(Illustration by Adam McCauley)
What is the most effective way to relieve people living in extreme poverty? Some researchers believe unconditional cash transfers (UCTs) provide the answer. But skeptics have alleged that UCTs can do more harm than good. For instance, recipients can spend the money on frivolous temptations, or the cash can generate interpersonal conflicts.
Since 2009, the nonprofit GiveDirectly has provided cash infusions to poor households in Kenya and Uganda. Unlike those from many other cash-transfer programs, GiveDirectly’s funds are unconditional, large, and delivered in a concentrated dose. The nonprofit’s staff targets families most in need by pinpointing the poorest communities, going door to door to assess need, and verifying selected families through audits and monitoring. A text message pops up on a beneficiary’s phone announcing the arrival of a deposit to their bank account. Recipients are free to use every penny as they see fit.
Johannes Haushofer, Princeton University assistant professor of psychology and public affairs and founder of the Busara Center for Behavioral Economics, teamed up with the center’s president and GiveDirectly cofounder Jeremy Shapiro to study how poor households in rural Kenya respond to an influx of unconditional cash from the organization. “This work is important for showing how cash given without any strings or conditions can also have sizable benefits for people’s lives, and can be done in a way that is very cost-effective in terms of delivery,” says David McKenzie, lead economist of the World Bank’s Development Research Group.
The researchers used a randomized controlled trial from 2011 to 2013, in which they accounted for both villages and households targeted, the amount given, the time frame of the transfer (lump sum or monthly payment), and the individual recipient (wife or husband). Each targeted household received either $404—twice what the average household in the area consumed in a given month—or $1,525. The research team then surveyed each targeted family about what they consumed and earned, as well as their health, education, psychological well-being, and domestic relationships. The team also collected saliva samples to test for the stress hormone cortisol.
They found that, by and large, worries about the negative effects of UCTs are greatly exaggerated. Households covered by the study spent the bulk of the money on home improvements, investments in small businesses, and livestock. Recipients were 24 percent more likely than nonrecipients to have upgraded their thatch roof to an iron roof, and they added to their livestock by 50 percent. Beneficiaries spent more on food, medicine, social events, and health compared with neighboring households. Recipients did not report spending more on temptation goods such as alcohol and tobacco. “This work is part of a growing body of evidence that poor people in developing countries use cash to better their lives, with little evidence of the concerns people might have of money getting wasted on alcohol, tobacco, or gambling,” McKenzie says.
Programs like GiveDirectly’s are not wasteful, Haushofer concludes. “Cash transfers don’t make people lazy. People don’t squander the money, as many people would have you believe they will.” In addition, he says, cash transfers have surprising effects on a whole range of noneconomic outcomes. Psychological well-being, for example, improved and reports of domestic violence declined.
Cortisol, Haushofer says, presents a useful complementary measure to traditional measures of psychological wellbeing. Levels of the hormone were lower in families who received lump-sum transfers than in those who collected monthly payments. The people who received lump sums tended to spend their cash on large assets, whereas the people who got monthly transfers mostly consumed the money. “It could be that by the time we came to measure their levels, the monthly group had largely consumed away their transfer, whereas the lump sum group still had their large assets, and that is why their cortisol levels are lower,” Haushofer says.
Whether unconditional cash donations have long-term impacts on people’s lives, or whether the effects dissipate once the assistance has ended, remains to be determined, McKenzie says. Another outstanding question: how do cash transfers compare with other interventions? “Now we know that cash transfers aren’t horrible,” Haushofer says. “We don’t know yet if they’re better than other things.” He urges scientists to conduct studies that compare cash transfers with other options.
Haushofer and Shapiro’s study offers an important benchmark for any NGO addressing extreme poverty. “GiveDirectly has shown that simply giving cash involves low overheads and measurable benefits for households,” McKenzie says. “So all NGOs working in the social sector now need to ask whether what they are delivering is measurably better than simply giving cash.”
Read more stories by Corey Binns.