by Franck Wiebe, Chief Economist at the Millennium Challenge Corporation
In the face of particularly senseless uses of foreign assistance, aid workers sometimes say “it would have been better to drop the money out of a helicopter” to convey how bad programs waste money.
Cash Transfers are less dramatic (and possibly less efficient) than throwing money from a helicopter, but CTs are increasingly accepted as a standard aid mechanism. Their beauty is their simplicity – simply give poor people what they need: more money so they can decide what they need most. Moreover, their likely impact on welfare is easily assessed, because the benefits can be quantified and tracked.
One CT in Zambia incurred administrative costs that cut the value of each aid dollar to beneficiaries to 73 cents. This reduction is large, but not unexpected – a World Bank review of CTs showed that such costs range from 11 to 63 percent. The net value of a cash transfer program to local households can be estimated, accounting for predictable local admin costs. Why not expect donors to demonstrate that their aid projects will be at least as good as a cash transfer?
For many aid projects, standard benefit-cost analysis (BCA) can be used to estimate impact and compare to CTs. The Millennium Challenge Corporation has used BCA for nearly 85 percent of its activities and posts its analyses online. BCA was standard practice at the World Bank, but no longer, and many other donors have never embraced the practice.
A farmer training project, for example, that aims to raise farmer productivity through technical assistance and access to credit poses few challenges to estimating the relevant costs, and the program logic should describe how those expenses will be translated into inputs, outputs, and ultimately higher household incomes. The net discounted value of additional income earned by participants in such a project in Zambia could be more or less than the 73 cents delivered through a CT. Should donors fund such projects without first determining that they are expected to provide more benefits than a CT? The logic of teaching a person to fish rather than giving them a fish only holds if it is more cost-effective to do so.
Distributional analyses enable us to make even better comparisons. The CT that provides 73 cents per aid dollar to local beneficiaries probably also targets the lowest-income households well (but imperfectly). Perhaps 40 cents go to families living under $1.25/day, 25 cents go to households under $2/day, and 8 cents is captured by non-poor households.
Does the farmer training project deliver similar benefits to the poor? The answer depends on the project design, and this information, invaluable for donors and government decision-makers, is usually not too difficult to estimate. A relatively effective farmer training project might generate 85 cents for each dollar invested, but if it targets richer farmers to enhance efficiency, as many do, those under $2/day might get less than the 65 cents expected from the CT. Of course, neither program is a growth-enhancing investment (both are transfers that cost more than they deliver), but why would donors fund “capacity-building” without first demonstrating that the project will outperform a CT?
Ultimately, enhancing aid effectiveness means putting more resources behind those interventions that put more money in the hands of the poor, and CTs should be considered an option that might outperform many of our traditional (and some traditionally ineffective) interventions. Of course, other projects might outperform CTs. As a matter of practice, MCC invests in public goods and services and rarely funds those that are not expected to generate at least a dollar of additional income for each dollar of aid, a higher standard than using CTs as a default. But, in the interest of aid effectiveness and as a starting point, donors could agree not to fund projects unless they can be demonstrated to be at least as good as a cash transfer. Is that too much to ask of aid?
9 Comments
Sounds good but if we did used the cash tranfers as a benchmark, we would be ignoring the fact that these might not necessarily be sustainable.
Unforunately, projects that might be more sustainable take much more time to measure for effectiveness.
For example, think how many useful and sustainable education projects could lose needed funding under such a benchmark.
Cash tranfers simply don’t work as a macroeconomic solution to poverty–so long as choice exists and the poor still have the ability to make bad ones.
I suppose the west’s “welfare state” may have prevented some of the worst kinds of poverty (although you need a large private sector to pay for it)…
However, playing devils advocate, its hardly considered an unqualified success in our own societies. If we’re counting on those in the developing world to spend money on the right things (more accurately, to have a better knowledge of what they shoudl spend it on than the government/aid workers do), then why do we have so many people in the west stuck on benefits – why havn’t those people invested in themselves, trained themselves, to the point where they are generating their own income?
Or are we providing cash transfers to the worlds poor forever?
I’m also wondering how this would play with the general public in the west who fund these transfers – evidence of impact aside (unfortunaltey), would there be strong enough support?
My knowledge of cash transfers is limited… as I said, “to play devil’s advocate”….
“The logic of teaching a person to fish rather than giving them a fish only holds if it is more cost-effective to do so.”
Actually, the logic presented in that statement only holds true if the money you give through a CT sustains a person’s food need for the rest of their life. The problem is that a CT is a recurrent event that must happen every so often to provide food for a person. Whereas teaching someone to farm is knowledge which lasts a lifetime.
Thus, the sustainability efforts of CT projects is often much less than educationally based projects and is probably more costly in the end.
Slightly related – I just finished Dambisa Moyo’s book; Dead Aid. I would be most interested in your thoughts on her work.
In discussions of aid effectiveness the thing that is generally forgotten, of course, is the ‘macro’ social cost of aid, especially in highly aid-dependent economies – i.e. its effect on local politics, culture, incentives, accountability, decisionmaking, budgeting, administrative effort, etc etc etc. It is forgotten in cost benefit analyses because it is not easily identifiable, not measurable and not attributable. This macro baggage is what makes Cash Transfers plausible – but they are short term – stimulating consumption not investment. The overwhelming need in the poorest countries is indigenous ideas, initiative and investment. Foreign Aid (cash or not) has proved itself largely irrelevant to this. How will this happen? Im trying to write a book about it, following a small start in “Reforming the World Bank”
The outcome of a development project, whether via Cash Transfer or of an investment nature necessariy depends on the business environment in which the client operates. Perhaps a CT channeled to a small producer/trader in an entrepreneurial setting would engender very productive activities — but a similar goal might be achieved by a microloan (or microsaving services) in a more sustainable way. When CTs come up I always recall a devastating OpEd by Dale Adams, published in the NYT or the Wash Post in the 1980s, in which he compared World Bank ag. credit projects as less efficient than dropping the cash from a low-flying helicopter. There was great consternation among senior Bank Management about the OpEd. (Actually, in recent times I believe that the Bank has tried combined grant/loan packages as a way of supporting lower-cost small farmer lending — e.g., FADAMA II in Nigeria. (I haven’t seen any Bank IEG assessments of those activities.)
It’s important to note that cash transfers are primarily recommended (in general, not necessarily by Franck Wiebe or the MCC) as a relief intervention, following large-scale rapid onset emergecies where there was widespread loss of livelihood (often agriculture). In this kind of setting CTs can be an incredibly effective and also efficient form of aid.
We’d want to be very careful, though, about suggesting CTs as a long-term solution to general poverty.
Regarding teaching a man to fish:
1) While there is some point of relative cost ratios where I would rather dole out fish than teach to fish, I do not require the teaching side to be as cost effective in economic terms alone. Part of considering the development of individuals as being more than needs-satisfaction, teaching a person to fish has many non-monetary benefits that would be difficult to calculate.
Yes, we can come up with clever proxies. My point is that _my_ tipping point is not a cost ratio of 1.
A few more thoughts, Franck:
There is another issue to consider in the question of CTs, the transfer of decision making from the donor to the beneficiary. This transfer of control of the resource brings with it faster and less costly decision and implementation processes as the author notes (and increased utility, we suspect), but it also changes attitudes in that our generic poor beneficiary becomes a person with a mind and free will, an equal of his donor, and lacking only a bit of cash to begin improving his circumstances. I wonder how measurable this important change in the relationship is.
Related to this, to the measurability part, is an issue common in post-conflict economic development work, of which we’re doing so much lately.
At a recent presentation at the Wilson Center, experts were talking about economic development in post-conflict areas and they seemed at little adrift. They spoke about infrastructure and transparent bidding processes and the usual assortment of program options their agencies bring to the aforementioned generic beneficiaries, but the unsettled realities of a post-conflict environment were touched on only in passing.
Part of the reason for this might be a quantitative bias, if I can call it that– if it can’t be measured it didn’t happen. So, they seemed to imply, building a road or bridge is justified or not by its ROI.
But public works projects serve other purposes in post-conflict societies. Replace the rifle in his hands with a shovel, for example, and reward productive labor. Public employment is also a variation on the cash transfer in that the former soldier takes home some cash to begin improving his circumstances.
Good CBA captures the value of that downstream economic activity, but does it also capture the, what would we call it, empowerment?
This is the edge, perhaps, were we begin to distinguish between an investment and development work.