Tackling Poverty By Giving Money Directly to the Poor

It seems like a such an obvious idea: help the world’s poor by simply giving them the money they need. Although it is of course important to support groups that provide water, medical care, and other necessities, empowering someone with the funds they need to get out of poverty seems like a worthy and sensible approach.

But how does one money to those in need, especially when they live on the other side of the world? Among the thousands of different aid groups that exist in the United States alone, there are apparently none that simply pass your funds along to the recipient — except for GiveDirectly, the first (and so far only) nonprofit that focuses exclusively on unconditional cash transfers.

An assessment by Huffington Post’s Impact column shows how deceptively simple yet effective this strategy is:

GiveDirectly transfers about $1,000 to very poor families over the course a year. It makes no rules or even suggestions about how to use the cash.

Since launching in 2011, the group has distributed about $15 million to communities in Kenya and Uganda. These are not the poorest countries in the region. Rather, they are at the center of Africa’s revolution in mobile banking, which is crucial to GiveDirectly’s strategy. A person in sub-Saharan Africa is 60 times more likely to have a mobile financial account than a European.

Once GiveDirectly has selected a village based on publicly-available poverty data, it uses an ingeniously simple method to identify who will receive money: it enrolls households who live in homes built with thatched roofs and mud floors (as opposed to corrugated metal roofs or concrete floors). The use of organic materials is a reliable indicator of severe poverty — easy for members of the community to understand, and for GiveDirectly’s staff to audit, the group states.

The money is then delivered electronically. Recipients typically receive an SMS alert and then collect cash from a nearby mobile money agent. (If they are among a dwindling minority in Africa that doesn’t have a mobile phone or SIM card, GiveDirectly helps them buy one using a portion of the cash transfer.)

Distributing the money electronically slashes costs and eliminates several prime opportunities for corruption (i.e., fewer middlemen to siphon off funds or ask for bribes). It is at the core of GiveDirectly’s plans to scale its work to millions of poor people worldwide.

This helpful chart shows how donations are allocated. It is always vital to only support those organizations uphold both transparency (by showing financials and methodology) as well as efficiency (seeing how much goes to the cause versus overhead, staff, etc.) In this regard, GiveDirectly checks out.

But given that GiveDirectly is the only major aid group focusing on cash transfers, does that suggest the approach is inefficient? Is that why it has not caught on? Thankfully, there is growing research confirming the merits of the direct aid approach:

Cash transfer programs have an extensive research record, including dozens of peer-reviewed studies spanning at least 13 countries in four continents. The U.K.’s development agency calls cash transfers “one of the more thoroughly researched forms of development intervention”; a gold-standard charity evaluation group GiveWell (not affiliated with GiveDirectly) says transfers “have the strongest track record we’ve seen” for a non-health poverty program.

Longer-term research into anti-poverty interventions is rare, but it exists for cash transfers. A 2013 study in Uganda found that people who received cash enjoyed a 49 percent earnings boost after two years, and a 41 percent increase after four years, compared to people who hadn’t gotten a transfer. Another study in Sri Lanka found rates of return averaging 80 percent after five years. In Uganda, not only were the cash recipients better off, but their number of hours worked and labor productivity actually increased.

Do many people just end up wasting their money on alcohol or smokes? Last year, the World Bank reviewed 19 studies of cash transfer programs and said the answer is no. “Almost without exception, studies find either no significant impact or a significant negative impact of transfers on expenditures on alcohol and tobacco,” the report stated. “This result is consistent across the world.”

There is also the research cited in the book “Poor Economics“, written by MIT graduates Esther Duflo and Abhijit Banerjee, who founded the university’s Poverty Action Lab in 2003 precisely to study the impact and efficiency of cash transfers. Pushing back against the widespread notion that the poor are unable to manage their money — and thereby cannot be entrusted with direct funds — they found that on the contrary:

…the poor are in some ways even more sophisticated with their finances than wealthier people, partly because it is so important that they get things right. The extreme poor personally manage loans to family and neighbors; they evaluate credit offers without the support of financial institutions; they manage their day-to-day cash flow in the context of very inconsistent income patterns. All of this helps explain why giving cash to the poor, rather than allocating capital on their behalf, has proven particularly effective.

Indeed, accounts for GiveDirectly show that recipients spend their funds in wildly different ways: to acquire basic needs, like food or health care; to get an education or technical training; and to start or expand a business. Everyone has different needs and goals, and the poor know better than everyone what their conditions are and how best to improve them. Even if their ventures fail — which is certainly the case at times — it is no different than what we would expect of any middle or upper class person in the developed world. People have dreams and potentials that they want to tap, so empower them with the means to do so.

To be sure, there is no perfect solution to poverty, and even cash transfers have their shortcomings, as one of GiveDirectly’s lead researchers, Chris Blattman, pointed out in an op-ed in the Times about a project in Liberia:

Almost no men wasted [the money]. In the months after they got the cash, most dressed, ate and lived better. Unlike the Ugandans, however, whose new businesses kept growing, the Liberian men were back where they started a year later. Two hundred dollars was not enough to turn them into businessmen. But it brought them a better life for a while, which is the fundamental goal of any welfare program. We also tested a counseling program to reduce crime and violence. It worked a little on its own, but had the largest impact when combined with cash.”

So even when the results fall short of the goal, there can still be a silver lining. Moreover, financial resources can only go so far without access to the goods and service, from healthcare to education, that people need to get ahead. That is why such efforts must be coupled with other programs that fill in the gaps, or directed to areas where an infrastructure exists to make the money go far.

In any case, what matters is that more people benefit from the aid than squander it, and by that standard direct cash transfers seem to work.

But the positive impacts of cash transfers have been consistent and wide-ranging, from improved nutrition, healthier newborns and greater school participation to decreased HIV infection rates and psychological distress. As a result, according to a 2011 review by the UK’s development agency, global aid has undergone a “quiet revolution,” with developing countries launching transfer programs believed to reach between 750 million and one billion people.

Nevertheless, GiveDirectly is determined to make its solutions as results driven and empirically validated as possible. There remains an accountability problem in the aid world, with relatively little research done to validate existing models of aid. (That is why I am a big advocate for, and frequent user of, Charity Navigator, which you can read about here.)

GiveDirectly is leveraging its data to help improve transfer programs carried out by others. It has again publicly pre-announced new RCTs of its work, including one ambitious study of how cash transfers impact communities at a macro-level. “We’re asking questions like, what happens to the structure of businesses after cash transfers? How does local government change what they do? How do schools reallocate their budget? What happens to the prices of goods?” Niehaus said. “These are the sorts of questions that finance ministers have.”

GiveDirectly also continues to run experiments to test its core model. It tried directing cash toward female heads of households and toward younger women, and using criteria other than owning a thatched roof. None substantially changed the results. A new RCT is testing what happens when cash recipients have more control over the timing of their transfers (some want a lump sum upfront to pay for an expensive item; others want the payments spread out so their in-laws stop asking for loans). Another trial will find out what happens when GiveDirectly provides information about possible ways to spend the money.

 

It goes without saying that this is a welcome development that us would-be humanitarians should welcome and support. With increasingly more advanced information technology, there is no reason why an aid organization should lack data or evidence of its approach, or why it should not respond to said data with any necessary changes.

If you are interested in learning more about the “effective altruism” movement that is underpinning GiveDirectly’s efforts, check out the following TED Talk by ethicist Peter Singer here. And as always, please feel free to share your thoughts.

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