BOSTON — Developed countries spend billions of dollars in foreign aid each year. The wealthiest states give $150 billion collectively. However, throughout history, the world’s poor has not seen much of this money.
Aid is typically given in the form of in-kind transfers: livestock, vocational training, food, tools, etc. Giving actual cash transfers as a form of aid has not been popular in the world of poverty alleviation. However, new studies are showing that direct money donations are largely more effective than in-kind transfers, and economists and humanitarians alike believe that this may be the future of giving.
The main reason for this seems to be the overhead costs involved with delivering goods to families. Transporting costs are expensive and cows are a prime example.
In West Bengal, India, a nonprofit called Bandhan spends $331 to get $166 worth of livestock to the poor. The price is due to delivery, which involves targeting recipients, administering donations and transporting the animals.
Even more drastic results were found in a study done in Rwanda. Economist Rosemary Rawlins discovered that the cost of donating a pregnant cow through the nonprofit Heifer International, with all respective additional delivery and administration costs included, costs nearly $3,000.
This is not to say that donating goods is not helpful. All costs aside, helping the poor is helping the poor, and having provisions such as livestock is much better than nothing at all. The problem here is that efficiency is essential when it comes to poverty alleviation.
Recent studies are arguing that we could be giving to the poor through a much more efficient method: cash transfers.
Cash eliminates opportunity costs that the donations of goods carry. It can go directly into the hands of the poor without additional labor, delivery or administration costs. With the Bandhan example in India, they could reach twice as many households with cash grants as they do with livestock.
Why does this matter? Well, apart from the obvious fact that alleviating poverty is a top priority, there is also a lot of money at stake. Each year, the U.S. government gives $30 billion in foreign aid, and U.S. households give $15 billion. That is the U.S. alone; there is over $100 billion in annual funds to worry about as well.
What is done with these billions of dollars matters, both in measures of effectiveness and preventing wastefulness. Efficiency is critical in poverty alleviation, and studies by organizations such as Innovations for Poverty Action and the World Bank show that in-kind donations such as education and loan programs are proving to be less effective than what was expected.
In a recent study, economists Nathan Fiala and Sebastian Martinez examined a government-run training program in Uganda that simply granted rounds of about $7,000 to over 250 groups of 15-25 young adults. With each group’s share of about $400, they in turn provided a business plan describing how they would use the money. There was not much oversight after this and they were free to spend the money how they wished.
Results showed that a majority of participants actually ended up using their funds to purchase tools necessary to establish themselves in a useful and demanding trade such as metalworking or tailoring.
In this case, cash proved to be the victor. Over four years, these participants’ income rose by an average of 40 percent.
The overwhelmingly dominant counter-argument to cash transfers when it comes to poverty alleviation, both national and abroad, is that recipients will blow the money away on drugs and alcohol, that they will not make educated decisions with spending or that donations make the poor dependent on aid.
It would be false to say that some would not spend the money on drugs or alcohol. However, the general consensus among studies is that recipients do not misuse the money this way. In fact, economists conducted a study in Liberia in which they allocated $200 grants to known drug addicts and criminals. Instead of spending the money on drugs or for criminal purposes, these individuals used them to bay basic provisions or to start a business. If these recipients did not spend the money on drugs or alcohol, researchers are confident that most other recipients would not either.
In a study done by the World Bank, they found that 82 percent of the people evaluated with cash transfers reduced consumption of alcohol and tobacco. In an additional study, they found that only 1.2 percent of people who received transfers reported they used the money on alcohol or tobacco. In another study, the percentage of donations used to purchase these items was below 0.5 percent.
These studies and others like them have continued to disprove the myths that giving the poor money will lead to frivolous spending or laziness.
Another integral point made in these studies goes back to the idea that in-kind transfers have an opportunity cost. Cash transfers, especially with increasing technology, are more cost efficient, and data shows that recipients who receive aid will use the money to buy what organizations would aim to supply in the first place such as livestock or food.
When recipients buy these goods, they are directly eliminating all of those extra costs discussed earlier. Additionally, since not everyone has the same skill sets or goals, cash transfers allow people to use money to the best of their advantage to set themselves up for long-term growth. Cash provides flexibility.
A study conducted by the Massachusetts Institute of Technology showed that transfers also increase consumption, reduce hunger, increase the psychological well-being of recipients and allow for growth due to investment.
These recent studies are stirring debate among government officials of developed countries and aid organizations. But however controversial the topic may seem, this method of aid seems to be the future of poverty alleviation.
Already today, cash transfers reach 1 billion people worldwide.
Sources: MIT, Foreign Affairs, Vox