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Unconditional cash transfers: a recipe to fight poverty?

As unbelievable as it may seem today, poverty has not always been thought as something that needs to be eradicated. Not so long ago, in 1771, Arthur Young, one of the greatest English writers at the time, said:

“Everyone but an idiot knows that the lower classes must be kept poor or they will never be industrious.”

A group of children at Crumpsall Workhouse (1895-97). Public domain (source).

Indeed, poverty was deemed essential for economic development. Fortunately for the vast majority of world’s population, this has changed and nowadays, poverty is something undesirable that hinders development. To illustrate the turn in the world’s mind set, one could simply look at the motto of the World Bank since 1990:

“Our dream is a world free of poverty.”

Such change of perspective has encouraged research to understand the source of poverty and to find the best strategy to fight it. Needless to say, both debates are still open and present. Among the most common reasons used to explain the existence of poverty and, in particular, its persistence, there is the concept of poverty trap, which has been used in 2014 in no less than 2,150 articles according to Google Scholar.

Jeffrey Sachs, a United Nations advisor and a strong advocate of the existence of a poverty trap, firmly believes that poor countries suffer from some adversities such as hot weather, infertile land and malaria that hinder their productivity. In his view, a large investment would be needed to overcome this set of problems but the inability of poor people to pay for the required investment keeps them in the so-called poverty trap. Hence, the need for generous aid programs he actively supports.

The concept of the poverty trap could also be explained at a much lower level, at a micro level, in the economics argot. People with very low levels of income struggle much more to be productive, for many possible reasons: because they are underfed, unhealthier, less skilled, socially excluded or geographically isolated. Namely, they are trapped in poverty. If these are the reasons keeping people in poverty, then the solution is straightforward: a “Big Push”, a large transfer of income is needed to allow families to break out of the poverty trap.

The theoretical concept of the Big Push can be translated in the real world in the shape of different policy instruments used to fight poverty. The variety of instruments at stake is considerable and there is no golden rule indicating which ones are the best. On the contrary, the optimal choice of instruments depends on the objectives of the government and on each particular context. Nevertheless, one can think of three general dimensions when deciding which type of policies to implement.

First of all, one needs to think about whether to implement in-kind policies (e.g. the direct provision of goods and services) or cash transfer policies. From a theoretical perspective, cash transfers are always preferable to in-kind provision since they do not constrain the freedom of the recipient to choose how to spend their money. Therefore, what would be the reasons justifying that governments provide any sort of in-kind transfers? One possible answer would be that the government thinks individuals are not always making the best decisions regarding their consumption and thus it is better if the state decides for them. Although this argument could sound paternalistic, it may make sense in specific situations. For instance, imagine the government gives to a 16-years-old a cash transfer. She may prefer to spend the money of a transfer in going out with friends rather than in education. On the contrary, if the government provides education services instead of giving the money directly to the teen, it is certain that he/she will spend it in education. Needless to say that the debate about which kind of services should be provided in-kind is still unresolved. While in some cases a vast majority agrees on the optimal way of public provision, drawing the line is still an unsettled issue, which depends on determining to what extend the government is entitled to decide what is best for a person.

The second dimension to consider is the target population of a public transfer or service, meaning who is eligible to receive it or make use of it. The debate is mainly about providing a general access (universal) or selecting a specific population (targeting). For example, a Minimum Income Program, such as the Di Bao Program in China, is a means-tested tool targeted to the poor aiming to complement income of the poor to ensure that everyone is above a certain (minimum) level. Advocates of targeting usually say that in terms of cost effectiveness a targeted policy can do a better job since the main and obvious advantage of these programs is that they are cheaper than universal ones. Nevertheless, there are two main critiques that are commonly made to targeted policies. The first one is that targeting is costly in itself, in terms of administrative and bureaucratic costs resulting from the selection of beneficiaries, which are not required in a universal program. Moreover, antipoverty policies in developing countries have focused a lot of attention and resources in the process of targeting to the extent that sometimes targeting is viewed as the objective rather than the means to fight poverty.

A second issue related with targeted policies is that they may induce negative incentives since some people may change their regular behaviour in order to be eligible. The most discussed example in this case is the negative incentive to work when a Minimum Income Program is put in place. However, even if incentive effects are always very intensely discussed in any public policy decision, when a program is targeted to the poor, incentives get far more attention. As if to say that poor people would more easily take advantage of public policies than rich ones. Self-targeting mechanisms are presented as an alternative to overcome the issues due to incentive effects. An example is the subsidized baladi bread provided in Egypt. Since only poor people who have nothing else to eat would buy this bread, they self-target themselves with their actions.

Egyptians eating baladi bread. Photo by David Lisbona (licensed under CC BY 2.0, source).

Finally, another dimension of a policy instrument that the government needs to decide on is (un)conditionality. That is, the government may ask for a specific change in behaviour before providing a transfer. Typically, one could think about the Conditional Cash Transfers (CCTs) programs in Latin America, like Progresa in Mexico, where the cash transfer is conditional on sending the kids to school and to medical revision. Similarly, unemployment benefits in developed countries, like the UK or Denmark, are often conditioned on replying to a certain number of job offers or on attending regular meeting with the counsellor.

The arguments in favour of CCTs are similar to those of in-kind transfers: a transfer needs to be conditional on schooling (job seeking) outcome because otherwise the individual would choose a suboptimal –both social and private- level of education (job seeking effort). Another powerful justification is that CCTs are more politically sustainable in the sense that it is easier to convince the voter to implement a system of transfers if it is conditional on something. Contributors will be more in favour of financing such a policy if they know that recipients need to show some effort.

On the other side, advocates of Unconditional Cash Transfers (UCTs) argue that CCTs constrain the freedom of the beneficiary and hence they are paternalistic. If poverty is due to a lack of money (poverty trap), there is a need for a big push (UCTs) to be spent in what they believe would be more useful. Moreover, UCTs do not have to incur with the cost of monitoring the compliance of the conditions and therefore they are most cost-effective and they leave less room for corruption.

The empirical studies assessing the impact of the two programs are ambiguous (Baird et al. 2013); both policies seem to be better than no policy at all but it is not clear to determine which one works better. Even though in most studies CCTs seem to be superior to UCTs, results could be driven by the little number of papers on the impact of UCTs.

In-kind (goods and services) Targeted Universal
Conditional Scholarship for higher education (conditioned on grades) Skill training for unemployed
Unconditional Subsidized baladi bread in Egypt Public education
Cash transfer Targeted Universal
Conditional Progresa in Mexico Unemployment benefits in the UK
Unconditional Guaranteed Minimum Income in China (Di Bao Program) Basic income

In conclusion, it is not trivial to identify the optimal set of policy instruments. It is, in fact, a very political issue. Hence, the choice of instruments to fight poverty will depend on how much a society values freedom of choice, economic efficiency and reaching the socially optimal level of a public good as well as on how much they trust their own government.

Bibliography

  • Baird, S., Ferreira, F.H.G., Özler, B. and Woolcock, M. (2013) Relative effectiveness of conditional and unconditional cash transfers for schooling outcomes in developing countries: a systematic review. Campbell Systematic Reviews 2013: 8, pp. 1–124. DOI: 10.4073/csr.2013.8.
  • Janet Currie & Firouz Gahvari, 2008. "Transfers in Cash and In-Kind: Theory Meets the Data," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 333-83, June
  • Martin Ravallion, 2013. "The Idea of Antipoverty Policy," NBER Working Papers 19210, National Bureau of Economic Research, Inc.