Undercover Economist

Development needed? Just give cash

‘A stack of research papers concludes that an excellent cure for poverty is simply to give poor people money’

Is this the most effective development programme in history?” asks Chris Blattman, a political scientist at Columbia University. He adds, “I think it’s a contender.”

The programme is simple enough to explain: give cash handouts of $50,000 to aspiring Nigerian entrepreneurs. Yes, you read that last sentence correctly — but more about the Nigerian cash drop in due course. It is merely the most eye-catching in a stack of research and policy papers to conclude that an excellent cure for the problem of poverty is simply to give poor people money.

That idea seems almost naive. Instinctively, we tend to feel that victims of famines and earthquakes need food and shelter rather than inedible cash. We may feel, also, that cash will be wasted — stolen, spent on drink, frittered away on treats or siphoned off by grasping relatives. Even if the money is well spent, will it generate self-sustaining economic growth? Yet an increasing number of development policy types are reaching the conclusion that cash beats many of the alternatives.

Ponder the most obvious objection first: that poor people will waste the money. David Evans and Anna Popova of the World Bank surveyed 19 randomised trials across the world studying cash transfers. Not one of them found evidence that spending on alcohol or tobacco had increased by a statistically significant amount. Poor people have better things to do with the money and often spend it well or even invest it successfully.

Blattman and his colleagues conducted what one might regard as a test-to-destruction of the “just give cash” policy. They handed out $200 at a time to homeless thieves and drug dealers in the slums of Liberia as part of a larger randomised trial. One could hardly think of a cash injection more likely to be squandered. And yet, on average, just $8 was spent on drinking or drugs; the rest was spent on rent, food, clothes and “business investments”. The most successful of these was a barrel full of strong drink that was resold by the cupful on the street.

What about the rather different idea of handing out cash in emergency situations — after earthquakes or famines or to refugees? (It is now possible to do this electronically through an ATM card or mobile phone.)

Clearly there will be times when cash is useless because there is nothing to buy. But if refugees have money, entrepreneurs will scramble to solve logistical problems and supply them with things to spend the money on. Except for a few cases, such as vitamins and vaccines, refugees are likely to understand their own needs best.

And while cash can be stolen, it is easier to keep electronic cash transfers secure than to ship food long distances through hostile terrain, with each warlord along the way extracting a cut.

Donor agencies are starting to experiment with cash transfers in humanitarian crises. A commission chaired by Owen Barder of the Center for Global Development recently made its recommendations to the UK’s Department for International Development. The first one: “Give more unconditional cash transfers. The questions should always be asked, ‘Why not cash?’ and ‘If not now, when?’”

So what about those Nigerian entrepreneurs? We already knew that small business grants could have big impacts. A few years ago I reported on an experiment conducted by David McKenzie, Suresh de Mel and Chris Woodruff in Sri Lanka after the catastrophic tsunami of 2004.

They gave out modest grants of around $100 to $200 to business owners, and found that on average these cash injections were invested with very high returns — around 10 per cent a month. But these were tiny one-person businesses.

Now David McKenzie has conducted this Nigerian trial of much larger handouts, with the aim of producing larger businesses with the potential to create jobs. The trial examined a business-plan competition — a policy wonk’s version of Dragons’ Den — that was funded by the Nigerian government and run by the World Bank and the Department for International Development. Several hundred applicants won outright but several hundred more were chosen by lottery from the runners-up. By comparing the lottery winners and the lottery losers, McKenzie could see the impact of the cash grant. It was large: three years on, the lucky winners were almost twice as likely as the losers to be running a business, and three times as likely to be employing more than 10 people. Such employers are exceedingly rare in Nigeria but a third of the lottery winners were among their ranks.

Of course, $50,000 is a lot of money and one might expect it to do some good — but McKenzie estimates that the cost per job created compares very favourably with popular entrepreneurship programmes such as mentoring or training. The truth is that while entrepreneurs in Nigeria and other poor countries are held back by corruption, red tape, poor roads and patchy electricity, they are also constrained by a lack of the funds needed to get their ideas off the ground. That is a solvable problem.

But does McKenzie agree with Blattman that he may have discovered the most effective development programme in history? No, he tells me with a chuckle. The most effective development programme, he says, is to let people move to another country. Now that’s a topic for another day.

Written for and first published at ft.com.