The Benefits and Drawbacks of Unconditional Cash Transfer

BY: KATHERINE GAN, SENIOR CONTRIBUTOR

In efforts to combat inequality and lift millions out of poverty, it has long been accepted that the best method is using foreign aid or conditional aid transfers. However, these tactics have been stalled by bureaucratic inefficiencies and corruption embedded in receiving countries. Therefore, it becomes necessary to look at other solutions such as unconditional cash transfers, even if this approach disputes traditional strategies.

Unconditional cash transfers have developed on the premise that giving cash to citizens allows them to have autonomy over their own lives. They can parcel out the monthly income received on health care, education, and food in order to meet their individual needs. This theory has been tested and well documented. In fact, in Uganda, a one- time, lump sum transfer had long term benefits, as “the people who received the cash ‘invest[ed] most of the grant in skills and business assets’ ending up ’65 percent more likely to practice a skilled trade, mainly small-scale industry and services such as carpentry, metalworking, tailoring, or hairstyling.’ This was not just an isolated case, as efforts around the world proved effective as well. In Ecuador, a short term governmental cash transfer program targeting poor mothers was found to improve the health and development of those children. Due to cash transfers, mothers were more likely to bring their children to health clinics or send them to school, resulting in the conclusion that “children whose mothers were eligible for transfers had outcomes that were…more than 20 percent…higher than those for comparable children in the control group.” This practice was beneficial even outside of local governments.

Give Directly, an NGO that championed the use of no-strings attached cash transfers, saw success as well. They gave $1,112 USD yearly, or $160 for seven months, to 137 Kenyan households. Afterwards, households increased their consumption and food security, leading to improved psychological wellbeing. Give Directly has used a model that eliminates waste, as only 10% is spent on overhead costs, and 90% is directly given to those the organization is seeking to help. Some express concerns that Give Directly, due to a lack of oversight, will encourage spending on alcohol and gambling. However, MIT’s Poverty Action Lab debunked this myth when they found that investments went to health care, education, and other necessary services that truly improved their lives.

Aside from international efforts, it should be noted that direct cash transfers could also work in the United States to serve millions of average Americans.. In fact, researchers at Columbia University found that “a universal child allowance in America of $2,500 a year would lift 5.5 million out of poverty, roughly reducing the poverty rate by a third.” and that this is preferable to expanding the child tax credit ” because the benefits reach the very poorest families, who don’t qualify for the tax credit”. Moreover, this could also support local businesses, as the funding would have a multiplier effect when the money goes to surrounding mom and pop stores and allows them to prosper.

While unconditional cash transfers are certainly promising at home and abroad, there remain concerns about the longevity of the program. Many argue that this policy is only beneficial in the short term, for in the period of a few years, nearly all progress can be easily reversed. Therefore, governments and other organizations have begun to develop companion programs that can bolster the transfers and reduce poverty in the long term. For example, by developing projects to build efficient, drought-resistant gardens, or training rural villagers to save their money rather than automatically spend it, citizens will acquire life-long skills.

The world’s most pressing issues cannot be solved with past solutions. As a result, programs like unconditional cash transfers should be explored and further developed in order to ensure that every dollar spent is truly a worthwhile investment.

Photo Credits: By Andres Chamba (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons