This post is excerpted and adapted from Shrewd Samaritan: Faith, Economics, and the Road to Loving our Global Neighbor (2019) by Bruce Wydick, available from HarperCollins/Thomas Nelson.
Providing direct cash transfers to impoverished communities, both domestically and overseas, has become one of the fastest-growing innovations in addressing poverty. But while cash transfers are increasingly popular, they remain controversial. The legacy of welfare programs in the U.S. and Europe have led many to question whether giving people cash makes them lazy, or even facilitates drug and alcohol use. Many donors wonder whether cash transfers simply solve a short-term problem at the expense of an intervention with long-term impacts. And even if cash does work, the question remains when it is appropriate relative to “in-kind” donations, services, and interventions such as food, clean water provision, farm-animal donation, child sponsorship, or a host of other types of programs.
Fortunately, in the last several years a tremendous amount of exciting research in development economics has investigated the effect of direct cash transfers as a means of addressing poverty that has brought scientific rigor to many of these important questions.
First, and most importantly, the evidence points to many large and statistically significant and impacts from cash transfers to impoverished families overseas. This include both conditional cash transfers (where cash is often given to mothers conditional upon enrollment of children in school and/or regular health check-ups) and unconditional cash transfers (where cash is given with no strings attached). A host of research shows that conditional cash transfers increase children’s school enrollment and improve their nutritional and health outcomes. And while there is some evidence that the cash transfers given as part of welfare programs in the U.S. and Europe have discouraged work to some degree, the research on the effects of cash transfers in developing countries, finds no evidence that cash transfers reduce labor market activity or increase spending on “temptation goods” such as alcohol and cigarettes.
The main debate among economists today is over the long-term impacts of cash transfers. There is growing consensus that conditional cash transfers have long-term impacts on children through improved health and their better educational outcomes, especially when economic conditions in home countries offer employment opportunities for those with more schooling. There is less consensus over the long-term economic impacts of unconditional cash transfers, where some studies have shown positive impacts to abate substantially when the transfers end.
However, despite the generally positive evidence for the effects of overseas cash transfers, the belief among economists is not that cash transfers should supplant all other forms of development aid, and it would be a mistake to interpret the encouraging new research on cash transfers as saying so. An emerging consensus is, however, that governments and NGOs who like to give the impoverished “things” need to demonstrate that these “things” yield a bigger benefit than an equivalent cash transfer. This consensus stems from the evidence of the impacts of cash transfers relative to many other in-kind donations, that cash is generally more efficient in terms of transaction costs, and the feeling that cash allows the impoverished greater agency over their own choices.
But it is important to delineate the exceptions where in-kind gifts and interventions may yield bigger benefits than cash. One exception is in the presence of spillover benefits from the intervention to the rest of the community. Vaccines, deworming, mosquito nets, and other health interventions are clear examples. If your child is dewormed, and my child accidentally steps in or ingests the dust of his feces, your child’s worms do not enter through the soles of my child’s feet. If your family sleeps under an insecticide-treated bed net, you are a lot less likely to get malaria, and then, as your neighbor, so am I.
A second class of interventions that create a strong case for in-kind programs over cash occurs with public goods, such as infrastructure and public sanitation, and common pool resources, like fresh-water wells. These types of goods tend to be under-supplied and inefficiently consumed when left to private markets. Cash can never solve the kind of collective action problems that are inherent to public goods and common pool resources. They are the purview of governments, skilled NGOs working closely with governments, or local collective action.
A third case relates to interventions in which potential beneficiaries have poor information about an effective intervention. For example, there is evidence that low-income parents in developing countries systematically underestimate the returns to schooling. Thus interventions that promote schooling may be easily justified over cash. (Schooling creates positive spillovers too.) This also may be the case with some kinds of new technologies, for example, where an NGO may be justified in providing a free high-yielding seed, fertilizer, or machine so that farmers may gain information about its viability.
But we must be careful here. For example, when an NGO I help lead, Mayan Partners, introduced clean wood-burning stoves in Guatemala, families lacked clear information about how well the stoves would perform. When we evaluated them via a randomized controlled trial, they reduced indoor smoke and reduced wood usage as claimed. But in the end, women rejected them because they didn’t heat up their tortillas fast enough. The families in our village would have probably been better off with an equivalent cash transfer.
Economists use standard neo-classical economics to justify the previous three cases. But work in behavioral economics (in which assumptions about the rationality of human decision-making deviate from neo-classical economics and incorporate psychological phenomena and other types of cognitive biases in our approach to fighting poverty) suggests other reasons to deviate from cash. For example, people often undervalue the future relative to the present in “irrational” ways. And how much they value investments that pay off in the future may depend on current levels of consumption. People also may be irrationally overconfident in their decision-making. In any of these cases, a donor or practitioner may justify providing in-kind assets, goods, or services instead of cash to “force” those in poverty into making decisions in their long-term interests.
And while some may argue that in-kind gifts forcing investment over consumption can be justified in the face of the present bias often found among the impoverished, we need to be careful here. These arguments are often forwarded by those whose giving is influenced by jingles like, “Give a man a fish and he eats for a day, teach him to a fish and he eats for a lifetime.” But when children are malnourished, a lack of food today can result in cognitive impairment that lasts for a lifetime.
Thus, in general, we need to learn to trust those in poverty with most of these consumption vs. investment decisions. Cash delegates this agency and authority to them and away from patronizing benefactors. In our giving, we need to be not only Good Samaritans, but Shrewd Samaritans, who understand both the benefits and limitations of cash.
Bruce Wydick is Professor of Economics at the University of San Francisco and Director of the poverty and development studies institute at the San Francisco campus of Westmont College. He is the author of Shrewd Samaritan: Faith, Economics, and the Road to Loving our Global Neighbor (2019), available from HarperCollins/Thomas Nelson.
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