Another Right Wing Myth Demolished

One of the arguments for providing services and goods to people instead of money is that the direct provision of money leads to spending on bad things, think tobacco and alcohol.

It turns out that the opposite is true:

It is increasingly common for governments to give poor people money. Rather than grant services or particular goods to those in poverty, such as food or housing, governments have found that it is more effective and efficient to simply hand out cash. In some cases, these cash transfers are conditional on doing something the government deems good, like sending your children to school or getting vaccinated. In other cases, they’re entirely unconditional.

For decades, policymakers have been concerned that poor people will waste free money by using it on cigarettes and alcohol. A report on the perception of stakeholders in Kenya about such programs found a “widespread belief that cash transfers would either be abused or misdirected in alcohol consumption and other non-essential forms of consumption.”

The opposite is true.

A recently published research paper (paywall) by David Evans of the World Bank and Anna Popova of Stanford University shows that giving money to the poor has a negative effect on the consumption of tobacco and alcohol. Evans and Popova’s research is based on an examination of nineteen studies that assess the impact of cash transfers on expenditures of tobacco and alcohol. Not one of the 19 studies found that cash grants increase tobacco and alcohol consumption and many of them found that it leads to a reduction.

………

Why on earth would this be? Evans and Popova highlight several possibilities.

One, the cash transfers may change a poor household’s economic calculus. Before receiving the cash, any spending on education or health might have seemed futile, but afterwards, parents might decide that a serious investment in their children’s school was sensible. To make this happen, it might mean cutting back on booze and smoking.

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Regardless of why, the idea that poor people will use any cash they get for cigarettes and alcohol has been laid to waste.

On a related note it turns out that cash transfers can be an order of magnitude more efficient than the direct provision of services:

Every year, wealthy countries spend billions of dollars to help the world’s poor, paying for cows, goats, seeds, beans, textbooks, business training, microloans, and much more. Such aid is designed to give poor people things they can’t afford or the tools and skills to earn more. Much of this aid undoubtedly works. But even when assistance programs accomplish things, they often do so in a tremendously expensive and inefficient way. Part of this is due to overhead, but overhead costs get far more attention than they deserve. More worrisome is the actual price of procuring and giving away goats, textbooks, sacks of beans, and the like.

Most development agencies either fail to track their costs precisely or keep their accounting books confidential, but a number of candid organizations have opened themselves up to scrutiny. Their experiences suggest that delivering stuff to the poor is a lot more expensive than one might expect.

Take cows. Many Western organizations give poor families livestock, along with training in how to raise and profit from the animals. Cows themselves usually cost no more than a few hundred dollars each, but delivering them -- targeting recipients, administering the donations, transporting the animals -- gets expensive. In West Bengal, India, for example, the nonprofit Bandhan spends $331 to get $166 worth of local livestock and other assets to the poor, according to a report by the rating agency Micro-Credit Ratings International. Yet even this program sounds like a bargain compared to others. In Rwanda, a study led by the economist Rosemary Rawlins found that the cost of donating a pregnant cow, with attendant training classes and support services, through the charity Heifer International can reach $3,000.

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“Just give the poor cash” is an old refrain. What is new, however, is a burgeoning body of experimental evidence, produced by groups ranging from the nonprofit Innovations for Poverty Action to the World Bank, on how the effect of cash grants compares to that of in-kind donations. Recent studies have come to surprising conclusions, finding that typically lauded approaches to reducing poverty, such as educational and loan programs, are not so effective after all.

One of the best examples is microloans, small, short-term loans to poor entrepreneurs. By opening up credit to people who were too poor to borrow from banks, the logic went, microfinance would give the poor the jump-start they needed to escape their plight. Beginning in the 1990s, the microcredit movement took the development world by storm, leading to a Nobel Peace Prize for the Bangladesh-based Grameen Bank in 2006.

As you might guess, microloans don't show the results that grants do.

Neither do training programs, etc.

This is yet another reason why the Clinton's gleeful destruction of the US Welfare program is so deeply contemptible:  Not only did it make the poor worse off, it cost the rest of us more money to make the poor worse off.

I know a lot of people who hate this idea, and the studies that support it:  A lot of them have a job delivering cows to poor people.