Cash transfers: How they work

by Sasha Alyson

The idea behind cash transfers is that instead of giving foreign aid to a government or INGO or UN agency, the money goes directly to the individual people it is supposed to help, putting them in control of the decisions that shape their future. If you haven’t already read about this approach, you may wish to start with our introduction to cash transfers.

Here, we’ll look at some frequent concerns about cash transfers.

“They’ll spend it on alcohol, tobacco, and gambling.”

This is the most common objection. But hundreds of studies have been conducted, and the evidence is overwhelming: The money is not frittered away. (We’ve looked at the evidence more closely in Why does the aid industry resist cash transfers?)

Other objections are that “it will make people lazy,” or “they’ll just have more babies.” The U.K.’s Overseas Development Institute reviewed 165 studies of cash transfers. On the whole, these programs were associated with reduced labor by children and the elderly and a slight increase in workforce participation by adults.(1) There was no evidence that they increased pregnancy rates.

I’ve come across only one writer who thought, on the basis of actual experience, that cash transfers were badly used. He is an outspoken aid critic, who is also skeptical of cash transfers. He tells of a European aid project in Pakistan that gave families a cash grant, hoping they’d use it to send their children to school. Instead, families generally purchased land, paid off debts, or bought high-status electronic goods.(2)

What’s the beef here? That Pakistani families didn’t do what the Europeans wanted them to do? Perhaps we should review the point of cash transfers. Buying land and paying off debts are good uses of cash, possibly smarter than to pay for bottom-quality schooling, which is the only schooling available in many regions. Let’s suppose that 2/3 of the funds were used in ways that genuinely benefited the families. We could look a long time before finding an aid project to match that.

“Handouts make people dependent.”

Sometimes they do. That’s a legitimate point to raise, so let’s take a closer look.

First, if we see this as repayment of a debt which the former colonial powers owe to the countries which they looted in so many ways, then we (I’m writing as an American) don’t get to say, “We earnestly wish to repay this debt, but it would be bad for you, so we’ll keep it.” Nor: “We’ll just give it to ourselves, but we’ll buy you something nice.” We should look for ways to repay which don’t do further harm. But there’s just no evidence of dependency, in part because….

…The amounts won’t be enough to make anybody dependent. If all the foreign aid that Western countries promise to pay (but do not) were given as cash transfers, and the world’s poorest people tried to survive on that, they’d starve to death. The West just isn’t being that generous.

Now let’s look at actual evidence. Cash transfers have been studied in many contexts and countries. Overall, they contribute to small but measurable increases in work levels and productivity.

Most important of all, if foreign aid were abolished and the money instead was paid as cash transfers, it is no longer available to undermine societies in the many ways described on this website. (See our story about Bribes, for starters.)

“Cash transfers will be difficult to administer, with lots of leakage and double-dipping.”

I’d have thought so too. But experience shows otherwise. Cash transfer programs in at least 130 countries, ranging from Sri Lanka to Liberia to Brazil, have managed to avoid those stumbling blocks. In countries where mobile-phone cash transfers are easy, those provide a simple mechanism. Brazil’s Bolsa Família program uses a card, similar to a debit or credit card. But Mexico, Brazil, South Africa, and other countries started their programs long before there were electronic short-cuts.

Most of these programs are run and funded by the government, not foreign aid. Many of them are specialized – some only target the elderly, for example. But they provide solid evidence that where the will – and the funds – are there, the actual mechanics can be worked out.

Who will we target? How do we identify that group?

These are separate but related questions, and there’s no single, clear answer. Ideally, we might prefer to distribute whatever cash is available such that everyone under a certain poverty level is brought up to that level. Realistically, it’s impossible to identify them and to know how big the gap is for each person. At another extreme, where nearly everyone is poor, it may be best to include everyone by default, ask that those who don’t need it don’t take it, and accept that the small amount lost to cheaters will be less than the cost of individually assessing everyone.

In between, there are many variations. The best approach for one country or region needs to be decided based on situations there, with local participation and buy-in. Many programs provide grants only for the elderly, or only as child support. India and Ethiopia have workfare programs: Those willing to do unskilled labor for minimum wage are guaranteed a certain number of days of work each year. Brazil and South Africa rely heavily on self-reporting to determine who qualifies, and evidence suggests that this works well.(3)

The key point here is that over 100 countries have set up cash transfer programs of one sort or another and found an approach which works for them.

Who will run it?

We ran a Twitter poll to see what people thought of cash transfers. (Results here.) There was a vehement response from people in Nigeria, Kenya, and several other countries of Africa who said, “It won’t work if the government is in charge. They’ll steal every dollar.”

All else being equal, programs like this ought to be run by the government of each country — but not, obviously, not if officials put it all in their pockets.

Is this really insurmountable? Cash transfers are much easier to audit than big aid projects; you can see just what’s reaching people. The budget needs to include an allowance for distribution costs. Having the government administer it would encourage a more reciprocal relationship with citizens, rather than one in which the government can do as it pleases.

Is that a sure thing? Not at all. If we’ve got a sure thing, let’s take it, but I don’t see one. This does seem like a possible way forward, in situations where none of the options is perfect. I’d propose giving governments the first shot at handling it, on a small scale, then gradually expand if they get it right. If they don’t, then it’s time to look at other methods.

How much money are we talking about?

It’s likely to be a modest help, but there’s no way to predict more than that, for several reasons. First, we don’t even have good figures about how much aid is flowing right now. The OECD tracks Official Development Assistance (ODA) from its member countries. Repeatedly, these countries have committed to contributing 0.7% of their GNI as foreign aid. Suppose they did, and it were distributed evenly among the 20% of the world’s poorest people, with 10% going to distribution costs. That would come to about US $15 per person each month.

But only a handful of countries actually give 0.7%. (In 2019, the list was Luxembourg, Norway, Sweden, Denmark, and the U.K.) The U.S. gave less than 0.2% of GNI. Ultimately, ODA came to about $153 billion, which would come to about US $7 per recipient.

And then, were cash transfers to become the major vehicle of foreign aid, some factors will push the amount lower, and some will push it higher.

Right now, much “foreign aid” boomerangs back to people and corporations in the donor country. In fact, a lot is grabbed before it ever gets out the door, by people who use some of it to lobby for more foreign aid.(4) But they won’t keep lobbying for it, if they’re not getting any. This will tend to reduce foreign aid spending.

On the other hand, a lot of people – including myself — oppose foreign aid because we think it’s largely a slush fund for well-connected rich people and that it undermines the countries it is supposed to help. We’d push for more funding, if it benefited the people it’s supposed to.

How will these opposing forces balance out? There’s no way to predict. But while the North currently falls far short of its 0.7% commitment, it’s not out of reach.

The Philippines was a colony of the United States until 1946. Then, through peaceful agreement, the U.S. flag came down and the Philippines became independent. One factor, of course, was pressure from the Filipino independence movement. But the U.S. could have held on longer had it wanted to; France, the U.K., and Portugal all kept their former colonies for another decade or two. In the U.S., however, anti-colonialism sentiment merged with self-interest (including concern about Filipino immigration, and competition from sugar and tobacco grown there) to produce public support for independence. With more awareness of the subject, it’s easy to envision public support, for reasons varying from idealism to economic self-interest, pushing the U.S. to meet or surpass its 0.7% commitment.

If this is such a good idea, why don’t we hear more about it?

You’ve heard about child sponsorship programs, right? You donate a certain amount each month, perhaps $40, to sponsor a poor child in a faraway land. You send the child your letters, postcards, photos of yourself; the child (ideally) writes back or sends a drawing. Most large international charities – including World Vision, Save the Children, and Plan International – offer child sponsorships. It’s widely agreed, by those whose salary is not paid by child sponsorships, that this is a terrible way to raise funds. Much of the money is eaten up just coordinating the child-sponsor exchanges. More is spent on advertising to find new sponsors. How much? The charities aren’t offering details. A former employee at Save the Children, highly disillusioned by what he’d seen, got access to internal records and revealed that in American programs, of the $240 that came in for a sponsored child, only $35.29 (less than 15%) actually reached the field.(5)

That left $204.71 to advertise the program, feed stories to the press, and make sure new sponsors kept signing on. There’s no organization with strong financial self-interest in promoting cash transfers, because the money goes to the poor, rather than to fund-raisers.

However, if you look at opinions from people who have researched the issue thoroughly, you’ll find a widespread consensus that cash transfers are an effective way for those with more money to help those with less.

Killing two birds with one stone

If I steal your watch and then sell it to James (who did nothing when he saw me steal it, because he wanted a cheap watch), and then somebody with a badge comes along, James will have to give back the watch and I’m probably in trouble, too.

But if I lead a coup and take control of an entire country, and I have enough guns, I can sell the country’s oil, cobalt, and forests and the money is mine. I’ll keep some, and use some to pay the army, because others will get jealous. The rest of the population doesn’t get a cent although it was their oil, cobalt, and forests too. There’s nobody with a badge to stop me. This dynamic, part of what’s known as the resource curse, underlies a great deal of global poverty. Wealthier countries could refuse to buy what are effectively stolen goods, but they like cheap raw materials. The sale of natural resources by a government is a rare case in which mere possession is assumed to be ownership. Not because it’s right; because it’s convenient for those who write the law.

Cash transfers offer a feasible way forward. If a country’s rulers do not truly represent the population,(6) then other countries have a right, even an obligation, to refuse to recognize them as the owners of those resources. The resources can still be sold – nations that want them are not going forego them entirely – but the income would be divided among and given directly to the people of the country. Under this scheme, the cash transfers in a great many countries would grow significantly, and it doesn’t require any charity, just the Have nations abandoning the policy that Might makes Right.

This probably sounds like pie in the sky. But 250 years ago, ending slavery must have seemed far-fetched to anyone who thought about it. Sixty years ago, you might have had a good chuckle about the notion of equal rights for women, and that would have put you squarely in the mainstream. Times and attitudes do change. They only change when people challenge the status quo, propose and discuss alternatives, and rally support. It’s happened before, we can do it again.

Notes and Sources

  1. Understanding the impact of cash transfers: the evidence, by Jessica Hagen-Zanker, Francesca Bastagli, Luke Harman, Valentina Barca, Georgina Sturge and Tanja Schmidt. Overseas Development Institute, London, July 2016.
  2. Aiding and Abetting: Foreign aid failures and the 0.7% deception, by Jonathan Foreman. Civitas, London, 2012.
  3. 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, p. 119.
  4. The U.K. is one of the few countries that does give 0.7% of GNI to foreign aid. But that’s not as generous as it sounds. Eurodad, a network of 50 civil society organizations in Europe, reports that about 90% the country’s foreign aid contracts go to British firms. (Development, Untied: Unleashing the catalytic power of Official Development Assistance through renewed action on untying, by Polly Meeks. Eurodad, Brussels, 2018.)
  5. The Road to Hell: The Ravaging Effects of Foreign Aid and International Charity, by Michael Maren. The Free Press, New York, 1997.
  6. Just how do we decide whether a country’s rulers truly represent the population? Complex international questions like this usually involve hobbling together a workable compromise, not a textbook-neat answer. The key question is, could we create a better system than what we’ve got now? I’ve presented a greatly condensed version of a proposal that has been developed in depth by Leif Wenar in his book Blood Oil, lauded by Angus Deaton, Peter Singer, and others. He addresses this problem, along with much else.

Top photo: A Brazilian family with their Bolsa Familia card by Sergio Amaral/Ministério do Desenvolvimento Social (Creative Commons license CC-BY-SA-2.0)