In international development discussions one thing that often gets lost is the voice of the poor. Usually, development is something that is done “to” them. Programs are conceived and planned out in headquarters of development organisations and NGOs by “experts” who are thought to know better than anyone how to solve the problems of people to whom they might have little or no connection. At the same time, development programmes are notoriously expensive to implement and after years of slow progress, and little dent in the global rate of poverty, tax payers have started to ask whether either the poor or the donors are getting good “value for money.” While more skeptical commentators have used terms such as the “development industrial complex” which exists to serve its own needs and logic more than the poor.
Frustrated by the traditional development approach of big spending but scant results, a new group of donors, tech entrepreneurs from Silicon Valley, decided to ask a very bold question – what would happen if we just gave money to the poor, no strings attached, for them to spend as they wish? Will they spend it on alcohol, drugs or gambling? Or will they prove that they are in fact in the best position to decide what their most pressing needs are and allocate the resources accordingly?
Conceived by one of the co-founders of Facebook, Chris Hughes, and funded by tech giant Google, the NGO GiveDirectly set out to find the answers to these questions. True to the data-nerd roots of its founders, GiveDirectly designed its cash-giving project as an experiment (a randomised controlled trial) and it enlisted the help of one of the best evaluation teams around, Innovations for Poverty Action (IPA) at MIT, to find out the kind of impact such an intervention can have. The results of the study released last fall surprised the development community and surpassed all expectations – contrary to increasing spending on alcohol or drugs, no-strings-attached cash transfers to the poor led to significant increases in income, assets and psychological wellbeing of the recipients.
Satellites and mobile phones - the new development toolkit
The GiveDirectly unconditional cash transfer (UCT) project took place in the Rarieda area of Western Kenya between 2011 and 2012. Residents of this remote area live on an average of around $1 per day, and 64% of them surveyed said they did not have enough food in their house for the next day. The poorest households were identified using satellite imagery – houses with roofs made out of mud or grass were marked by their lack of luminosity compared to houses with tin roofs.
In the randomised controlled trial study villages (with a high concentration of mud or thatched roofs) were randomly assigned to a treatment or pure comparison group. Within the treatment villages 500 eligible households were randomly assigned to receive the cash transfers. These were compared to 500 control households that did not receive the cash. Comparisons were also made between treatment villages and non-treatment villages in the same district to identify any spillover effects the project might have.
Three things were of particular interest to the experimenters – does it make a difference if the cash is given as a lump sum or in installments? What size of cash transfer ($300 or $1000) has the biggest impact? What is the difference if the transfer is given to the husband or the wife in the household?
GiveDirectly took advantage of the extensive mobile payment network available in Kenya to make the cash transfers using a service called M-PESA. Remote rural areas in Kenya, such as Rarieda, might not have proper road connections yet but everyone lives within a 30-45 minute walking distance to an M-PESA agent. Using the mobile payment system also led to a drastic reduction of delivery cost to only 10%, which means that for every dollar donated 90 cents were received by the recipients.
Give a man a fish
So, what happened when these poor villagers living on the poverty line received a large windfall? Contrary to the expectations of seasoned development practitioners, there was no evidence of increase in expenditure on alcohol, drugs or gambling. On the other hand, the assets and income of the cash recipients went up, significantly.
Assets, such as replacing the thatched roof with a metal one, and holdings of livestock, went up on average by 58%. Income also went up by 33% on average from sources such as non-agricultural businesses and animal assets. It’s interesting though that the study found little evidence of change in the main source of income of the recipients.
Increase in income also led to a higher level of consumption and food security and it lowered the number of days children went without food by 42%. The fact that receiving the cash reduced stress and increased happiness was measured by the level of cortisol (a stress hormone) in the saliva of the recipients. Smaller monthly transfers were found to better at increasing food security, whereas lump sum transfers were better at increasing the asset base.
The financial windfall also seemed to have had a positive effect on the empowerment of women in treatment villages – both for recipient and non-recipient households. However, whether the transfers were made to the woman or man of the household seemed to have had no significant effect on overall outcomes.
What we know so far and what we don’t
While the results of the experiment seem to indicate a big success for no-strings cash transfers, there are a few things that deserve a closer look.
Let us consider how much the results of the study actually tell us. As World Bank economist David McKenzie observed, the fact that a windfall leads to increase in assets and income in the short-term is not too surprising. However, given the one year time-frame of the study, it is difficult to judge the long-term effects of this increase and whether it is sustainable or not.
In fact, traditional programmes that combines the giving of an asset, for example a cow, with training on how to maintain and grow that asset and creating linkages with markets might have a bigger and more sustainable impact on increasing incomes and lifting people out of poverty in the long run. Without studying the comparative results of these different kinds of programmes it is difficult to say which ones will fare better in a cost-benefit analysis in the long-term.
On the other hand, the study found no significant outcome after one year on development indicators such as health and education, which will are goals the development community tend to care a lot about. It’s also important to note that the source of income didn’t change for most recipients, which means that giving away a lot of cash doesn’t necessarily lead to more entrepreneurship.
The idea of giving cash to the poor is also not entirely new. In fact, conditional cash transfer programmes (CCTs) that make payment contingent on desired behaviour have been popular among donors for over a decade. Such programmes have been shown to be very successful in achieving long-term development goals such as increasing school enrollment among poor children or improving nutrition rates. At the same time, CCTs supply poor households with cash that allows them to withstand shocks in earnings or increase their ability to invest in assets.
CCTs however can be vulnerable to abuse. In most developing countries any type of cash or asset transfer scheme that leaves discretion up to public officials can be subject to corruption or manipulated for political purposes. In this regard, the extremely light delivery mechanism of UCTs such as GiveDirectly has an advantage.
The small number of studies available that compare the outcome of conditional and unconditional giving found that CCTs are better at getting results and the stricter the conditions, the better. For example, a programme in Ghana gave a small sum of money ($120) to local business owners, some conditionally, requiring the owner to buy assets for the firm, and some unconditionally. It was found that profits were twice as high in firms that got the cash conditionally.
On the other hand, cash transfers with minimal conditions can also work well. In Uganda, the government gave one-time grants to groups of young people (approximately $7,500 per group) who had to submit a business plan in order to be eligible. No conditions were applied on how the grant was to be used. It was found that the young people used the money to learn trades and on tools and materials to set up enterprises. In a four year period, earnings for the groups went up by 38% and capital stock rose by 57%.
UCTs that give away large amounts of cash to the extreme poor might also have unintended negative impacts on social dynamics. While the GiveDirectly study found no impact on relationships between neighbours who received the transfers and those who did not, interviews done on the ground by NPR journalists found evidence of increased tension between neighbours. Considering that $1000 amounts to over two years of household income in this area, that is perhaps not surprising.
The bottom line is that while UCTs seems to be quite successful in the short-term we don’t have enough data yet to know whether they fare better than conditional transfers or more traditional aid programmes in the long run.
Raising the burden of proof
Direct, unconditional cash transfers give poor households the flexibility to allocate resources to the needs they themselves find most pressing. But at the same time, we need to be mindful about how much these types of interventions can achieve. Paul Neihaus, one of the founders of GiveDirectly, himself pointed out that cash transfers are not replacements for necessary structural changes such as developing good governance systems or delivery of public goods.
There is also a limitation to how much we can rely upon the ability of people to make difficult long-term choices in the absence of a supportive institutional framework. Abhijeet Banarjee, one of the most influential development economists around, illustrates this point best with an example – British parents on average are better than Indian parents in getting their children immunised.
However, this has little to do with any intrinsic conscientiousness on the part of the British and more to do with institutional constraints such as children being barred from going to school or using the public health system if they are not immunised. The key here is that since the state provides these services, it therefore also has the right to compel behaviour. In fact, Banarjee argues that without the proper enabling environment there is little evidence that anyone, poor or otherwise, will always do the sensible thing.
One thing however is clear – as technology tools like mobile banking and Internet become more available to the poorest, it will require a rethink of what forms aid can take. Perhaps just as importantly, by taking a data-driven approach, GiveDirectly has raised the burden of proof for the aid community, and especially NGOs, many of whom have been hopelessly bad at demonstrating the impact of their work until now.
So what are the implications of UCTs for a country like Bangladesh? This is a big aid recipient country with a large cottage industry of NGOs and handicapped by structural problems such as high levels of corruption. At the same time, it is home to a highly entrepreneurial and hard working population which is eager for a hand-up rather than a handout. UCTs will not be a panacea for all the developmental challenges that we face, but the context here certainly make it a compelling enough idea that deserves to be explored.