Can cash grants help reduce poverty?

1.2 billion people around the world, or roughly one in every six people, live in extreme poverty – defined as survival on less than $USD1.25 a day according to The World Bank. As a proportion of the global population, however, this number has fallen dramatically over the past few decades. The economic uprising of several key East Asian nations has resulted in over 700 million people, over the past twenty years, breaking free from extreme poverty. Organisations such as the UN have project further decreases in the years to come. Indeed, there are many political, economical, and environmental factors that contribute to the extreme impoverishment of individuals around the world and many argue that this is a deeply complex issue that we cannot afford to merely throw money at – or can we?

A recent study by Christopher Blattman, Nathan Fiala, and Sebastian Martinez titled, “Generating Skilled Self-Employment in Developing Countries: Experimental Evidence from Uganda,” has found that simply giving selected extremely poor residences of Uganda a business plan and ‘unconditional cash transfers’ (UCTs) resulted in unexpectedly positive economic outcomes for the recipient and surrounding community. While the conventional grain of thought postulates that extremely poor recipients of cash gifts would exercise no responsibility over the funds and squander the money satisfying their immediate consumption desires, conclusions from the study have found this not to be the case – with the majority of individuals choosing to invest money to better their long-term living conditions through enterprise.

In an attempt to promote economic sustainability and social cohesion through employment, cash grants that averaged $382 (or roughly the annual wage for the recipient) resulted in the recipient investing the cash in education, skill training, business tools and materials. Four years after receiving the UCT, roughly half of the individuals had shifted from agricultural work towards skilled trades – where they could start their own businesses – and strong increases in income were also demonstrated. In comparison to control groups, comprised of individuals who did not receive an UCT, overall earnings increased by 39% on average. It was also observed that roughly a quarter of beneficiaries of the cash grants grew their enterprises to the point where they hired extra labour – providing employment to members of their community and extending the employment impacts of the initial gift. Not only would the recipient’s immediate community benefit, within four years 40-50% had also begun to pay taxes – contributing to the economic wellbeing of the nation on the whole.

In an alternate study conducted by Blattman et al. (2013), the researchers looked at the effects of giving $USD150 cash grants to 1,800 extremely poor women, and a few men, once again, in Uganda. After roughly 18 months, they found that their monthly earnings had doubled and their cash savings had tripled – on average. Many of the women chose to enter the trading business and purchased goods from larger trading centres to on-sell in their village. Therefore, lowering the prices of the items in comparison to if they sourced it locally or attempted to make it themselves. This raised the real purchasing power of households in the village.

While giving out cash grants to aspiring, extremely poor entrepreneurs in developing nations will not be the lone factor in eradicating extreme poverty on a global scale, it will certainly be a crucial piece in the immense puzzle in doing so.

Microcredit, while beneficial in alleviating the recipient’s health and wellbeing, education attainment and consumption (especially of durable goods), has been found in numerous studies to not provide an increase in employment or earning capacities of the recipients. The prevalence of microcredit institutions serving the extremely poor have continually been under criticism for charging crippling high interest rates to the very poor – comprising of exorbitant proportions of their incomes – and forcing borrowers into debt traps.

Equipping impoverished individuals with the skills needed for trade and business is necessary in ensuring that they have adequate knowledge of the industry they are entering in order to succeed, and basic business knowledge is essential in sustaining a profitable enterprise. Many NGOs currently are solely focused on providing these services, and indeed they are essential, however, they cannot be used unaided. While such an approach is viable in developed economies, such as Australia where there are many established firms that are willing to hire and pay workers for their skills, in developing nations there are few firms with the capacity to do this. Therefore, when workers are equipped with skills, they cannot work for a firm, as there are few, if any, surrounding them and they cannot start their own business, as they do not have ample capital. Therefore, delivery of skills and capital must go hand in hand. However, why separate the two?  The Ugandan grant recipients were observed to have spent a portion of their cash gift, roughly a third, in skills training and the remainder in capital such as inventory and inputs. This gave them complete freedom to decide for themselves which trade they would be most suited towards, derive the greatest amount of enjoyment from, and ultimately, place them on a trajectory that will offer the highest possibility of success.

Undeniably, like any method that is implemented in an attempt to alleviate poverty in various parts of the world, there are limitations stemming both from the method itself and also the political and economic stability of the region in question. Large-scale projects of UCTs are limited by the giver’s access to grant money – which may prove difficult to raise due to the absence of a monetary return. In regards to social cohesion, it was found that the increase in economic welfare of the individuals were independent was independent of this – with no recorded change in measures of community integration, anti-social behaviour, or violent protests. Furthermore, the empowerment of women due to their rise in incomes was not found. On average, women’s incomes increased by 73%, dwarfing the 29% increase recorded for men. As the women, on average, had a lower level of education and capital initially, their income increased at a much higher rate than men’s. Such findings are consistent with widely regarded economic models, such as the Solow growth model (however, applied in this microeconomic setting). However, despite the higher earning capacity of women, empowerment of women (as measured by their independence, community status, or freedom from domestic violence) was not found – indicating that in Uganda, and perhaps other sub-Saharan African nations, empowerment of women ought to focus on changing the changing of social values rather than attempting to increase their economic wellbeing. Therefore, the implementation of UCTs should be made entirely on the basis of improving the beneficiaries’ economic welfare, employment, and business opportunities, and spurring economic growth in the region – rather than improvements of social behaviours or empowerment of women.

References

1. Blattman, Christopher and Fiala, Nathan and Martinez, Sebastian, Generating Skilled Self-Employment in Developing Countries: Experimental Evidence from Uganda (September 17, 2013). Available at SSRN: http://ssrn.com/abstract=2268552 or http://dx.doi.org/10.2139/ssrn.226855
2. Blattman, Christopher et al., Building Women’s Economic and Social Empowerment Through Enterprise An Experimental Assessment of the Women’s Income Generating Support (WINGS) Program in Uganda (April 2013). Available at: http://www.poverty-action.org/sites/default/files/wings_full_policy_report_0.pdf
3. The World Bank, Poverty Overview (2013). Available at: http://www.worldbank.org/en/topic/poverty/overview