As a means of poverty reduction, cash transfer programs are strongly increasing in the past two decades (Fiszbein & Shady, 2009; Bastagli, Hagen-Zanker, Harman, Barca, Sturge & Schmidt, 2016). Of those programs, the unconditional cash transfers (UCTs) are gaining in importance: some 130 low- and middle-income countries have at least one UCT program (Bastagli e.a. 2016). Charities like GiveDirectly, recommended by charity evaluator GiveWell (2018a), also contribute to the influence of UCTs in development economics.
In contrast to conditional cash transfers (CCTs), unconditional transfers do not require any predetermined development choices by the receiving households, such as health check-ups, vaccinations or school enrollment. The household can do with the money whatever they want, and they receive the money without conditions.
In this article, I discuss both the effectiveness and ethics of UCTs. Are they efficient and equitable? What are the advantages and disadvantages compared to other development programs? I will argue why in particular rich donors in developed countries have important reasons to finance UCTs in poor countries.
Based on several recent randomized controlled trials (e.g. Haushofer & Shapiro, 2013, 2016) and literature reviews (Bastagli e.a., 2016; Fiszbein & Shady, 2009; Lagarde, Haines, & Palmer, 2009), there is a lot of empirical evidence of positive effects of cash transfers on poor households and communities. The reviews (mostly based on CCT-studies, but also some UCTs) show improvements of education, health, nutrition, income, employment, productive investment, psychological well-being and female empowerment. There is no significant evidence for work disincentive effects or inflationary effects. And the cash transfers have negative effects on child labor, domestic (physical) violence and unwanted pregnancies.
Although the difference in effectiveness in terms of child health and schooling between CCTs and UCTs is weak (Akresh, De Walque & Kazianga, 2013; Robertson e.a., 2013), UCTs have some advantage: they require low administrative (overhead) costs, because they require less monitoring. Monitoring of conditional cash transfer programs such as Progresa in Mexico often increases the administrative costs with more than 20% (Caldés, Coady & Maluccio, 2006). The empirical evidence for cost-effectiveness of UCTs is the reason why GiveWell, an influential charity evaluator in the new effective altruism movement, considers UCTs as one of their priority programs (GiveWell, 2018b).
Due to the simplicity and measurable effectiveness of a UCT program, this program can be used as a benchmark for future studies that measure and compare the effectiveness of different interventions. One recent example is a randomized controlled trial (RCT) in Rwanda that compares an integrated nutrition and WASH (water, sanitation and hygiene) program with a UCT (McIntosh & Zeitlin, 2018). Neither the nutrition-WASH program, nor the cost-equivalent UCT program showed significant improvements on child growth, dietary diversity, anemia, household consumption and wealth. The only positive impacts were an increase in household savings for the first program and an increase in productive and consumption assets for the second program.
The comparative RCT in Rwanda did show another important result: when the direct cash transfers are large enough (i.e. larger than the costs of the WASH program), improvements can be seen on nutrition, child growth, child mortality, savings and assets. This result is important because we can expect that UCTs have a lot of room for more funding: due to exchangeability of money, those programs have a lower diminishing marginal returns compared to other programs. For example, doubling an investment for community health clubs or latrines not necessarily doubles the health outcomes. But doubling the cash transfer amount could double its impact.
Although the abovementioned benefits in terms of effectiveness, low overhead costs and room for more funding, UCTs also have some disadvantages. First, there are the opportunity costs: UCTs can divert investments away from other programs. In particular, when local governments finance UCT programs, it can result in an underinvestment in public goods. Cash transfers are directed at households who are mainly concerned about their own private utility, and less about external costs and benefits, resulting in a market failure (Rosen & Gayer, 2005). For example, parents might underestimate the positive societal externalities of education and hence underinvest in (especially girl) education. Furthermore, poor households can have imperfect information, resulting in poor consumption and investment choices (Fiszbein & Shady, 2009). Hence, especially in regions with imperfect information or where public goods, education and health are highly underfunded or not subsidized, UCTs should not be seen as the one and only solution to target poverty, but as complementary programs, next to other development programs. Sometimes conditional cash transfers might be more effective than UCTs, especially when there are large expected positive externalities of improved education and health (Fiszbein & Shady, 2009). But in areas lacking educational and health facilities, conditioning cash transfers on health check-ups or school enrollment will be ineffective without simultaneous investment in these education and health sectors.
Finally, to conclude this section about disadvantages of UCTs, there is evidence based on a RCT that UCTs can have negative psychological externalities (Haushofer, Reisinger, & Shapiro, 2015). In particular, life satisfaction may strongly decrease for neighboring households who did not receive a cash transfer. Further research is required, but these negative externalities of envy can probably be remedied by giving everyone in the community who falls below a poverty threshold a cash transfer, and by providing relevant information to the community why some households get a cash transfer.
Next to the effectiveness (the costs and benefits) of UCTs, we can look at ethical considerations.
A first benefit of a UCT is that it respects the autonomy of the receiver. In other words, for those donors who value autonomy more than other measures of well-being, such as household income or health, UCTs can be supported, even when they happen to be less effective.
Next, from a utilitarian point of view, rich people may have a duty to donate money to the poorest people, because of the law of diminishing marginal utility of money (Diener & Biswas-Diener, 2002; Gossen, 1854). The more money you have, the less valuable is an extra amount of money. When a poor person receives an extra dollar, his or her well-being can improve as much as when a rich person receives hundred dollars. Or in other words, when a rich person donates one dollar to a poor person, he or she can improve the well-being of that poor person with a factor hundred compared to his own well-being.
A third argument why rich people may have a duty to finance UCTs for the poorest people, is that those cash transfers can be (partially) considered as a compensation fee to pay for damages done to poor communities. Let me give three examples: the use of natural resources, the place premium and the emission of greenhouse gases.
As Wenar (2008) argued, our international trade system involves trade in stolen goods. From a fairness point of view, we can say that everyone deserves an equal share of the world’s natural resources. Valuable minerals and raw materials in developing countries should belong to the local communities, but as a resource curse, those natural resources are often taken by force from the local communities. Local dictators and warlords steal the raw materials and sell them on the international market. Rich consumers buy stolen goods when they buy consumer products that contain those materials. Hence, those rich consumers have a duty to pay the poorest people a compensation fee for those stolen goods.
A second example is the place premium due to our global system of closed borders and migration restrictions (Clemens, Montenegro & Pritchett, 2008). Rich countries restrict their levels of immigration. As a result, the global labor market is not in equilibrium and there is a huge efficiency loss. When poor migrants are allowed to migrate to the places with higher labor productivities, their wages can drastically increase. According to some models, open borders and free migration could almost double global GDP (Clemens, 2011). A policy of closed borders means people in poor countries are harmed, by pressing down their wages. It is as if those poor people are prohibited to work at a higher paying factory.
Third, the high emissions of greenhouse gases can be considered as stealing emission permits from the poorest people. Suppose a global system of emission permits (a cap-and-trade system) was established, where every person receives an equal amount of permits. If those emission permits could be traded, their expected price could be close to $100 per ton of CO2 in 2018 (based on the high damage scenario under random estimated climate sensitivity in Dietz & Stern, 2014). The poorest people, who do not emit much CO2, could sell their permits to the richer people. An absence of such a trading scheme is equivalent to the situation where the emission permits of the poorest people are stolen. For example, if a rich person emits 10 tons of CO2 above a fair share, that person has to buy emission permits worth $1000 from the poorest people who have lower emissions than the fair share.
To conclude this section, let us now study some ethical considerations that plead against UCTs. First, if cash transfers are paid by local governments (instead of international donors), then perhaps conditional transfers are better than UCTs for political economy reasons, in particular when it comes to support by local tax payers (Fiszbein & Shady, 2009, p59).
Second, UCTs can result in a higher consumption and investments of goods with large negative externalities. The receiving households did not increase their spending on temptation goods such as alcohol or tobacco (Haushofer & Shapiro, 2013). But about 12% of the cash transfers goes to investments in livestock (Haushofer & Shapiro, 2013, p30). And the receiving households increased their consumption of more expensive foods such as meat, fish and dairy: the food expenditure elasticity of those animal products is larger than 2, which means a 1% increase in household income results in more than 2% increase in the consumption of those food products (Haushofer & Shapiro, 2013, p26). The problem is that animal products have large negative externalities for those who value the environment and animal welfare. Animal products have a high environmental footprint (Aleksandrowicz e.a. 2016; Clark & Tilman, 2017; Poore & Nemecek, 2018) and a high moral footprint (Saja, 2013). Although the context in poor countries is different from the factory farms in developed countries, the consumption and production of animal products in poor countries might still have a high moral footprint and hence worsen animal welfare. This ethical consideration can be remedied when rich donors of UCTs also invest in the development, production and promotion of animal free products that have lower footprints than animal products.
UCTs have benefits in terms of effectiveness, low overhead costs, room for more funding and respecting the autonomy of receiving households. There are several reasons why UCTs are ideal for rich donors: they have a duty to donate to UCT programs, both from utilitarian reasons (the law of diminishing marginal utility of money) and as compensation fees for harms done to the poorest people (such as closing borders and stealing natural resources and emission permits). Furthermore, rich donors of UCTs have also more opportunities to invest in the promotion of animal free products, in order to remedy the increase of the consumption of animal products by the UCT beneficiaries.
For local governments, financing CCTs and investments in public goods can be preferred above UCTs, because of support by local tax payers and market failures such as imperfect information by households and positive externalities of improved nutrition and health.
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