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Cash transfers are one way to alleviate poverty in developing countries

POSTED September 6, 2015 1:51 a.m.
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Worldwide, over 1 billion people live in extreme poverty. That is, they make less than $1.25 a day. Moreover, until recently, about 3 billion people, who represented about half the world population, lived on less than $2.50 a day. These World Bank figures speak volumes about how big the poverty problem is. The size of the problem helps us understand why governments, NGOs and even some companies are looking for a way to address this issue.

Currently, no one has found a definitive solution, but many interesting approaches have surfaced — one of those is cash transfers. As its name suggests, the idea is to forward money to people in need. In a broad sense, there are two types of transfers: conditional and unconditional. In both cases, recipients are allowed to spend the money they are given as they like; the difference is that conditional transfers require recipients to fulfil conditions upon or before receiving aid. Examples of those conditions are: guaranteeing that kids attend school or that recipients go for medical check-ups and immunization. On the other hand, unconditional transfers give money with no strings attached.

Conditional transfers are widely implemented in Latin America and are mainly managed by governments. Conversely, unconditional transfers are more prevalent in Africa and are mainly implemented by NGOs. The objectives of many of these programs are to encourage consumption and food security, as well as to increase investment made in businesses, and for education and health. According to the Center for Global Prosperity, an estimated 1 billion people receive some type of transfer worldwide.

To provide evidence that some of the stipulated goals were met in Africa, Johannes Haushofer and Jeremy Shapiro from MIT found in a 2013 study that unconditional transfers allowed households to build 58 percent more assets. Also, food consumption was increased by 20 percent and, consequently, hunger and food insecurity were reduced by 30 percent. Likewise, the revenue from small businesses like animal husbandry and other self-employment increased more than 35 percent.

Conditional transfers, on the other hand, are implemented by over 40 governments worldwide. The Institute for the Study of Labor (IZA) found that in Latin America the income from these transfers represents over 20 percent of the recipients’ total income. Moreover, according to the Economist, about 110 million people benefited from these programs in that region as of 2010.

Although it is difficult to deny that transfers do provide many benefits, we could nevertheless inquire if they are the definitive strategy to eliminate poverty. The most likely answer would be no, at least not on their own. In an article from the Stanford Social Innovation Review, Kerry Star and Laura Hatterndorf suggest that the long-term impact of cash transfers may actually be very small. Additionally, transfer programs may dangerously create the incentive for dependence; that is, since people know they are going to be paid as long as they are in need, then some of them may lose the incentive to make significant changes. Although this may seem less than sensitive to write, we have witnessed evidence of this type of dependency in many countries

Poverty is not only about lack of resources, it’s also about the lack of meaningful work and educational opportunities, among many other causes; cash transfer programs do not always address these issues. Nevertheless, although cash transfers may not be the silver bullet to eliminate poverty, they do provide an opportunity to fight off absolute scarcity of resources.

John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Mario Mercado Mendoza, Hoffmire’s colleague at Progress Through Business, did the research for this article.

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