Let us start with the classic (borderline cliché) development proverb: if you give a man a fish, he eats for a day, but if he is taught how to fish, he will eat for a lifetime. It was this analogy that got conversation started at the latest Technology Salon, “Are Mobile Money Cash Transfers the Future of Development?”
Development practitioners and researchers alike are becoming more attentive to the demands of the poor and how to best cater to their needs. This means thinking outside the box and arriving at novel strategies that tackle poverty. Cash transfers are one of these innovative approaches. The idea is this: cash provides the poor with direct, in many cases unconditional, injections of money, which gives them the missing finances they needed to jumpstart a business or meet basic needs.
But if we take this classic proverb to heart, we could easily conclude that it’s a bad idea to give the poor cash. Which makes all the recent hype over cash transfers puzzling – isn’t giving cash analogous to giving a single fish? Participants at the Tech Salon didn’t seem to think so. Poverty does not exist because individuals lack fish or because they lack the ability to fish. Rather, poverty comes from a shortage of funds to build fish farms.
Could cash transfers, an entirely voluntary, philanthropic and donor-driven approach, be the future of development? What is the evidence that cash transfers are working? How are they positively impacting the lives of the poor? Are there implications of flooding the poor with cash? How do we improve and scale up the idea? And if we can do so, are we at the edge of a paradigm shift in how we do development? These are just a taste of the questions participants tackled during the Tech Salon.
Cash transfers provide entrepreneurial individuals with the missing capital they need to start a business. Instead of being given a fish, they are given something better: a choice to spend an amount as cash as they (not we) best see fit. Many studies show that if you give the poor cash, they don’t in fact spend it on a single “fish”(one day’s needs), they use a portion of the grant to invest in building a “fish farm”(business).
The idea of cash transfers is young and the verdict on effectiveness is still out. In the meantime, we can use preliminary evidence to dismiss some myths:
- People are not poor because they lack training or entrepreneurship; they are poor because they don’t have the funds needed to start a business.
In developing countries, financial markets are often broken and individual bank accounts are small. Under these circumstances, it is hard to obtain employment, much less, run your own business. And without any sort of job, income flows will never materialize, regardless of how entrepreneurial the poor individual may be.The issue isn’t that individuals don’t know how to fish (as aid donors often seem to think); rather, it’s that they aren’t given a chance to apply what they know. Cash transfers overcome these hurdles. An unconditional direct transfer sets the business in motion and research shows that once this bump has been crossed, the poor are fully capable of keeping their business up and running.
- There is no reason for us to expect the poor to waste their cash grants.
In fact, it is a relief to discover that recipients put their cash grants into savings, investments or meeting of basic needs. Even unemployed, young males in Liberia are seen investing a large chunk of the cash they receive. It is this subtlety that makes cash transfers different from remittances. But so far, the benefits are exclusive to income levels – the effect of cash transfers on socio-economic indicators is unclear. In Uganda, for example, female recipients saw their income double but they reported no change in domestic violence or in the decision-making dynamics in their households.
- Cash transfers are different from other forms of financial assistance, such as foreign aid.
Government programs operate on the macro level, giving bilateral assistance or funding towards e.g. specific training programs for a select group of poor individuals. Cash transfers, on the other hand, gets down to the micro-economy, directly transferring money from the hands of the donor into the hands of the poor. The fiscal contract is between a private donor and a needy individual, government aid agencies (the notorious mis-manager of development funds) is left out of the equation. This change in power dynamics has positive effects on the outcome for the poor. For one, it results in greater transparency than foreign aid, as donors can know exactly where their money ends up.What’s more, cash transfers are improving microfinance. M-Pesa, a common form of mobile money used by GiveDirectly, is making microfinance more efficient, as mobile money lowers costs of fiscal transactions by up to 8%.
Despite their allure, cash transfers do not come without serious challenges.
- Issue of measuring benefits to the poor
A growth in an individual’s income is not the same as economic development. In the same vein, it can be tough to measure the overall success of cash transfer programs. Because cash transfers are improving incomes and employment levels of the poor, should the benchmark for success be set at a level of employment? Or a threshold of income? It’s hard to measure success when we are still unsure what the final goal of the cash transfers should be: are we trying to create wealth, foster community development or just improve the livelihood of a single household?
- A boost in income is not the same as a surge in wealth
In development, we tend to focus our attention on methods that accomplish the latter. If our goal is wealth creation, the challenge becomes identifying the wealth creators in societies, the individuals who will give donors the greatest return on their investments. The looming question is sustainability. Even harder, is measuring the developmental impact of the transfer. As long as we lack an adequate benchmark to measure success from, it will be hard to scale up cash transfers. Giving directly may be beneficial for a household now but if the goal is development, we are looking to make a lasting impact, not just doing good for now. We owe it both to the poor and to the donors to assess if the benefits of the transfers exceed the costs of transaction.
- Need to understand the nature of the beast.
Cash transfers come in many shapes and size; it is hard to pick which type of transfer should be the preferred default method and when one type should be used over another. At the Tech Salon, we addressed conditionality. Unconditional transfers allow for greater flexibility as we place trust in the poor’s decision making. Conditional transfers, on the flipside, could give a sense of security to the investors. On that note, it’s unclear if a lump sum is more effective than a stream of payments. A one-time transfer of cash would give an immediate boost, enough money necessary to get a business up and running. On the other hand, a stream of payments allows more budgeting flexibility, as these expand the individual’s opportunity to save and invest.
- The context of the transfer matters:
$200 in Haiti has different purchasing power than the same $200 grant in Ethiopia. We cannot expect Haitians and Ethiopians to spend $200 in similar ways. How do we tailor cash transfers accordingly? And how do we decide which recipients to target? Is it better to give to women, who have seen some of the greatest benefits from the grants? Or do we give to youth, who, with their entire lives ahead of them, could give the donor the biggest return on investment? How do we ensure we invest in the wealth creators if we do not know how to find them?
Hype and challenges aside, are cash transfers *the* future of development? Not necessarily. At Tech Salon, we acknowledged that as long as countries face institutional problems, cash transfers would not do much to change the wealth of the nation. Developing countries face financial barriers that can’t be solved with an injection of cash. In Liberia and Haiti, no lump of cash will change the bureaucratic, messy business environment. Also, problems of poor management and corruption remain unaddressed. If we hope to improve cash transfer programs, we need to address these problems and specific goals that can be targeted.
Maria Andersen is a M.A. Candidate at Johns Hopkins University (SAIS)
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Tags: cash transfers
, Economic development