In the early 2010s, GiveDirectly gave large unconditional cash transfers (UCTs) equivalent to roughly an annual income to the poorest households in rural western Kenya. A year later, the result was that people were happier and better fed. They had bought tin roofs and cows and other good things and didn’t waste money on bad things. In the short term, they were much better off when they gave a lot of money to really poor people.
That’s not surprising. We already knew from many studies that poor people handle money well, that the relief of acute stressors makes them happier and that even a short-term escape from the scarcity mentality can trigger all sorts of good things. But given Mulago’s mission of “sustainable change on a large scale”, we wanted to know whether short-term benefits would turn into lasting effects. Has this huge injection of money changed a family’s socio-economic development over time?
Unfortunately not. By the age of four, the families who received the GiveDirectly money were not much better off than control families. While they had increased consumption for several years, all caught up with them four years later. These short-term gains persisted – no one went back – but as a slowly rising tide got everyone else on the same level, it turned out to be a temporary surge. Good things have happened, but: That big cash injection didn’t change their long-term development, it didn’t seem to change their life profoundly, and it didn’t have much lasting impact.
The first, short-term results caused a lot of excitement when they were released; many people thought that this would “change the development sector” and so on. When the disappointing longer-term results came in I thought it was going to be a REALLY BIG thing. Those results splashed cold water on the whole future of development business, right?
Nope. It was largely ignored and the UCT train roared on the tracks.
Nowadays people tend to lump different types of money transfers together, although they and their effects are often very different: conditional, unconditional, one-time, multiple, short-term, long-term, large, small, accompanied by other interventions, unaccompanied, and many Combinations of these. The GiveDirectly cash transfers were of the great, one-time, unconditional, no-intervention sort (which I grinly call a LOUT). Since, as far as I can tell, GiveDirectly are the only ones who have performed this particular type, so far there is no evidence of sustained effects from this type of UCT.
But what if we think bigger? Thanks to a brilliantly conceived and executed study by Ted Miguel et al, now we can see what happens in a regional economy when you a lot of LOUTs, in this case worth $ 11 million in a region of 300,000 people and 650 parishes. The results are still pretty good a year later, and while the budgetary effects are similar, it is the regional effects that are most noticeable. The authors argue very convincingly that 1) everyone was better off whether they got the money or not, 2) the infusion had an impressive 2.7x multiplier effect in the local economy, and 3) nothing bad happened (that big cash boost ) did not lead to inflation).
These are really important additions to the cash transfer literature – a multiplier of 2.7 is nothing short of spectacular – and all three outcomes will have important policy implications over time. And of course the development media reacted with the same headlines as in 2016, e.g. “A charity abandoned a massive stimulus package for rural Kenya and transformed the economy“(It’s a great article aside from the hyperbolic title). But to me, these study results raise exactly the same question as the original household study.
Lead this to continuous Change? Is something really “transformed”?
I’m not an economist – it takes me about a week to read through one of these newspapers – but I don’t know if we’re going to see sustainable changes at the regional level rather than at the budgetary level. The authors found that much of the short-term impact was due to the emergence of “weaknesses” in the local economy, that is, there was overcapacity that took action when more money was in circulation (e.g. local mills had Machines and people sitting around unused). As they put it, the improvements in the economy were “demand driven (consumer spending) rather than investment driven (productivity spending)”.
We saw that putting a LOUT on a household economy had many short-term benefits, but it didn’t seem to do much continuous A hit. Given that the change observed here is “demand driven”, I’m not sure why we believe that a one-time injection of money into this impoverished rural economy would also have much sustainable effects? This isn’t a previously robust economy that needs a stimulus kick to get it going again; We are talking about an economy based on a poverty trap for smallholders: hard-working people who earn a living from inferior harvests on increasingly smaller plots with increasingly poor soils. This means that people are usually “standard farmers” who have not chosen to farm but use their only capital (growing commercial crops is difficult and something that only a small percentage of these farmers want to adopt in the first place) . )
Fundamentals need to be changed here, and given the consumption-driven mini-economic boom, it seems unlikely to be that one-off cash bolus. Investing is about morning. With people living this close to the bone, they have to spend the money on it today.
Far too timely not to ponder this “demand-driven” topic, the authors suggest that a regional UCT could address the problem of liquidity traps:
“Other theoretical perspectives from international trade, economic geography and development … as well as the literature on liquidity traps mentioned above would suggest that there could be sustained local effects of temporary cash injection due to agglomeration effects, rising revenues and changes in income inequality, market structure and company specialization up to shifts in the social networks of dealers and suppliers. “
The problem is that not all liquidity traps are poverty traps. When the majority of the population is stuck in unproductive smallholder farming, the deck is stacked against all of these “enduring local effects”. There’s a reason proven “Ultra Poverty Graduation” programs offer people much more than just money, and why these programs have been most successful in countries like Bangladesh, where the ultra-poor are a minority who grow in an otherwise vibrant economy have to fight. Poverty traps are stubborn things, especially when everyone around you is trapped in them too.
If one-time cash is unlikely to break the blockade of the poverty trap, smaller sums that are paid out continuously over a longer period of time can potentially make lasting changes. In another revealing recent study Handa et al gave unconditional $ 12 a month to Zambian families in two-week installments for three years. Although it was a complex study, the paper is perfectly readable: the result is that the families have been shown to be better off, and that this steady, reliable trickle of money had a multiplier of 1.67 (meaning that every dollar distributed generated an additional income of 67 cents). And the kicker is that such a UBI-style transfer may have more impact than a blanket LOUT of nearly double the total (or as much as other much more expensive poverty graduation programs).
This is a really big deal, and maybe there is something magical about the steady, dependable trickle of cash that is groundbreaking. Can a sustained increase in consumption drive second-order changes that have a lasting effect? I don’t know, but it’s impossible not to worry about everything going back to baseline when the faucet is turned off. Obviously, Handa’s three years humble UBI did a lot of good and it’s hard to say it’s not worth doing as long as 1) you can find someone to pay for it and 2) it doesn’t divert money from something with more lasting effects ( Given the track record of some, ahem, big aid funders, a humble UBI might be a good distraction).
But is it development? Can it change the long-term development of a family – or a region -?
After spending a lot of time getting the most out of our foundation’s money, I still believe that cash is about poverty reduction, not development. I wouldn’t mind if I was found wrong; I’ve bumped my head against the wall for years trying to find a solution to stalled rural economies in places like western Kenya and rural Zambia, and it’s not like I have a better answer.
But even if I don’t buy it, at least not yet, funders like Mulago should still watch out for cash studies. We have to be willing to shift resources if cash in whatever form turns out to have a bigger impact than the types of solutions we are currently funding – although I really expect Mulago investments to do much better. But even if we learn about the potential of cash – and these studies are spreading like rabbits – it is high time proponents figure out where the big-scale money is supposed to be coming from. As I dig through this stuff, I haven’t read any substantial discussion of this issue, particularly in the context of troubled governments in Africa. You must have a big payer: way too many things will be taken way too far before anyone finds out who it will be. Don’t let that be anymore.
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