By Lorenzo Schirato
Pumping cash into developing economies seems to be the most reasonable way to address poverty and inequality in countries lagging behind. No matter whether the direct beneficiary is a government or a citizen or whether the same government or an international organization is the supplier of these resources, providing money by itself contributes greatly to address the pressing issue of poverty reduction.
Immediately after the colonial era, developed countries started to experiment different ways to support and maintain the ties with their former colonies via financial aids. Thanks to the Marshall plan and similar reconstruction programs created after World War II, the topic of governmental and international financial aid became a serious business and an important tool for the advancement of global economy. Today, the landscape of these programs is more various than ever and the question of which type of intervention is the most effective to address poverty remains unanswered.
A way to provide financial aid that has progressively grown in popularity is to directly provide money to those who are most in need of it, a type of intervention known as Cash Transfer (CT). Today, Cash Transfer programs are considered one of the most effective tools to address poverty and inequality in disadvantaged communities around the world. This type of aid can come in the form of a Conditional Cash Transfers (i.e. the provision of financial resources conditional on the fulfillment of certain requirements by the beneficiary) or in the form of Unconditional Cash Transfers (i.e. no strings attached to the amount received). In contrast with classic aid schemes tailored to central banks and governments, these transfer programs rely on a bottom-up approach that allows them to directly target individuals and families living in the most disadvantages areas in the world.
Unconditional Cash Transfers Programs (UCT) have been particularly popular in Sub Saharan Countries and were largely supported by International Organization like UNICEF and DfID (Department for International Development) and also by private companies like Give Directly. Conditional Cash Transfers (CCT) initiatives have been equally successful especially in Latin American Countries like Brazil and Colombia with the support of organizations like the World Bank and the Inter-American Development Bank.
From a general point of view, both types of program display a good record of achievements around the world. Nonetheless, both CCT and UCT present several drawbacks as well as implementation issues and it is usually the case that one program succeeds in contexts where the other fails. As the reader may suspect, there is an ongoing discussion regarding which of these two schemes is more impactful and cost-effective. The question is certainly puzzling and relevant for the future of Cash Transfer Programs and, as we could have expected, a clear answer has not been reached yet. Nonetheless, there is a reasonable set of evidence that indicates that the success of these initiatives is highly context-dependent: the result of each scheme is clearly contingent on the specific issue and the economic environment policy makers decide to address.
On average, Conditional Cash Transfer Programs are the most effective in situations characterized by the presence of asymmetric information and where the unavailability of capital constitutes only a secondary concern. In such contexts, receiving money prior to meet different requirements creates an incentive to align individual decisions to social preferences. For instance, requiring parents in Colombia to send their children to school in exchange of periodical cash transfers has been proven to be effective to address poverty and its most important manifestations at a macro level. Moreover, if CCT Schemes are clearly targeted and fully implemented, they not only help families in the short run but also impact persistently the condition of future generations through improvements in education and healthcare. With respect to other interventions, what makes CCT Programs (like Bosa Familia in Brazil orOpportunidades in Mexico) unique is that they both target poverty in the present and eradicate the historical causes of poverty in the future. Now it should be clear that conditionality represents a key requirement for the impact and success of these Programs.
If on the one hand CCTs seem to be tailored to overcome the limits imposed by information asymmetry and poor knowledge, UCTs have been proven to be better suited to address situations where the lack of available capital is the major problem. According to the theory that receivers may know better what they need than their donors, it certainly easier for a farmer in Kenya to better allocate these resources for his family business with respect to his donor overseas. Moreover, UCTs seem to work equally well also because the role of conditionality is often substituted by peer monitoring and selection when it comes to assign and manage the transferred resources. The benefit of not having strings attached to cash transfers is also evident if we consider that most conditions are difficult to respect in targeted regions especially because of the unavailability of services to base these conditions on.
Both types of Cash Transfer Programs present challenges in their implementation as well as potential drawbacks. It should be clear now that CCT Programs success highly depends on the conditionality design: it is possible that these requirements are too difficult to meet as well as too challenging to monitor. We should also consider that imposing specific requisites may cause problems of distortions and other fungibility issues (for instance, this may cause families to switch to goods and services of inferior quality in the short run). On top of that, there has been evidence that some specific conditions may as well worsen the recipients situation when we look at health and nutrition indicators. Other issues have been raised in terms of cost-benefit evaluations of these schemes which are in general more expensive to manage and definitely more challenging to monitor. On the other side, UCTs mechanism is rooted on the challenging assumption that recipients know better how to spend these cash transfers. Moreover, given the lack of conditionality, it remains still difficult to monitor cash flows and evaluate the impact of such initiatives.
To conclude, we must recognize that there is not such a thing as a perfect Cash Transfer Program. As many field experiments have shown, the success of these initiatives critically depends on the context of their implementation as well as their design. In an analogous way, the potential drawbacks generated by these interventions highly depends on the nature of the issues policy makers are addressing. These considerations make it obvious that a clear and detailed evaluation of the target communities problems, necessities and characteristics is essential to ensure a significant and persistent impact of these interventions. In other words, the conditionality requirement can be both the key factor of success and the main cause of failure of CT Programs: the impact of these initiatives still depends on the researchers ability to tailor them to the specific nature of the problem.
This article was originally published in The Reference Point.