Cash transfers: An alternative approach to aid

In 1804 the enslaved people of Haiti made history. They revolted against their French masters and won independence. Never before, nor since, has such a feat occurred.

Not long afterward, France sent warships to demand that the impoverished new nation pay 150 million gold francs to former slaveholders, as compensation for their loss of “property.” For more than a century, Haitians were burdened by this debt and interest payments.(1)

Today, the world’s wealthiest nations, members of the OECD, have agreed that it’s appropriate for them to offer help to others – and have repeatedly committed to each give 0.7% of their GNI (Gross National Income) for foreign aid. There are several good reasons to fill this modest commitment.

First on my list, though not all will agree, is reparations. Much of North’s wealth was built on what was stolen from the South, some of it centuries ago, some of it yesterday. France’s extortion of Haiti’s wealth has been repeated thousands of times, in hundreds of ways. In a just universe, the global North would pay reparations, and it wouldn’t be up to the North to decide whether, when, how, and how much. In the existing universe, this doesn’t get a lot of traction from those in power. Families, corporations, and countries all get to pass down the wealth that was acquired by immoral or illegal acts of earlier generations, but they are absolved of any responsibility for the costs of that wealth.

More widely accepted is the belief that if we have far more than we need, and others have far less, then it’s a good thing to share a very small bit of it.

And finally, there is self-interest. The consequences of extreme poverty mostly affect those who live amidst it. But sometimes they spill over. Surely the immigration crisis would be alleviated if fewer people lived in circumstances that seem beyond hope. Terrorism too? That’s harder to predict, but it seems likely that if the North was offering genuine, respectful aid, rather than imposing colonial-style policies with a happy face, that would reduce the resentment that contributes to terrorism.

There are many steps the wealthier nations to reduce global poverty. Here, let’s look at just one issue: What is the best way to use that 0.7%?

Just give them the money

In a nutshell, there are two ways we can give this 0.7%. (I’m writing as an American voter and taxpayer, although I haven’t lived there for nearly two decades.) We can advise them on how it should be spent, which on a practical basis often means we will spend it on their behalf. If you think all that’s holding the South back is a lack of advice from the North, we’ll just have to agree to differ.

Or we can give it to them and let them decide. This approach is known as cash transfers. Money is given directly to the people it’s intended to help. They decide how to spend it. Many countries already run such programs; I’ll look at the mechanics in another story. (link below) From everything I can learn, cash transfers work better than the alternatives.

• This approach shows respect for the people receiving the aid – as opposed to just claiming to do so. It puts control in their hands – as opposed to just claiming to do so.

• It’s far more efficient. Efficiency can be a false god, but it’s hard to see any downside in this case. Whether distributing goats, food, shoes, or advice, aid organizations put much energy into pleasing the donor, generating publicity for their work, and organizational maintenance. They know which fundraising ad draws the most money, but they haven’t measure their actual impact on the people the claim to help. Cash transfers eliminate enormous, unproductive, and often-disguised overhead costs, which often bring no real benefit.(2)

• Spending decisions are made by the people affected, who will be in the best position to build on successes and learn from mistakes. They will be around to put those lessons to use; U.N. and NGO staff have long since moved on.

• With cash transfers, it is no longer possible to fudge the details about how the money is spent. Program directors can no longer fly around first class and have travel expenses lumped with some free food that was handed out, then categorize it all as “Program expenses incurred while feeding the poor.” It’s much easier to compare how much went in, and how much directly reached beneficiaries.

• This approach alleviates the problem that is widely observed, but rarely reported: Donated items are enormously quicker to get lost, stolen, or fall apart for lack of maintenance, because they are no one’s actual responsibility.

• Aid money given to governments and large NGOs tends to flow to people whose only real skill is positioning themselves in the money river. They spend a lot just to maintain their connections. Poor people receiving small amounts are likely to buy something they need, from someone who provides it, thus encouraging production of things that have actual value.

• No longer are aid funds available for thinly-disguised bribes, pushing bureaucrats to ignore their own citizens while pursuing whatever new project will please foreigners. Instead, as the population spends the money, the local economy grows. Taxes become a greater source of government income, which means that the government has a greater incentive to provide something in return. Ending corruption will be a long, difficult struggle, but at least this moves in the right direction.

• It invites a diversity of ideas and solutions. The aid industry rewards groupthink, in which the safest course is to simply accept what everyone else says. But in a different set of circumstances, groups often make very good decisions: When some information is shared, but each individual also plugs in their own insights, background, and environment, and makes a decision before knowing what everyone else thinks. Many small expenditures by disparate people would bring that about.(3)

There is a natural urge, when confronted with widespread poverty or suffering, to “do something.” Often this translates into doing something that feels good but actually causes harm. Cash transfers offer a way to satisfy this urge which, from all the evidence I can find, will be helpful, not harmful. Cash transfers make clear that “do something” does not have to mean, “make their decisions for them,” but rather, to allow people greater control over their lives.

Will this end extreme poverty?

No. Even under the best scenarios, it’s not enough to guarantee that everyone has enough to eat. If the OECD countries all gave the 0.7% of GNI that they’ve repeatedly promise but rarely deliver, and all of it were used for cash transfers to the poorest 20% of the world’s people, it would come to around $15 per person each month. Converted at purchasing power parity – PPP – that is still a bit below the extreme poverty threshold used by the World Bank.(4)

Often, however, even a small amount will spell the difference between malnutrition and not. Or it could pay a child’s tuition at a low-cost private school, where the public schools have failed. A few months’ worth could buy a sewing machine to start a small business. Cash transfers of this amount should never be considered generous, they will not end extreme poverty; I’ve concluded simply that this is how the North can do the most good and the least harm with what it chooses to give.

Notes and Sources

To explore the subject more, I highly recommend Just Give Money to the Poor: The development revolution from the global South, by Joseph Hanlon, Armando Barrientos and David Hulme. Kumarian Press, Sterling, Va., 2010.

  1. For a good overview of Haitian history, including the French extortion, see Mark Schuller’s book Killing with Kindness: Haiti, International Aid, and NGOs (Rutgers, 2012). A Guardian story, France’s debt of dishonour to Haiti, reports on an open letter by 90 prominent figures, calling on the French government to pay it back. (No, France did not do so.)
  2. Since 2002, the Global Partnership for Education has been a leading force in how the West shapes education policy in the global South. Yet after all these years, GPE says it has “insufficient data” to know whether this has helped children learn more. (see Willful Blindness at GPE) Did it get the data? No, but it did bring in Rihanna as its “Global Ambassador.”
  3. In The Wisdom of Crowds (Doubleday, 2004) James Surowiecki describes how, in the right conditions, groups exhibit just what his book title suggests.
  4. The current U.N. definition of “extreme poverty” is living on less than $1.90 a day, or about $60 a month, so it may seem like U.S. $15 a month would fall very short. But the $1.90 figure is adjusted for purchasing power. It’s equivalent, in most developing countries, to about U.S. $0.60 or 0.70 cents a day, about $20 per month.

Top photo: Sri Lankan refugees receive cash transfers by EC/ECHO Arjun Claire (CC-BY-SA-2.0)

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