The Best Way to Fight Poverty Is to Just Give Cash to Poor People.

Commentary about business and finance.
May 29 2013 12:26 PM

The Best and Simplest Way to Fight Global Poverty

Proof that giving cash to poor people, no strings attached, is an amazingly powerful tool for boosting incomes and promoting development.

An UAn Ugandan woman holds her child and a small bag containing kernels of beans that were strewn in the brush as bags of food relief ruptured on impact after they were air dropped by a WFP aircraft in northern Uganda on Oct. 19, 2007gandan woman holds her child as she holds a small bag containing kernels of beans that were strewn in the brush as bags of food relief ruptured on impact after they were air dropped by a World Food Program (WFP) aircraft in the Olilim camp for Internally displace people in the Lira District of northern Uganda, 19 October 2007.
A Ugandan woman holds her child and a small bag containing kernels of beans that were strewn in the brush as bags of food relief ruptured on impact after they were air dropped by a WFP aircraft in northern Uganda on Oct. 19, 2007

Photo by Roberto Schmidt/AFP/Getty Images

Poverty is, fundamentally, a lack of money. So doesn’t it make sense that simply delivering cash to poor people can be an effective strategy for alleviating it?

Transferring money to poor Americans has been a much bigger success than most of us realize. When it comes to the global poor—the hundreds of millions of slum-dwellers and subsistence farmers who still populate the world—one might be more skeptical. Perhaps the problems facing these unfortunates are simply too profound and too complex to be addressed by anything other than complicated development schemes. Well, perhaps.

But there’s striking new evidence that helping the truly poor really is as simple as handing them money. Money with no strings attached not only directly raises the living standards of those who receive it, but it also increases hours worked and labor productivity, seemingly laying the groundwork for growth to come.

These results come to us from Christopher Blattman of Columbia, Nathan Fiala of the German Institute for Economic Research, and Sebastian Martinez of the Inter-American Development Bank. They suggest both a promising new approach to fighting intense poverty and bolster a refreshingly old-fashioned account of its causes. The research comes from a 2008 initiative in Uganda’s very poor northern sections. The government announced plans to give roughly a year’s worth of average income (about $382) to young people aged 18-34. Youths applied for the grants in small groups (to simplify administration) and were asked to provide a statement about how they would invest the money in a trade. But the money was explicitly unconditional—parceled out as lump sums with no compliance monitoring.

It’s easy to see that a nice injection of cash would make people better off. But in principle, the long-term impact could be ambiguous. Give money to a person whose only job prospects are low-paying and unpleasant, and perhaps he’ll simply respond by working less. That kind of income support would increase human welfare, but not really create any economic growth. That’s not what happened in Uganda. The government selected 535 groups—a total of about 12,000 people—for the experiment. Of the 535 groups, about one-half were randomly selected to actually get the money, and the rest were denied. Blattman, Fiala, and Martinez then surveyed 2,675 youths from both the treatment and the control group before dispersal of money, two years after dispersal of money, and four years after dispersal of money. The results show that the one-off lump-sum transfer had substantial long-term benefits for those who got the cash. As promised, the people who received the cash “invest[ed] most of the grant in skills and business assets,” ending up “65 percent more likely to practice a skilled trade, mainly small-scale industry and services such as carpentry, metalworking, tailoring, or hairstyling.” Consequently, recipients of cash grants acquired much larger stocks of business capital and thus earn more money—a lot more money. Compared to the control group, the treatment group saw a 49 percent earnings boost after two years and a 41 percent boost after four.

Those strikingly high returns are reminiscent of one of the oldest and simplest accounts of economic growth there is. According to this theory, poverty is caused by a lack of capital. Because the absence of capital is so immiserating, the return on investment in poor places is extremely high. Thus capital ought to rapidly flow from rich places to poor ones, rapidly boosting incomes and inducing economic convergence. In practice, though, we don’t really see this happening. That’s inspired a lot of complicated thinking about the roles played by institutions, public policy, culture, epidemic disease, and just about everything else under the sun.

The Ugandan experiment suggests a simpler answer. Maybe there’s just no feasible way for subsistence farmers and casual laborers in rural Africa to get loans at reasonable interest rates. When young people get money for free, they’re able to put it to such good use that it’d be well worth their while to pay interest in order to get their hands on it. But there’s no Ugandan equivalent of federally subsidized student loans for youth to jump-start their tailoring careers.

One of the most interesting results from the experiment is that recipients of grants actually report 17 percent more hours worked, suggesting that the money serves as a true bridge to economic opportunity. Grant winners increase both the quantity and quality of labor supplied, suggesting there should be at least some spillover benefits to the broader community. No doubt there are major limits to how far up the development ladder you can climb with this strategy: It might not work in moderately prosperous countries with more access to capital. But these results are extremely encouraging. A large share of poor people live in countries (India, for example) that have enough financial resources to undertake transfer programs all on their own. And people in the rich world can pitch in as well. GiveDirectly is an exciting new charity model that lets you directly transfer money to households in Kenya. Overall, the message is that taking a huge bite out of global poverty may be easier than most people realize. Poor people just need more money.

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