Does giving money to poor people work?

posted in: Economics | 0

Since the definition of poverty is not having enough money, it might seem obvious that giving money to poor people is a good way to help them. But cash transfers, as they are known in the aid and development world, are not recommended by everyone. Some people argue that giving things in kind – whether food, sewing machines or tools – is better.

A lot of research has been going on to see what works, without the perverse consequences that so often spoil aid interventions. The UK government’s Department for International Development (DfID) has been sponsoring research done by the Overseas Development Institute (of which I am proud to say I was once a Fellow) to find out what the beneficiaries themselves think. ODI has just released a video showing one African woman’s views on cash transfers. One video is not enought to settle the debate, though another DfID document show generally positive research findings.

Perhaps you’re wondering why anyone would object to aid taking the form of giving money directly to those we are trying to help? There is a long standing philosophical and practical argument in development economics about whether the poor are the best judge of what is good for them. The standard economics approach is that the poor are like all other people – they know what they want and how to get it and giving them the resources to do so stands the best chance of getting good results. The oppositive view is that poor people don’t always make good choices and well intentioned outsiders may be able to help them by guiding or constraining their choices. Most rich countries have welfare schemes that deviate from giving straight cash to poor people, for fear that they will waste it (eg food stamps). This view is attacked for being paternalistic by the standard economists (eg. William Easterly). But one of the world’s leading economists, Esther Duflo, who is Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics in the Department of Economics at MIT, argues that sometimes the poor do make mistakes. This is the subject of her Tanner lectures, delivered in November 2012.

Duflo has just been nominated by President Obama to join the US Global Development Council, which is led by Mohammed El-Erian of PIMCO, himself a Cambridge-educated economist. She has been a pioneer in the use of experimental interventions as a way to learn what actually works. True double blind tests are very hard to do in social policy but by matching villages by every other characteristic and then making an intervention in only half of them, researchers are far more likely to find out what really works than by relying on theory, or worse, on dogma.

DfiD is using cash transfers for much of the UK aid policy, but has chosen to do so only after reviewing a lot of evidence. It’s one of the encouraging aspecs of modern development economics that policies are increasingly driven by evidence of what works. Solving world poverty remains a vast and unfinished goal but at least the meagre resources provided by rich countries might now be better spent.

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