Free Lunches


A recent NYT article described an up-and-coming model for development: cash transfers with no strings attached. Cash transfers are, of course, an old idea in development, and their main attraction is that, from an economic perspective, they increase “allocative efficiency” of donations–in plain speak, the people who know their own needs and preferences best are allowed to choose where scarce resources will go.  So what could go wrong?

Well, a lot. A friend offered me a rupee for my thoughts on this, and that’s about all they’re worth, but here are a few considerations.  When comparing the efficiency of these sorts of cash-transfer programs to standard subsidies, I would imagine that they come off very well. In fact, in some ways, this isn’t so different from remittances, except that it’s arguably more “just” in that the individuals targeted will typically not have the benefit of magnanimous relations in the diaspora.  However, I also suspect that (a) *how* it’s done is just as important as *if* it’s done, and (b) it’s not the panacea that proponents suggest. One can imagine scenarios, e.g., in which giving money to individuals (as opposed, e.g., to giving money to local participatory gov’ts that would then decide collectively how to spend it) would alleviate (healthy) public pressure on local gov’t to provide public goods and infrastructure.

On point (a), I’m not talking primarily about the mechanism of the transfer itself. Cell phones are probably the best way to do it, as their coverage in most countries is now expansive and the costs of access to the network are low-ish and falling. Rather, there are a whole host of issues that arise with transfers of wealth from outside an economy, and questions that need to be asked.  For example, (1) who receives the gifts? The percentage of a given village receiving them may bear on collective feelings of envy–a single downtrodden recipient might be thought of as an exeption, while a larger number might become a “class” that is thought of differently by their neighbors. Also, (2): how much do they receive? Someone gaining a LOT of money may suddenly find themselves resented and even targeted for attack. In fact, one might imagine a scenario in which a local mafia formed in response to such transfers, essentially targeted the recipients one by one and confiscating or taxing their gains. (3) Are the criteria for distribution made apparent to the entire community, or does it really seem like manna from the (quixotic and unknowable) gods? If the criteria are unknown, then the system may seem fundamentally unfair–potentially fueling a desire for vigilante redistributive justice. (4) Do the community elders approve of the intervention? If not, recipients may find themselves at odds with the social structure of their community. (5) Are they one-time transfers to people, or regular income subsidies? If the latter, how is it determined that someone no longer needs help? Moreover, if success gets them booted off the list, doesn’t that provide a perverse incentive not to put their money into productive investments? (6) Is the quantity of money injected into the local economy enough to cause inflation, either in terms of goods, services, or real estate? If so, will there be negative costs to the program borne by those who are poor but not quite poor enough to qualify for the cash transfers?

On point (b), there are at least two associated dangers: one political and one economic.  On the political side, it seems that cash transfers have the potential, as indeed NGO interventions do, to erode the social contract between the individual and government.  Faith in democratic systems more generally might be undermined as people turn to privatized solutions to their problems.  On the economic side, there are real positive economic spillover impacts associated with public investment that are less likely to be realized when it’s individuals choosing to make the investment decisions. The ability to buy antibiotics, for instance, may weaken the pressure to build a decent community water system capable of filtering waterborne microorganisms. (Fearon, Humphreys, and Weinstein had an experiment in Liberia on community-driven reconstruction that estimating the impact of CDR projects on social cohesion, democratic political attitudes, and material well-being using, in part, the willingness of funds recipients to invest at the individual versus the community level.) And poor infrastructure is one of the major constraints on the expansion of small businesses in the developing world. In fact, one of my favorite organizations, Rebuild Africa, rebuilds community infrastructure–schools, bridges, community centers (in addition to private houses)–in northern Liberia using only local labor and materials, and largely eschewing external injections of funds for exactly these reasons.

All that said, these unconditional cash transfers are probably, used sparingly and judiciously, a great way of averting worst-case scenarios for the worst-off.


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