    Further, what is really the difference between getting a ‘bail-out’ in cash or blankets + houses + seeds + cattle? It’s still a ‘bail-out’, hence there is a possibility for incentive and selection distortions anyway. Much like any other insurance scheme.

    Posted May 19, 2009 at 7:18 am | Permalink
  4. Jmh wrote:

    What’s the reasoning for there not being any inflation?

    Posted May 19, 2009 at 9:15 am | Permalink
  5. Bernard Lowther wrote:

    The reliability of these evaluation results will depend a lot on the methodology. Probably it was based on a survey, as distinct from direct observation. If the respondents/recipients believe (erroneously or not) that their answers might somehow affect their community’s future access to similar programs — or might reflect badly on the nice people who implemented this program — they are likely to understate their purchases of ‘bad’ items like booze. Similarly, since they had been alerted to the idea that the spending decisions should be made jointly, they are going to be reluctant to give the ‘wrong’ answer on that aspect too. It is very difficult in my experience for an evaluator to convince respondents and interviewees not to worry about whether their replies will have undesirable consequences.

    Posted May 19, 2009 at 9:38 am | Permalink
  6. Alanna wrote:

    We’ve seen good results in Tajikistan with unconditional cash transfers; families here use them to get out of debt and purchase livestock (which are a form of savings).

    Posted May 19, 2009 at 10:45 am | Permalink
  7. SS wrote:

    @ Laura Frescheti

    “When USAID provides blankets, seeds and fertilizer to flood victims, they are doing their best to decide for the victims what their most urgent needs are. With the cash transfers, the people can decide for themselves how to meet their most urgent needs.”

    Laura – Have you ever been in a flood ravaged area in the third world? If you have you would know that seeds, fertilizer, blankets, potable water, tents and food are almost never available in sufficient quantities locally and when modest shipments are brought in by traders they are sold at huge mark ups.

    I don’t need to insult you personally but editors at Aid Watch should know better. Thye don’t. I am still waiting for an answer to my question to Dani Rodrik and Dr. Easterly on a previous post. If posting nonsensical gibberish and not responding is good for your careers, by all means continue. It will remain non-sense.

    SS

    Posted May 19, 2009 at 12:36 pm | Permalink
  8. SS2 wrote:

    I’m curious about whether the expectations of future cash-handouts affects how a current cash-handout is spent.

    If there is expectations of future cash handouts or a culture of giving cash, I’d expect that more of the money would be spent on (at least what we consider) frivolous items. What sort of work was USAID, Oxfam and Concern doing in the area previously?

    Posted May 19, 2009 at 1:47 pm | Permalink
  9. SS wrote:

    SS is not = SS2

    In fact the idiocy of this person is such that they not only does he have absolutely nothing to say but he can’t even identify himself distinctly. This fellow should be given a full guest blog he is that stupid and irrelevant.

    SS

    Posted May 19, 2009 at 2:02 pm | Permalink
  10. Jeff wrote:

    It’s not one-intervention-fits-all. Laura Frescheti is not wrong: There are definitely situations where direct cash transfer is an appropriate intervention. On the other hand, there are situations in which cash transfer would be obviously the wrong choice. “SS” gave a decent example. You have to be careful with either one. Either one can result in more harm than good if implimented without understanding well the context.

    SS and SS2: get a room already…

    Posted May 19, 2009 at 3:38 pm | Permalink
  11. Dominic J wrote:

    I would have expected an increase in money supply to cause inflation only where there were difficulties in spending the money (food shortages, etc). Where the money is paid in an external currency (esp. US$) this effect would be minimised, since anyone can use the cash in any other market, or entice merchants to bring goods to the area, where the new money has arrived.

    That so little is wasted shows only how near the population is to pure subsistence. The same would probably not happen with those in relative poverty in richer countries.

    Posted May 19, 2009 at 4:42 pm | Permalink
  12. caveat bettor wrote:

    Increasing cashflow can be a good thing, but there is a sustainability issue. For instance, besides Norway, most oil-rich–and therefore cash-rich–nations have no Plan B for avoiding similar fates to the nations in Africa.

    Posted May 19, 2009 at 5:09 pm | Permalink
  13. Laura Freschi wrote:

    @ Everyone, thanks for the constructive comments and other examples you provided.

    The question of expectations is an interesting one. What I didn’t have the space to go into in detail in the post is that the interventions in Zambia and Vietnam occurred under very different circumstances. In Zambia the series of cash payments were meant to be a one-time response to a specific emergency (although the intervention may nonetheless create expectations that similar help will be forthcoming in future crises as Matt C rightly points out) whereas the intervention in Vietnam was a several-year program meant to address chronic poverty.

    Because it is meant to address a long-term and systemic problem, it seems to me that the project in Vietnam is a much less clear-cut case for the effectiveness/appropriateness of cash transfers. For example, the evaluation points out that the people who receive the transfers are chronically poor in part because they are highly vulnerable to negative shocks in the production cycle and their crop yields are not reliably high enough for them to pay off debts incurred in buying seeds and fertilizer each year. The cash transfers can’t remedy this underlying problem, and many of the people are unable to escape the cycle of debt despite the extra money they are receiving.

    Regarding the existence of markets: While the data collected are far from perfect, it does seem clear that in both cases there was a wide variety of useful goods and services available for people to purchase; if there were no functioning markets for goods and services, cash transfers would clearly be a poor choice of intervention.

    Posted May 19, 2009 at 11:47 pm | Permalink
  14. K wrote:

    @Laura Freschi:

    First of all, this blog post is very interesting indeed, and thank you for posting this. Well, I have a brief question, that is, where is (or what is) the control group..? I just want to know how credible the evaluation cited in the 2nd paragraph on which this blog post is based is..

    Posted May 20, 2009 at 4:56 am | Permalink
  15. Jessica Shortall wrote:

    Not everything is cash-able. There are coordination issues, as well as services that need cash to run, but are not cash-based on a 1:1 basis. How would a family organize an after-school program that provides healthy meals and tutoring/mentoring for kids get this service, with only a stack of cash in hand? Who is an elderly person going to pay to visit with him/her? How would people pool their cash together to gain efficiencies around purchasing of goods?

    And in a more philosophical sense, how does handing out cash build community, solve macro problems, provide a base for effective activism? Not all non-profits do these things well, but the good ones do.

    Posted May 20, 2009 at 12:34 pm | Permalink
  16. nancy farrell wrote:

    Well,mine is like all the other storys except,i can not take it any more,my husband has to pay 400.00 a month for child support ,and because its so much,we can not pay our mortgage ,my husband just went back to work after not having any for months,now within a week that women wants more more ,never enough,and because we can not afford an attorney,we get screwed.on a boy who turned 18 in march.any suggestions,pls i am at my wits end,and a VERY SICK WOMEN.

    Posted May 22, 2009 at 6:17 am | Permalink
  17. Mohan wrote:

    Statistics, as the old adage goes can be used to prove anything. Also it seems a controlled sampling as in this instance. If cash handouts were as effective, why do the western governments spend millions (or billions) controlling welfare doles and food-stamps with strings: most supermarkets don’t allow one to buy liquor using food stamps.

    And just to get back to the example “When USAID provides blankets, seeds and fertilizer to flood victims ….” Let us use some commonsense: Imagine being given a xxx dollars – in cash or preloaded on a charge card – whey you your house (and village, neighborhood) is flooded. The shops and supermarkets are also going to be flooded. Where would you get the necessities? Would you rather not have some warm food and a blanket rather than cash

    Posted May 24, 2009 at 5:08 pm | Permalink
  18. Agree totally with this. I remember once I was in the Bundibugyo district in Uganda, some weeks after an inssurgence had been crushed. The World Food Programme trucks were lining up in Fort Portal but had no go ahead because of security. I traveled there and noted that as long as you had money there was food to get. You could even get beer and Coca Cola. I am sure that if people in the camps had been given cash that small traders rapidly had supplied them with what they needed.Instead of giant logistic and bureaucratic challenges there would be dynamic trade going on…..

    Posted May 26, 2009 at 10:14 am | Permalink
  19. Tracy W wrote:

    Jessica Shortall: How would a family organize an after-school program that provides healthy meals and tutoring/mentoring for kids get this service, with only a stack of cash in hand?

    Well if you have a stack of cash in hand other people have an incentive to do the organisation bit. For example, many people in rich countries buy cars, despite building a car requiring an awful lot of organisation (raw materials, skilled labour, paying the skilled labour, paying the skilled labour’s taxes, assigning the skilled labour to roughly the right job, etc). What happens is not that every family who wants a car organises all this themselves, but that some people organise the car building process themselves.

    If a lot of families have cash on hand and want an after-school program that provides healthy meals and tutoring/mentoring for kids, then people who have some ability to organise tutoring/mentoring and meal service have an incentive to do so in order to get the money.

    Who is an elderly person going to pay to visit with him/her?

    Students looking to make some spare cash. While I was at university an elderly person hired me to help him with his family tree. I learnt a lot from him too, as well as the money, which was helpful.

    How would people pool their cash together to gain efficiencies around purchasing of goods?

    Well, again, in the West you see this system called “markets”. For example, near me there is a farmer’s market. A range of farmers come together in one place on a Saturday to sell their goods. Those of us who want to buy food, or other things, go to this location, rather than having to go to each farm individually. The farmers also get to sell their goods one day a week rather than having people coming by individually interrupting them while they are trying to farm. You actually also see this system in non-western countries too.

    Mohan: okay, let’s say you are a heartless supplier of warm food/blankets/other goods useful for surviving disasters, who lives outside a flooded area. If you know that all the people in that area will have money and will want warm food/blankets/etc, wouldn’t you have a hell of an incentive to get there with your supplies as quickly as possible?

    And if a heartless supplier only motivated by profits can’t get the resources in, how could a charity do so?

    Posted May 29, 2009 at 5:10 am | Permalink
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