Can We Trust the Poor With Cash?

What do the poor do with cash handouts?  There is mounting evidence from interesting new review papers that, at least in developing countries, cash grants do not increase purchases of “temptation goods” such as alcohol, narcotics, and cigarettes, but rather they are spent much more widely on productive investments, education, and food.

Until recently, the presumption among economists and laypeople alike remained skeptical about giving poor people cash.  Giving cash to the poor has always been associated with a multitude of sins: laziness, family breakdown, and using the new cash to feast on temptation goods.  Indeed, for years this has been the working assumption that has made donors shy away from cash donations in favor of in-kind donations.  If you don’t trust somebody with cash, then give them specifically what you think they need instead.  It has been a skepticism that has crossed both faith-based and secular charity worlds.

In the United States, it may be that much of our hesitancy has come from our collective experience with a broken welfare system, where welfare checks are widely viewed as having dampened incentives to work.  We refrain from giving cash to panhandlers in part because of our fear that our handouts will be used to feed addictions.  These fears are not unjustified.  There is, for example, evidence that North American panhandlers spend perhaps a third or more of received handouts on alcohol and drugs. Other studies have demonstrated the negative impacts of welfare on work incentives and, conversely, the positive impact of welfare reform on boosting employment and earned income.

But there is mounting evidence that when cash grants are given to the poor in developing countries, very little of it is spent on temptation goods.

An important new paper by David Evans and Anna Popova at the World Bank reviews 19 studies with quantitative evidence on the impact of cash transfers on temptation goods. The studies were chosen using a well-specified algorithm on Google Scholar and include a significant number of randomized controlled trials.  Fascinatingly, almost none of the studies finds increased expenditures on temptation goods, and the vast majority of the studies estimate negative impacts (i.e. where expenditures on temptation goods actually goes down with the cash transfer), and more than have of these negative findings are statistically significant.  The absence of an increase on temptation good expenditures from conditional cash transfers (where cash grants are contingent on children’s education, health examinations, or business investment) is somewhat stronger than for unconditional cash transfers (where the recipient receives cash without stipulations), but even when cash is given unconditionally, only one study finds positive and significant increases on temptation good expenditures.

Another excellent and accessible review of the experience of cash transfers in developing countries is an article in the current issue of Foreign Affairs by Chris Blattman and Paul Niehaus, which describes studies in Uganda, Sri Lanka, Mexico, Ghana, and other countries on the economic behavior of those receiving cash transfers.  Consistently, these studies show that the transfers are not misused, but rather invested and used for basic household necessities.  The article describes how Blattman and his co-authors even provided $200 to a sample of drug addicts and petty criminals in the slums of Liberia.  Even the majority of these funds appear to have been spent on basic necessities and starting small businesses.

My favorite study is the October 2013 MIT working paper by Johannes Haushofer and Jeremy Shapiro in which they find rather dramatic results from the GiveDirectly unconditional cash transfers in Kenya: within an average of about six months after the treatment, households showed a 58% increase in net asset values, a 30% reduction in the likelihood of the respondent having gone to bed hungry in the preceding week, and a 42% reduction in the number of days children went without food.  As in nearly all of the other reviewed studies, they find no evidence of increased expenditures on temptation goods such as alcohol and tobacco.

Can a strategy of providing cash grants to the hard-core homeless work in a developed country? Obviously we have to be careful here, because we are dealing with a self-selected segment of the population with characteristics very different than the average poor person in a developing country, the kind of person receiving the cash transfers in these studies.  But one very small study offers some hope.  A 2010 experiment in London reviewed by the Economist allocated cash grants of £794 to 13 hardcore homeless who had been on the streets between 4 and 45 years.  These individuals were offered a life-changing one-time grant that they could allocate to be spent on anything that they believed would benefit them.  Given the choice over how to spend the money, none chose a temptation good; nearly all chose some kind of purchase that had the potential to offer them a clean start.  Two years later 11 of the 13 participants in the experiment remained off the streets.

The evidence is still mounting on the impact of giving the poor cash, and few believe that cash grants alone are a panacea for overcoming poverty, but there is a growing body of evidence that the money is being spent in ways that are more helpful than most of us previously believed.

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