Cash Transfers and External Aid: Can the Developed World Effectively Foster Development?

 Photo Courtesy: Benedicte Desrus/AP Photo[1]

By: Natalie Schreffler

Development is a phenomenon that has generated considerable debate among scholars and practitioners since the end of World War II, and the types and efficacy of interventions continue to produce mixed results. Factors like time to develop (early modern Europe had centuries to develop into their modern nation-states, whereas most developing countries today have had mere decades), health care, conflict, vulnerability to hazards, quality of governance, access to education, corruption, and inequality, among others, are all at play in a country’s development.  An environment in which sustainable development can occur necessitates that all of these factors exist at the right level and work in conjunction with each other. This raises the next point—what is the developed world’s role, if it exists, in fostering the economic growth of low-income countries? The broad, overarching objectives such as those of the Millennium Development Goals are difficult to measure and implement, although some people undoubtedly benefit from them. A more precise way to measure aid effectiveness is in more specific interventions, and the simple nature of specific interventions makes it easier to measure whether they make a sustainable difference for the people that they are intended to help.

One of the most easily measurable interventions (in both execution and efficacy) is cash transfers. The more common form is conditional cash transfers, in which an organization gives money directly to a poor person or family in a low-income country and places conditions on how that money may be spent—for example, the family must put their children in school and visit a doctor regularly. This practice originated in Latin America and has since spread to over two dozen countries. It is seen as a relatively easy, effective intervention[2] that has produced ostensibly good results—the most cited of which are increased school enrollment, poverty reduction and the abundant number of people that are helped in the program (tens of millions).[3] The vagueness of the “number of people that are helped” measure aside, the conditional cash transfers have clearly been beneficial for a large number of impoverished people, especially in the domain of education. Conditional cash transfers are often lauded for their effect on increasing school enrollment, which is an integral aspect of poverty alleviation—although, as Lant Pritchett claims, school enrollment is not inevitably linked to cognitive development[4] and should not be disproportionately emphasized in measuring the success of a cash transfer program. However, keeping children in school, especially girls, has been associated with significant long-term effects. A girl with one additional year of education can earn up to 20% more as an adult.[5] Returns on girls’ education in developing countries are substantial—a cross-country study on the effect of education on average wages for girls estimates that primary education increases girls’ earnings by 5 to 15 percent over their lifetimes (the figure for boys is 4 to 8 percent).[6] This increase in earnings also works to increase a country’s GDP, showing that a country would gain long-term benefits by investing in its children’s education. Cash transfers are a way for the developed world to help in this initial investment. Schooling may not always translate directly into learning,[7] but any schooling might still be better than no schooling.

Unconditional cash transfers have only recently surfaced, spearheaded by GiveDirectly, and imitate conditional cash transfers in every way except that there are no requirements for how the money must be spent. The first independent study of unconditional cash transfers was conducted in Western Kenya by the Massachusetts Institute of Technology’s Johannes Haushofer and Jeremy Shapiro, a former board member of GiveDirectly. The study ran from 2011 to 2012, during which households in a very poor region (64% of families in the area reported not having enough food in their house for the next day[8]) were randomly selected to receive US $720—some were given the money in increments, some all at once. The money was transferred using a mobile phone-based banking system called M-PESA. The results of the study are promising. The households that received the cash experienced a 33 percent increase in income from sources like livestock or business, the number of days children went without food decreased by 42 percent, and most importantly, the psychological well-being of recipients improved significantly.[9] As Haushofer reports, “We don’t see people spending the money on alcohol and tobacco and instead we see them investing in their kids’ education, in health care. They buy more and better food. We see violence go down, psychological well-being go up quite significantly.”[10]

The difference in the effectiveness of the two types of cash transfers is not clear, due in part to the fact that unconditional transfers have not been around long enough to empirically validate their efficacy. Conditional transfers seem to be derogatory in nature, sending the message that the developed world does not trust poor people to spend money well, so the developed world needs to babysit them in the most basic sense of financial decision making. But in some cases, a modicum of direction is necessary for the recipients to know what will produce the best long-term effects—some business owners in low-income countries might not have the educational background to know how to initially invest in their business, for example. But unconditional transfers have proven to be more effective in other instances—for example, an ongoing government program in northern Uganda in which a group of about 20 young people are given a lump sum of $10,000. The recipients usually learn a trade and set up enterprises, increasing the participants’ average earnings by as much as 50% in the four years that the program has been in effect.[11]

Unconditional transfers honor the intellectual capacity of recipients by trusting that they know how to best spend money for their own benefit. Conditional transfers are valuable in that they may serve to guide recipients in the way that previous studies have shown they should go. In deciding whether a conditional or unconditional transfer is best, it is essential to consider the recipients themselves—where do they live, what specific problems do they face, and what are their long-term goals? More studies of unconditional cash transfers will provide new insights into which type of intervention is best for which people. Analyzing these specific interventions can help the developed world understand its role in fostering the development of low-income countries. From what has been seen so far, the key is in keeping interventions simple and direct, and cash transfers are a significant example of this style.

To read more about GiveDirectly, please go to: http://givedirectly.com/.

 

Natalie Schreffler is a second-year M.I.A. candidate at The Pennsylvania State University’s School of International Affairs. Her work with NGOs in Benin and Malawi, as well as her experience in refugee resettlement in the Seattle area, has prepared her for studying international conflict resolution and development. Natalie’s interests include women’s empowerment, sustainable development, and refugee and migration issues.


[1] http://www.businessweek.com/articles/2013-03-06/what-africa-can-teach-us-about-the-future-of-banking.

[2] “Conditional Cash Transfers: Paying People to Invest in Children,” The World Bank, February 12, 2009, http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:22067206~menuPK:8732516~pagePK:64165401~piPK:64165026~theSitePK:469382~isCURL:Y,00.html.

[3] “Pennies from Heaven,” The Economist, October 26, 2013, http://www.economist.com/news/international/21588385-giving-money-directly-poor-people-works-surprisingly-well-it-cannot-deal.

[4] Lant Pritchett and Rukmini Banerji, “Schooling is Not Education!” A publication of Center for Global Development, May 2013, http://www.cgdev.org/sites/default/files/schooling-is-not-learning-WEB.pdf.

[5] Sri Mulyani Indrawati, “A Lesson from Malala: Girls’ Education Pays Off,” World Bank Blogs, July 12, 2013, http://blogs.worldbank.org/education/lesson-malala-girls-education-pays.

[6] Jad Chaaban, Wendy Cunningham, “Measuring the Economic Gains of Investing in Girls: The Girl Effect Dividend,” The World Bank: The Policy Research Working Series, August 2011, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/08/08/000158349_20110808092702/Rendered/PDF/WPS5753.pdf.

[7] Annie Lowrey, “The Gap Between Schooling and Education,” The New York Times, October 18, 2013, accessed October 27, 2013, http://economix.blogs.nytimes.com/2013/10/18/the-gap-between-schooling-and-education/?smid=fb-share&_r=0.

[8] “New Study Finds Cash Alone Effective Way to Fight Poverty,” Innovations for Poverty Action, 24 October 2013, https://poverty-action.org/node/6099.

[9] “New Study Finds Cash Alone Effective Way to Fight Poverty,” Innovations for Poverty Action, 24 October 2013, https://poverty-action.org/node/6099.

[10] “What Happens When You Just Give Money to Poor People?” NPR, 25 October 2013, http://www.npr.org/templates/transcript/transcript.php?storyId=240590433.

[11] Christopher Blattman, Nathan Fiala, and Sebastian Martinez, “Generating skilled self-employment in developing countries: Experimental evidence from Uganda,” Social Science Research Network, September 2013, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2268552.

 

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