Our choice to name GiveDirectly as our #2 charity has drawn some surprise and criticism. GiveDirectly seeks to deliver 90c directly into the hands of the very poor (no strings attached) for every $1 of total organizational expenses. There are many people who consider this intervention “unproven” (since there is not research linking cash transfers directly to the sort of health impacts associated with other top charities’ programs) and even dangerous (with the idea being that the people receiving the transfers are unlikely to spend them well).
We believe that cash transfers face a lower burden of proof than other charitable interventions, yet have been studied more than any other non-health intervention we’re aware of, with results supporting the idea that they have net positive impact; that GiveDirectly fits the description of a “charity with documented positive impact”; that the magnitude of this impact is certainly open to debate, but appears reasonably high and could be competitive with the most cost-effective interventions; and that much of the intuitive resistance we see to the idea of unconditional cash transfers may be driven by misleading analogies between the developing world and the developed world.
This post will
- Lay out the basic case for the appeal of cash transfers.
- Address what we see as misleading analogies between the developing world and the developed world, analogies that lead to what we see as excessive pessimism about the impact of cash transfers.
Improving consumption, in the short and long run
For several years, our definition of “evidence of impact” has included evidence that “wealth is being transferred to low-income people.” Documentation of positive impact is usually (necessarily) documentation of proxies for improved quality of life, and of such proxies, we have long found “increased wealth/income/consumption” to be one of the stronger ones. (Other strong proxies include improved nutritional status as indicated by height/weight-related measures, and reduced incidence/prevalence of symptomatic diseases such as malaria and diarrhea. A more direct measure of long-term impact is reduced mortality, but we do not wish to consider interventions based solely on their impacts on mortality, as different people have very different intuitions about how this impact should be valued relative to life improvement.) Improvements in wealth/income/consumption are a common goal of health programs, job training programs, and other programs; we would consider such improvements to be evidence of positive impact in evaluations of such programs, and it seems consistent and appropriate to consider them evidence of positive impact in evaluations of cash transfer programs as well.
It may seem near-tautological to say that cash transfers improve recipients’ wealth/income/consumption. We recognize this, and this is why we sometimes describe cash transfers as carrying a “lower burden of proof” than other interventions. If a charity can establish that it is placing significant wealth in the hands of low-income people (not necessarily an easy thing to establish), we believe this is essentially tantamount to evidence of positive impact. (That isn’t to say that it proves the charity’s impact is highly positive, exclusively positive, or even net-positive; but we believe that it establishes a case for such impact comparable to the best cases we’ve seen for other interventions.)
However, it isn’t the case that this is the only argument for cash transfers. Cash transfers also happen to be the most extensively studied non-health intervention we know of. In a large number of high-quality studies, researchers have looked to see whether cash transfers have indeed increased consumption, what sorts of consumption they’ve increased, and whether common concerns about them are supported by evidence. The consistent picture that emerges from these studies is that cash transfers generally do increase consumption, particularly on food, and that evidence to support common concerns has not emerged despite being looked for. (More at our writeup on cash transfers.)
As discussed previously, there is a smaller set of studies implying that people get significant return on investment from cash transfers, even over the long run; the case for longer-term impacts of cash transfers is broadly comparable to the case for longer-term life improvement impacts of our other top charities’ health interventions, and the cost-effectiveness according to our best estimates is in the same ballpark as well.
One common objection to cash transfers is along the lines of “They probably do help some, but can’t we do better?” We think the answer is that we likely can do better, but it isn’t obvious. For one thing, it’s important to keep in mind the limitations of giving as a casual donor. While a major philanthropist may be able to take big risks with big upside, a donor without special expertise – looking to translate dollars directly into improved lives – has limited options. (For what it’s worth, we feel similarly about LLIN distribution and deworming: we think it’s likely that a major philanthropist could do better than paying directly for delivery of these interventions.)
More importantly, cash transfers can have leveraged and transformative impacts. The most direct evidence of this is pair of long-term studies finding annual rates of return on invested funds in the range of 35-75%, over ~5-year time frames, which we have stated constitutes evidence that is roughly as good as the evidence for long-term impact for deworming.
Many people see claimed returns in this range and find them implausible, as though earning such returns would require great ingenuity and/or risk-taking. For relatively wealthy people, this is an accurate perception; but for people with extraordinarily low levels of wealth, the returns to a little bit more – especially delivered as the sort of lump-sum payment that helps them get around the challenges of volatile and uncertain incomes described in Portfolios of the Poor – could be significant. The right analogy is not to an investment vehicle that can provide returns on arbitrary amounts of savings; rather, it’s to the kinds of returns we can realize every day by being able to spend money up front rather than piecemeal. (For example, if I buy a $5 water bottle that allows me to save $1 per week on bottled water, that’s an annual return of over 1000%. I have enough flexibility in my finances that I would never think twice about an expenditure like this, but for someone on an extremely low income, the situation is different.)
- One common reported use of GiveDirectly’s transfers is purchasing livestock – something that is often portrayed as having lasting, leveraged, transformative impacts. (Though the purchases of livestock by cash transfer recipients have important differences with the livestock distributed by livestock-specific programs – namely that recipients choose which livestock to purchase, and can purchase something else instead if they’d prefer.)
- Another common reported use of GiveDirectly’s transfers is purchasing a metal roof, to replace a roof made of mud and thatch. We asked about this sort of purchase on our site visit; we were told that mud/thatch roofs take repeated applications of money and time to repair, and can leak to the point of compelling people to move their families and belongings into others’ homes when it rains heavily (or when their roofs are not in good shape). It’s not hard to imagine that a metal roof could make a major and lasting difference to a family (and GiveDirectly has stated to us – though we have not yet examined the details – that the effective “rate of return” on a metal roof is about 17% annually, which would be very high). Unlike with livestock, I’ve never heard of a charity giving out metal roofs; this is arguably an illustration of the idea that recipients have ideas for improving their own lives that haven’t occurred (or can’t be sold) to donors.
- There are many more possibilities for how recipients could leverage cash transfers into lasting, high-return impacts. One person on our site visit stated that he had used the money to purchase a motorcycle instead of having to rent it by the day for his job; this sort of story is common among microfinance recipients and in Portfolios of the Poor (the most credible attempt we’ve seen to understand how very low-income people in the developing world manage their finances). Indeed, the high repayment rates and high interest rates associated with microfinance give some indication that it is common (though not universal) for low-income people in the developing world to have fairly simple opportunities to earn high returns on cash, and the evidence we have seen on long-term returns from cash provides further evidence.
Two more perspectives from which cash transfers look attractive:
- One way to think of cash transfers is as “giving low-income people their choice of intervention [via purchase] to improve their own lives.” There are many plausible reasons to think that their choices may be inferior to the choices of more educated aid professionals, and not all such reasons rely on the idea that aid professionals are better informed. (Alexander covered several of these in a post earlier this year, defending his preference for bednet distribution over cash transfers.) But there are also plausible reasons to think that recipients’ choices may be superior to those of aid professionals. For our part, we’d guess that cash transfers are more beneficial than many, but not all, charitable interventions, and our charity rankings and recommended allocations are consistent with this position.
- Another argument for cash transfers is that they are the best intervention to support given “maximum skepticism.” If I put no credence whatsoever in expert analysis and academic studies, unconditional cash transfers would be my intervention of choice. Since I do put some credence in such analysis and studies (particularly the strongest ones), I don’t go all the way to this position; however, I think that such analysis and studies have more weaknesses than most people recognize, and I don’t find the position of extreme skepticism absurd or indefensible.
Some people object to GiveDirectly based on the idea that “cash transfers have been tried and haven’t worked” in the U.S. They cite examples such as government welfare programs and studies of lottery winners.
We believe that it is very misleading to analogize the poor in the developing world to the poor in the U.S. This is primarily because
- Poverty means such different things in the two different contexts. We’ve argued in the past that the standard of living that corresponds to “poor” in the U.S. would correspond to “rich” in the developing world. The poor in the U.S. generally have access to what we consider basic necessities: shelter, food, plumbing, electricity, and education; the poor in the developing world often cannot afford what we’d consider the most basic levels of such necessities.
- Because the U.S. poor generally have access to basic necessities, there is generally little low-hanging fruit in terms of easily purchased items that can materially improve one’s standing. This is (we believe) precisely why there are such better giving opportunities in the developing world.
- When we think of the U.S. poor, we generally think of people who have access to basic necessities but may face more daunting challenges, such as living in high-crime neighborhoods, being unable to hold what we consider desirable jobs, having substance abuse or other mental health issues, etc. Overcoming these obstacles and becoming “middle-class” would take either a great deal of money (reasonably well spent) or fundamental changes in educational status, behavior, environment, etc. By contrast, the developing-world poor generally lack the ability to afford very basic things; purchasing these things could make them much better off, while still at a lower standard of living than the U.S. poor.
- We also think the nature of “temptation to spend money unproductively” is very different in the two settings. While the developing-world poor certainly have opportunities to spend money on gambling, alcohol, cigarettes, etc., we haven’t (on our site visits) observed the same level of opportunities to waste large amounts at once that we see here. Furthermore, it’s quite plausible to us that the greatest temptation for a clinically malnourished individual would be to legitimately improve his or her diet (e.g., by eating more protein) or address some other pressing basic need (such as a leaky roof).
The last few of the above points are speculative, and shouldn’t be taken as an attempt on our part to demonstrate that developing-world cash transfers are well spent. Rather, they should be taken as illustrations of why it isn’t safe to extrapolate from the U.S. to the developing world. (Instead, one should focus on the studies that have been done of cash transfer programs.)
Another point worth noting is that even if cash transfers have had disappointing results in the U.S., it isn’t clear that any other anti-poverty intervention has had better results. (More at our discussion of U.S. equality of opportunity.) One way of putting our view is that (a) in the U.S., poverty is often too complex to be solved by money, and therefore donors have trouble helping significantly whether they are making cash transfers or funding other interventions; (b) in the developing world, poverty often includes a lack of very basic, very helpful necessities that can be easily purchased, and therefore donations can do a great deal of good in the form of cash transfers or other interventions.
We don’t take the position that cash transfers are the best intervention out there. But we think they are a highly promising intervention, and that many of the concerns we see raised about them are unwarranted and/or exaggerated. In terms of both the intuitive case and the evidential case, we think cash transfers are on the very short list of the most promising interventions we’ve seen for individual donors.