In the United States, the debate over a universal basic income is an exercise in “first world problems.” If we simply give everyone money, will we discourage work? Will some people buy cigarettes and lottery tickets instead of better housing and food? If we decide against a completely universal program, settling for an “unconditional cash transfer” instead of a true UBI, what subset of the population should get the payments? Should this no-strings-attached cash come on top of, or replace, our sizable existing welfare state? How should we pay for it, starting with the GDP of one of the world’s richest economies?
We should have these debates, of course. But we should also feel grateful that the stakes are as modest as they are.
In Poor Relief: Why Giving People Money Is Not the Answer to Global Poverty, Heath Henderson, a Drake University economist who has worked with the World Bank and the United Nations, turns our attention to the far deeper poverty of the developing world. There, too, the fad for unconditional cash has gripped the minds of philanthropists, nonprofit organizations, development agencies, and governments.
These days, most developing countries have some kind of cash-transfer program, Henderson reports. These programs are generally targeted to the poorest families, but they usually do not impose behavioral conditions (such as work requirements or a school-attendance mandate for children). Experiments in fully universal programs are growing.
Henderson argues that these schemes backfire in various ways when used in poor countries, and he believes the money would be better allocated through “deliberative democracy,” in which communities debate how to spend it. Any effort by outside actors to alleviate poverty in struggling communities will have plenty of trade-offs, but Henderson is worth hearing out here.
Giving people cash is attractive for some good reasons. Freed from the paternalism of in-kind transfers — think food stamps, for example — a person or family can decide for themselves whether food is what they need most, or if instead it’s home repairs, education, transportation, or something else. Handing out cash can also be administratively simpler than other, more specialized types of aid.
However, Henderson provides some eye-opening anecdotes and research to illustrate the limits of this approach. He begins with Jharkhand, a state of India. In 2017, Jharkhand ran a trial testing a new approach to poverty relief: Instead of offering folks a quantity of rice at a steep discount through local stores, a system that had proven cumbersome and vulnerable to corruption, it transferred money directly into families’ bank accounts — enough money to cover the equivalent amount of rice for those who chose to spend it that way.
By the next year, there were large protests. People were confused about how to get their money. One woman paid for several rides into town, as well as the services of a “banking consultant” to check her balance, while missing work. Overall, recipients managed to claim only about 60% of their benefits, with the elderly and disabled especially struggling. Before too long, Jharkhand switched back to the old system, as bad as it was.
This particular anecdote may have only a limited lesson to teach us: Don’t use bank accounts to distribute benefits to people unfamiliar with the process of withdrawing money from a bank. But cash programs have other serious limitations in the developing world, too.
Perhaps most importantly, while cash transfers can, in theory, be spent on anything, in practice, certain things require collective investment, not just individual expenditures. If what a place really needs is clean water, healthcare facilities, or transportation infrastructure, cash transfers to individuals are unlikely to achieve that. A poll in Tanzania asked respondents to choose between cash transfers and government spending on public needs; two-thirds opted for the latter, with similar results also found in Mongolia and India. Henderson contends that cash transfers are themselves paternalistic, in a sense, for foreclosing such options.
Also, most cash programs are not fully universal, instead being targeted in various ways to keep costs down. (Even a nominally “universal” program will, at least if it’s funded by taxes, charge some people more than they get anyway.) Targeting formulas can get dicey in the best of circumstances, such as when there are good administrative or tax records showing everyone’s jobs and income, and they are even harder to implement in many poor countries.
Some programs target the poor through a “proxy means test,” where, instead of relying on a household’s actual income to calculate benefit eligibility, the household’s means are estimated statistically based on factors such as members’ jobs and the condition of their home. Needless to say, these estimates are far from perfectly accurate, as studies have shown that they miss many low-income households. Even cruder methods can involve targeting broad populations for aid based on age or geography.
In Chad, one program selected recipients in poor areas through a proxy means test, and because not everyone could read flyers about the program or listen to the radio, winners were announced at community assemblies. Everyone thus knew which of their neighbors were receiving the cash. These folks now had targets on their backs; others would, for example, charge them higher prices or refuse to pay back debts.
In Indonesia, conflicts over targeting for a cash program led to social unrest. In the Philippines, cash transfers drove up the price of food for nonrecipients. There can even be conflicts within households: The burden of collecting payments often falls on women, for example.
Despite their flaws, don’t cash transfers at least make their recipients better off? To an extent. In America, unconditional-cash experiments have generally (and unsurprisingly) boosted spending among those receiving free money, while having little effect on important downstream outcomes, such as children’s educational performance. Henderson presents a similar summary of academic research into cash programs in the developing world.
These programs do boost household expenditures, and contrary to some fears, they don’t seem to reduce work effort. But, as in the U.S., the impacts on health and educational outcomes seem pretty modest, especially in unconditional programs that don’t, for example, require children in recipient households to attend school. Long-term benefits are especially hard to come by.
So if unconditional cash isn’t a panacea for global poverty, is there anything better? Henderson points us toward “deliberative democracy”: Create a process through which local citizens can debate how to use funds. This can mean giving them information about the issues and taking a poll, or having debate meetings that are either open to the public or held among a selected sample.
There are big upsides to this approach. Local citizens have direct knowledge of their communities and what they need, and can freely choose between giving direct aid and spending the money on larger projects. Of course, there are pitfalls here too: If the process isn’t structured well, it can fall prey to elite capture, misinformation, or corruption. And as anyone who has been to a local government meeting could tell you, it can also eat up a lot of time and resources.
THE LONG SHADOW OF THE FEDERALIST DEBATES
Clearly, neither cash payments nor deliberative democracy is perfect. Both options will waste some money, choose beneficiaries in suboptimal ways, generate conflict, and so on. Even readers who share Henderson’s skepticism of unconditional cash might end the book less than fully convinced that his methods are superior — in part because, to his credit, he spells out pros and cons to both.
Some rich philanthropist should run an experiment: send cash to one group of communities and implement a careful deliberative process to allocate funding in another, and measure various outcomes afterward.
Robert VerBruggen is a fellow at the Manhattan Institute.
