Money for Nothing: What the Development Sector Could Learn from Cash Transfer Programmes

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This article was earlier published on ReSeT - Research on Security and Transnational Governance
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Earlier this year Balder Hageraats published an article titled “International Development: Please drop the Charity Act”, criticizing the schizophrenic relationship between donors, NGO´s, and local beneficiaries of development help, and arguing for a more efficient development sector in which needs on the ground take centre-stage. If the sector were to follow such an approach, it could learn a lot from the global South, where various government programmes transfer money directly to the poor, no strings attached. They have led the way in showing that poor individuals already KNOW how to escape poverty: they simply lack the cash.

In Kenya, Having worked as a day labourer for years on end, mr. Omondi one day woke up to receive an sms-text saying he had been given $500 US, no strings attached! He had been one of the recipients selected in a programme where poor families in poor rural villages were given free cash-transfers to help them out of poverty. No conditions, no pay-backs, just free money. Local villagers suspected that the government was somehow behind it, trying to buy votes. People in the development industry were mostly afraid that recipients wouldn’t be able to handle the money wisely, spending it on alcohol and cigarettes. However, none of this happened. Many people in the programme used the money to replace their thatched roofs with metal roofs, which costs a few hundred dollars, but saves money in the long term. The results? People also invested in livestock and small businesses, showing a 48% increase in revenues from animal husbandry, for example. Mr. Omondi bought a motor-cycle to drive people from town to town, making $6 to $9 a day, more than doubling his daily salary, and enabling him to buy a second bike to expand his business.

Most cash-transfers programmes are not one-time lottery tickets however. More and more developing countries, most notably Brazil, Mexico, South-Africa, but also Indonesia, Namibia, Bolivia, Armenia and many others, are setting up long-term programmes that target a substantial but selected portion of the population and gives them a monthly cash transfer between 3$ and 100$ a month. Cash-transfer programmes differ greatly from each other, but are similar in the sense that (1) they benefit a selected group of poor families, (2) that the transfers are monthly and on a long-term basis, and (3) that there are no or few conditions as to how the money is spent. The basic results: It pushes the poorest families out of absolute poverty; it leads to more capital investments, local economic growth, better health, more children going to school, and lower birth rates; all without outside interference. For example, children that benefit from the Oportunidades programme in Mexico (which gives an average of 38$ a month to poor households) are 23% more likely to finish grade 9 than those outside of the programme. The same programme also meant that people eat 8% more calories and a more balanced diet of fruit, vegetables, and meat, leading to fewer illnesses among children and fewer sick-days for adults. In Brazil, the Bolsa Familia (family grant) and Bolsa Escola (school grant) programmes helped in bringing down poverty from 28% in 2001 to 17% in 2008.

Why cash-transfer programmes make sense and are affordable

Just as in developed western societies, various countries in the global South have recognized that everyone in society deserves a minimum amount of economic security. The cash-transfers are a right, not charity. Obviously, the transfers are only for selected groups of people in need, and they don´t serve as a substitute for salary through labour. Depending on the country and the programme, the transfers vary between USD $3 and USD $100 per month per individual or per family.

There are two important counter arguments to the idea behind cash-transfers in developing countries. One, can states afford such kinds of projects? And two, doesn´t handing out free money kill initiative and entrepreneurship, making people lazy and dependent? The answer is that pessimistic expectations with regard to the latter lead people to over-estimate the importance of the former. In other words; cash-transfers lead to local economic growth in the longer term, helping people out of the poverty trap and making the cash-transfer programmes not just relatively cheap, but actually profitable.

Let´s start with the argument that “charity” takes away initiative and entrepreneurship, a theory that micro-credit guru Muhammad Yunus has been fond of pointing out. Cash-transfer programmes in Mexico, South Africa, and Brazil have however shown that the money transferred to poor families is almost never spoilt. Admittedly, the money is not always invested, but rather spent on keeping children in school, or buying more nutritious food. This might not harvest direct financial profits, but certainly helps in long term development; Children in the Mexican Oportunidades programme, for example, are more likely to finish 9th grade, are healthier, and score higher grades. But cash-transfer programmes, just like micro-credits, can also have a multiplier effect for local businesses, because the extra cash allows people to invest in tools or skills and setting up a small enterprise. Poor people tend to invest and consume locally, creating a double benefit for the local economy. Also, cash-transfers don´t necessarily replace micro-credits. As a matter of fact, they can serve to make micro-credits safer and more attractive. Indeed, studies have shown that beneficiaries of cash-transfer programmes are more receptive to taking financial risks.

The fact that cash-transfer programmes are cost-effective in the long term takes away a big obstacle for governments as to who is going to pay. There are however other comprehensible concerns. Firstly, cash-transfer programmes are not a silver bullet to solving poverty; they can help people out of absolute poverty and intergenerational poverty, and they contribute to strengthening local economies and promoting social mobility, but only few make it to middle class. Also, the bigger the amount of cash per family, the less families you can select, and vice versa. In order to be able to afford a substantial programme, a government needs a solid tax-base or windfalls from resource-exports.

Why the development sector should jump on the bandwagon

But the money could also come directly from the international development sector. If governments in the global South can demonstrate that there is no need for paternalistic nudges, conditionality, or moral guidance, why couldn´t the development sector follow suit? There are many reasons to suggest that it should.

Firstly, cash-transfer programmes simply have a pretty convincing track-record when it comes to helping people out of poverty. In other words, it simply works. Cash-transfers are right-based rather than charity based, they are pragmatic in the sense that by nature they empower beneficiaries, and they are cheaper because each invested dollar has the potential of turning into two dollars. Many countries that currently benefit from ´traditional´ forms of cooperation could hugely benefit from switching to a more direct approach.

The development sector could jump on the bandwagon in two ways. The simplest way is by pitching in directly where governments lack public money to pay for cash-transfer programmes. But the development sector has an at least equally important role to play when it comes to actively stimulating development through the provision training, research, expertise and other services. ONLY giving money helps people in climbing out of the poverty trap, but they do still need a hand to pull themselves up. The development sector has all the necessary qualities to be this hand stretching out. Sadly, the hand that the development sector is currently stretching out is that of NGOs stretching their hands upwards to donors.

If the development sector were to learn from the logic behind cash-transfer programmes, they would fund locally identified needs directly. Donors could allow funds to flow more easily and directly to local communities (through local connectors), empowering those on the ground and connecting local needs to global resources.

This article is part of the Polis Project, a ReSeT programme focused on connecting local needs to global resources.