Economix Blog: Ending Poverty by Giving the Poor Money

Can you alleviate poverty by just giving money to the poor?

It seems like a tautology, sure. But for development experts, it is a subject of serious research. Say you give $100 to a poor person in a developing country with no strings attached, rather than providing goods or services like food or schooling, or $100 to use for a specific purpose. Does the money simply provide a one-time boost to her consumption? Or might it help her make longer-term investments, raising her standard of living down the line? And if it does help her down the line, might such cash transfers be underutilized as a broad development tool, too?

Christopher Blattman

A new study that speaks to those questions comes from Christopher Blattman of Columbia University, Nathan Fiala of the German Institute for Economic Research and Sebastian Martinez of the Inter-American Development Bank. The scholars looked at a cash-transfer operation called the Youth Opportunities Program, run by Innovations for Poverty Action, a nonprofit development group. In the program, the Ugandan government offered young adults the chance to band together, submit a proposal and receive a big sum — equivalent to a year’s income per person — with no follow-up. The idea was to encourage the young workers to shift from agriculture and casual labor into manufacturing and service trades. But once the groups got the money, they were able to do whatever they wanted with it.

It turns out that winning the money had profound effects. It made participants much more likely to enroll in skills training, and it increased the labor supply. It increased their earnings on two- and four-year horizons, especially among women. Indeed, women who won money from the program had average earnings 84 percent higher than women who did not, after four years. Winners were more likely to pay business taxes too. All in all, the annualized return on the “investment” of the cash transfer worked out to a whopping 40 percent.

Professor Blattman and I recently discussed the implications of the research for poverty alleviation and development. A lightly edited and condensed transcript follows.

This paper seems to imply that there’s some low-hanging fruit in development – that these cash infusions might have profound development consequences, and might be underutilized as a development tool.

The answer is yes in some cases. The answer might be yes in many or most cases. I think we still don’t know.

Think about these young people: they have potential, they’re smart and they’re hard-working. There’s someone in that group who’s lazy and undisciplined, just like you can find someone who’s lazy and undisciplined in any group of people. But for the most part, they’re decently smart and hard-working people who’ve had a basic education. And crucially, they’re in a stable country that’s growing.

They should have and do have all these opportunities to make money. But for a lot of these opportunities, you need money to start making money. If you’re in that environment, and the main thing that’s holding you back is you don’t have that start-up capital, if someone gives it to you, you’re going to accelerate up three or four or five years faster than you otherwise would have. But all of that depends on your thinking of capital as the binding constraint – and in reality, it isn’t. Not only does nobody in this program start Google Uganda, the average guy is just getting an extra six or eight hours a week of work doing a trade. They’re not becoming master craftsmen.

You see this a lot with small enterprises everywhere in the world: they get to a certain level and stop. We relieve this constraint that allows them to get up to the next level, but then they come screeching up to the next constraint, which might be a need for more credit and capital, or limits of their own abilities.

Plus, in this study, there’s a self-selection element, right? You need to get together with friends, apply to this program and parcel the money out among yourselves.

To be completely honest, they weren’t that self-selected. Imagine if the U.S. government started advertising a program where you just had to get together 20 people, put in application and they’ll send you $250,000. Maybe it’s to do something you’re not that interested in. But who cares! You’re going to apply.

What we don’t know is: What if the government had made them be a little less specific in their proposal? What if they transferred the money by mobile phone to individuals, taking away the framing of the program and with it the peer and community pressure to commit to investing? Would the participants have done things differently?

I have to believe that they wouldn’t have spent the money any better. They might have. The world’s a mysterious place. But a lot of what we know in behavioral economics makes us think that social pressure and precommitment are important. People feel personal angst, or group angst and community obligation. Everyone knew they received this money, and that might have contributed to the participants spending it in a more forward-looking manner.

It’s also interesting that you describe the program as an accelerant, not to diminish that. This is getting people somewhere years faster.

True, though the young women who did not get the intervention did not catch up. They came pretty close to stagnating where they were. They already had more difficulty earning and saving their way out of this rut. That implies that for some people, it’s not just an accelerant. For women, it might be much more than an accelerant. It might be an escape from a trap.

What do we know about how programs like this could scale up? Say you did the same thing except on a much broader scale – say, across the whole of Uganda.

This is a great short- and medium- term intervention. If participants get the capital, they can earn 40 or 50 or even 70 or 80 percent more per year. Those are great returns. Hedge fund managers would get very excited about that.

But one fundamental development problem is that people don’t have access to loans at less than that rate of return. Say these people could get a loan at a rate of interest of 20 percent, but they earned a real return of 40 percent and they could keep the difference. That happens in countries with financial sophistication and depth, but it isn’t happening here. Costs are so high – it has to do with the fact that these loans are inefficient, they’re such small loans, and there are high transaction costs.

The real solution has to be in getting small-business lending rates, or microfinance lending rates, from 100 percent or 200 percent down to 20 percent a year. If credit is cheaper, you don’t need to just hand out money. But that’s going to take a long time – decades. And in the meantime, this is a great program.

If we’re talking about scaling up, we’re talking about a lot of money. I’d put some of it not just into doing this, but tackling that problem. And in some sense, that’s what governments and institutions like the World Bank are trying to do, while using this as an interim measure.

What about when you actually scale programs like these up?

It gets very tangled and it’s not clear what the net result is. We’re working on a study on this, in northern Uganda, where we had a chance to test it more closely.

We gave cash to the 15 poorest women in these villages of 50 to 200 people in northern Uganda, villages that are off the beaten path. They’re remote, and imported goods are expensive. And by imported goods, I mean anything that’s not grown and made in the village, stuff coming from the nearest district capital or the capital of the country – everything from sugar to matchbooks to soap. The prices of these things are really high because not many people have money to trade in them, and the transport costs are high.

These women mostly use their money to become petty traders. So, there’s this village of 100 people, and previously only three or four of the wealthier families were doing trading. They were making really good profits because they could charge these kind-of monopoly prices. When these women became petty traders, they started to compete with them.

A few things happened. For the whole village the prices of all these goods – anything that’s not grown right there, basically – go down by a fair amount. We are still working on this study, and so we can’t give an exact amount, but it’s in the neighborhood of 10 percent. The purchasing power of the whole village goes up. These women are making profits, so their income goes up. But the cost is that there’s a small group of people who used to have more market power, and their incomes go down.

So that implies that there’s a net positive effect.

Well, the women could have become huge traders. But they actually didn’t do that. They only used 30 or 40 percent of the money on trade. That was probably optimal: if they’d spent it all, invested it all in the trading, there might have been an oversupply. The profits would have been driven out for everyone. They self-regulated. They managed to judge how much they were going to invest and how much they weren’t.

What do I think would happen if they scaled it up? I think that if the program were flexible enough to let people make the investments that were wise, you would see a lot of economic activity, a lot of production and trade, that wasn’t happening before. The net effect would probably be quite positive. But if people didn’t self-regulate and make good decisions – if they all became tailors and carpenters, rather than a much more diverse array of businesses, and that can happen – then I’d be more worried.

You mentioned that the earlier intervention helped people get past a certain barrier, accelerating them by a couple years, but at some point there were bigger structural barriers, whether it’s infrastructure or education. What do we know about when you hit those, or how to get over them?

We can hazard guesses. We have these studies on India, Sri Lanka and Ghana, where, in some sense, they’re doing Stage 2. They say: We have these existing entrepreneurs. What happens if we give them business skills training? Or more cash grants? What happens if we give them cheap credit? That’s where the literature has been.

In general, results have been mixed. They’ve found that this capital and training helps, but it doesn’t catapult people ahead quite as much, because the spring isn’t as tightly coiled. These poor, unemployed youth are really tightly coiled springs. They’ve got a lot of potential and they’re really constrained.

Also, I think we’re still figuring out what the barriers are to small-business growth. Capital is part of it. Training is part of it. But there doesn’t seem to be some solution that’s working everywhere really easily.

There’s also the question of when money might be more efficient than other forms of aid.

The government didn’t attach a lot of requirements in this program. Our instincts are often to be more heavy-handed. And my sense is that the governments and the World Bank tend to be less so. They have these programs and say they’re going to help 100,000 youths. How heavy-handed could you be?

But a lot of N.G.O.’s and charities will think in terms of 500 or 1,000 or 2,000 youths, and they tend to be really heavy-handed. There’s a lot of conditionality, and that’s really expensive because a lot of the programs take elite Ugandans or expensive white people from other countries and costly S.U.V.’s to deliver. It’s not clear any of that is worth it. It’s not clear it’s any more helpful than giving that cash to the person, because often that aid costs two or three times what a cash grant would.

Article source: http://economix.blogs.nytimes.com/2013/06/20/ending-poverty-by-giving-the-poor-money/?partner=rss&emc=rss