For a long time, governments have used in-kind welfare schemes to tackle poverty. In-kind schemes provide goods or services — food for schoolchildren, checkups for pregnant mothers, food stamps for families below the poverty line, etc. These in-kind welfare schemes are often complicated and multi-layered, so often only a small fraction of the scheme benefits actually reach beneficiaries.
India, for example, plans to spend INR 9.45 trillion ($141 billion) on central government schemes in 2017-18. However, many of the schemes under this umbrella are riddled with operational issues.
A scathing World Bank report in 2011 said that India’s welfare schemes have failed to aid the poor, saying that “most safety net and social security programs…are characterized by a range of problems which also reduce their poverty reduction impact.” The World Bank specifically targeted the programs’ “poor cost effectiveness and impacts”, driven by major leakages and implementation issues in India’s Public Distribution System (PDS).
Half of India’s subsidized food grains never reached the government warehouses and were siphoned off elsewhere.
India’s government has also highlighted similar issues. For example, a 2015 report by a High Level Committee from the Ministry of Consumer Affairs found that India’s PDS has 40–50% leakage. In other words, half of the sanctioned food grains never reached the government warehouses and were siphoned off elsewhere. Similarly, the 2014-15 Economic Survey found that 54% of government-subsidized wheat and 15% of government-subsidized rice never reach beneficiaries.
Other studies conducted by SEWA Bharat in Madhya Pradesh show that many centrally sponsored schemes reached less than 25% of the intended population. In addition, a lack of community empowerment and ecosystem readiness have plagued other government schemes. For example, the Pradhan Mantri Jan Dhan Yojana has created 220 million rural bank accounts, but 24% of them have no money.
Is it time to rethink in-kind schemes?
The main alternative to in-kind welfare schemes is cash transfers — just giving people cash directly— but some people think that cash welfare would be more expensive. Let’s consider a hypothetical situation to examine this point.
India has around 250 million households, as per the 2011 India Census Report.
If the government were to give INR 10,000 to each household, the total cost would be INR 2.4 trillion, which is 25% of India’s planned spending on government schemes.
Let’s pause here for a moment and allow this point to sink in. At a quarter of the planned welfare budget, the Indian government could deliver INR 10,000 to every Indian family.
Do cash transfers actually work?
This idea that cash transfers can be more cost effective has been supported by data. For example, a study in Ecuador, Niger, Uganda, and Yemen found that 18% more people could be helped with cash than food. Similarly, a World Food Programme project in Ethiopia found that cash was more efficient than food aid by 25-30%, and 2.5 times more of aid budgets went directly to beneficiaries in Somalia when they were given cash rather than food aid.
But a more important question remains — how effective are cash transfers at reducing poverty in the short and long term? Can they actually work?
American economist Milton Friedman raised this idea in 1969, 7 years before winning the Nobel Prize in Economic Sciences. At the time, he was speaking about how cash transfers would improve the overall economy and GDP, not poverty alleviation or individual well-being. However, his argument rested on the idea that the government should cut out intermediaries and trust the poor to decide what is right for their lives and society.
Back then, the idea was considered eccentric.
People have always questioned the idea of handing money directly to the poor, assuming that it will not stop them from being poor. The fear is that the poor would end up wasting the money on frivolous pursuits — like drugs, alcohol, and cigarettes — with their family and the overall society none the better.
However, economists are realizing this isn’t necessarily the case. A review of 30 of these studies found recipients either spent the same amount or less money on alcohol and tobacco after receiving direct cash transfers. Instead, people use the money for productive investments like housing and education, or they spend that cash in their local economies (which then recirculates in the local economy 2.59 times before being spent elsewhere).
This epiphany came about through a series of direct cash transfer experiments and pilots across the world. Here are some of those success stories:
Perhaps the best known cash transfer scheme is Brazil’s Bolsa Familia. Started in 2003, the scheme gives households below the poverty line ($56 monthly income) a monthly stipend of $13-15 per vaccinated child attending school. For households below the extreme poverty line ($28 monthly income), the program provided a $28 monthly stipend.
At first, Bolsa Familia was criticized for encouraging dependency and disincentivizing work. However, the scheme contributed to Brazil’s dramatic reduction in poverty and 15% decrease in inequality; between 2003 and 2009, the income growth rate of poor Brazilians was 7 times as much as for rich Brazilians.
Originally called “Oportunidades”, PROSPERA (Opportunities) is Mexico’s main anti-poverty program and one of the world’s first large-scale cash transfer programs. It gives cash transfers to low-income households, contingent on their children remaining in school and getting preventative health care.
Studies have shown that PROSPERA played a key role in reducing poverty in rural areas. The program increased school enrollment, especially after primary school — boys in the program have an additional 0.85 years of schooling and girls have an additional 0.65 years. In addition, the program led to a decrease of 11.8 percentage points in anemia among children under two.
In 2007, AVSI Uganda started the Women’s Income Generating Support (WINGS) program, which gave cash grants of $150 and 5 days of business training to 1,800 of the poorest women in northern Uganda. A year later, the women’s ownership of micro-enterprises and monthly earnings had doubled and their cash savings had tripled, as per an evaluation by Innovations for Poverty Action.
In a similar project in 2008, the Ugandan government started the Youth Opportunities Program to give $382 cash grants to thousands of poor 16 to 35-year-olds who submitted proposals for businesses or vocational training. Four years later, the recipients were twice as likely to be practicing a skilled trade — typically self-employment in carpentry, metalworking, tailoring, or hairstyling. Women in the program had 73% higher wages than unenrolled women, and men had 29% higher wages.
In 2013, SEWA Bharat (in association with UNICEF) organized a basic income experiment in Madhya Pradesh. They randomly chose 8 “general” villages and 1 tribal village, and all the individuals in those villages received a monthly cash transfer. In the general villages, adults received INR 200-300 per month and children INR 100-150 (which was given to the mother or a designated guardian). In the tribal village, the transfers were INR 300 for adults and INR 150 for children.
The experiment resulted in benefits across the board. Villages in the experiment had higher levels of spending on better toilets, clean drinking water, better energy and lighting sources, and basic household assets (like bicycles, motorcycles, scooters, TVs, and furniture). Nutrition for children went up, with 20% more children classified as the correct weight for their age. Girls were more likely to be enrolled in secondary school — 36% in control villages vs. 66% in the villages with basic income). Food sufficiency also went up, and households that received the cash transfer consumed more nutritious foods like pulses, eggs, fish, fruit, and meat. In addition, households saw higher levels of work and higher incomes; households receiving a basic income were 32% more likely to work more hours.
In 2010, the Joseph Rowntree Foundation ran a pilot where 15 homeless men in London (who had spent between 4 and 45 years living on the street) were given the chance to create a personalized budget and get optional support to carry it out. Each man chose how much money he needed to get off the street (capped at £3,000 per person) and how he would spend it. On average, each man received and spent £794 in the first year.
Some of the money went to household expenses like accommodation, furniture, and utilities, but the men also spent their budgets on training and courses, reconnecting with their families, dealing with physical or mental health issues, and more.
After 18 months, the majority of the men were living off the street or had plans to move off the street; these same men were previously reluctant to leave the streets. These men talked positively about their lives and had begun to make plans for the future.
The future of cash transfers
As a result of case studies like these, cash transfer programs have flourished around the world as a potential alternative to in-kind transfers. In 2014, 130 of 157 countries in the World Bank’s ASPIRE database had at least one cash transfer welfare program.
More recently, countries around the world are even talking about a more extreme version of cash transfers — universal basic income (UBI), which guarantees a monthly income for every citizen. Switzerland just narrowly voted down the implementation of UBI, and one of the French presidential candidates won the Socialist Party nomination with UBI as the centerpiece of his political platform. At the same time, the United Kingdom, Scotland, and India’s governments are talking about piloting UBI programs, while Finland is actually starting a UBI pilot where 2,000 citizens will receive $587 each month for the next two years.
However, there is still significant debate over the fundamentals of cash transfers. Should they come with conditions attached — for example, that children stay in school, the family attends a health center regularly, or beneficiaries use the cash to build a business — or should they be given unconditionally? Should governments give fewer large-scale cash transfers to help people escape the poverty trap, or should they disperse a larger number of smaller transfers to help more people? Should cash transfers happen just once or should they be given out regularly? Should they be given to the male or female head of the household? Should they be given in cash, digitally, or through a bank? Despite the massive number of studies on cash transfers, these questions are unanswered; yet changing each of these factors could drastically affect how effective a cash transfer will be in reducing poverty.
It’s still an open question whether cash transfers — or even universal basic income — will become the norm or even what form they will take. But it’s certainly clear that cash transfers are here to stay. After being first proposed by Thomas More more than 500 years ago, then revived by Milton Friedman more than half a decade ago, cash transfers are an idea whose time has finally come.