Cash transfers to the poor won’t solve poverty

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Jan 14, 2020

In July of 2017, I was invited by a prominent development organization to a convening on cash transfer programs. In global development, cash transfers typically describe direct payments that donor organizations or governments make to the poor, often with no strings attached. Since 2000, the radically simple idea of just giving the poor money has become quite popular. 

During the convening several researchers showed tables with complex statistical analyses that highlighted the benefits of giving poor families $50 a month or much larger lump sums. Results from the studies found that, on average, families spent the cash on good things, such as education, healthcare, and household supplies. Overall, people were a little better off after receiving a little bit of cash. Could “throwing money at the problem” actually work?

A recently published five-year study of $1,000 cash payments to more than 10,500 households across 653 randomized villages in Kenya—a first of its kind—found that giving cash has “large impacts on consumption and assets for recipients.” The cash transfer, which represented more than 15% of the local GDP, had such positive results that one author suggested this “ought to put to bed some enduring myths about the effects of giving cash directly to the very poor in rural Africa.” Plenty of other studies have pointed to the “effectiveness” of cash transfers in alleviating poverty. News stories celebrating these studies seem to suggest that the world has found a real solution to solving poverty. Unfortunately, all this excitement masks some major problems with the beloved practice.

First, millions of dollars are being spent to study something that should be common sense. When I was in the room listening to the merits of different cash transfer programs, I couldn’t help but wonder why some of the most brilliant economists in the world needed to study whether cash transfers worked. There seemed to be a concern that poor people might just spend the money on alcohol, tobacco, or other temptation goods, which it turned out, wasn’t the case. I kept thinking, do we really need to test this? We know what happens when people have more money. Look around the room. They’re healthier. They’re better educated. They live longer. Their governments work better. Do we really need to spend millions of dollars to conduct a randomized control trial in a poor village to show that more money can lead to a better life?

Second, there’s often no plan to scale these programs in any meaningful way. I asked two simple questions during the convening: How do you plan to scale these programs? Where would the money come from? There was no answer.

Consider this. The annual federal government expenditure per person in many poor countries is less than $1,000. In Nigeria, for instance, it’s around $150. In India, it’s approximately $550. The median in Africa is $289. Governments that struggle to provide basic needs for their citizens simply can’t afford to implement these programs, let alone scale them. And even if all official development assistance went toward cash transfers, it would add just $22 per person per year. Is it really worth spending millions of dollars on these programs and conducting efficacy studies on programs that cannot be scaled? It isn’t.

Cash transfers are just the latest iteration of the dated notion that poor people can’t fend for themselves—and will never be able to—so, the wealthy must provide the resources they need. On the surface, this strategy seems different from other conventional development approaches, but at its core it’s just an extension of President Truman’s 1949 Four Points Speech where he framed the developed problem simply as a lack of resources in “underdeveloped areas.” In fact, poverty is not fundamentally a resource problem. And pushing resources into poor countries—whether in the form of schools, hospitals, new water installations, or cash—does not result in sustained development. 

At best cash transfer programs are akin to using BandAids on a wound with a serious infection. Rather than look to short-term solutions that have no chance of scaling, why not learn from countries that were once poor and are now prosperous? Singapore, South Korea, and China didn’t lift over a billion people out of poverty by handing out cash. The United States, Europe, and Japan didn’t either. They all created prosperity by unleashing the power of innovation and entrepreneurship. A particular type of innovation called market-creating innovation, which makes products like sewing machines, computers, and banking more affordable to many, can have a transformative impact on societies. These types of innovations not only create many jobs but also increase tax revenues so governments can provide better services for their constituents, and perhaps most importantly, begin to change the culture of a region to one that values innovation and entrepreneurship. 

And as it turns out, in matters of eradicating poverty, it is this change in culture that unlocks significant latent value in an economy. Simply handing out cash to poor people doesn’t.

Efosa Ojomo is a senior research fellow at the Christensen Institute, and co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. Efosa researches, writes, and speaks about ways in which innovation can transform organizations and create inclusive prosperity for many in emerging markets.