Argument

In Defense of the Handout

In Defense of the Handout

The International Monetary Fund (IMF) just issued a major report warning that rising levels of income inequality are threatening to undermine global economic growth. In places like the United States and South Africa, the top 1 percent of earners continue to disproportionately expand their wealth, as Latin America and sub-Saharan Africa remain the most unequal regions in the world. Prominent among the handful of steps advocated by the IMF to more efficiently redistribute income and wealth is a plan that is sure to raise some eyebrows: giving cash directly to the poor.

While using what economists and development experts call "conditional cash transfers" to combat poverty and reduce inequality has gained enormous momentum over the last decade (and a huge degree of hype in places like Kenya and Uganda), it still strikes many casual observers as profoundly counterintuitive — particularly coming from traditionalist institutions like the IMF and the World Bank. After all, doesn’t the idea of simply just giving money to the poor run directly in contrast with the old axiom about teaching a man to fish? (This, after all, has been the guiding rule of engagement under which the IMF and most aid agencies have operated.)

But there’s a good reason why these institutions are holding conditional cash transfers in high regard. For one, the lessons from the use of cash transfers over the last decade suggest how profound our own misconceptions about poverty, development, and entitlements have been. In discussions about poverty — whether concentrated in the United States’ inner cities, small African villages, or Brazil’s slums — there has always been a strain of thought, particularly among conservatives, that the poor somehow deserve to be poor because of bad work habits or a reluctance to pull themselves up to a better existence. Republican Congressman Paul Ryan landed in hot water just last week after he suggested that urban poverty was driven by "generations of men not even thinking about working or learning the value and the culture of work."

The use of conditional cash transfers exploded into view a decade ago when Brazil established the Bolsa Familia or "family allowance" program, modeled on a much smaller pioneering Mexican program. Families below a set two-tier poverty threshold (with incomes, currently, of about $60 and $30 a month respectively) are given a yellow Bolsa Familia debit card, and the government credits this card with a set amount of money each month (roughly $13-$127) depending on variables such as the number of children in the home. The program initially targeted 3.6 million families in 2003, and covers over 12 million families today.

Predictably, the program was met with a firestorm of criticism when it was established in October 2003. Otaviano Ferreira Martins, a mayor from the Brazilian Social Democratic Party, complained, "The danger is that it will leave the people addicted to handouts." Others, such as popular conservative blogger Reinaldo Avezedo, said that the plan would encourage poor women to have more children to receive greater monthly payments.

Bolsa Familia was designed by Brazilians who understood the specific context of their own country: a geographically diverse nation with more ATMs (159,898 at last count) than any other country on Earth, but a large number of people living in extreme poverty when the program was launched. The goal: to ensure that no Brazilian lives on less than $1.25 a day, the currently accepted international threshold for extreme poverty as defined by the World Bank.

Brazil ties very specific strings to the money, not as a punitive measure, but to better position it to invest in the future. Wherever possible, in accordance with the cultural belief that women make better decisions about investing in the future of their children, the matriarch of the family is given control of the debit card and 90 percent of the beneficiaries are women. If families fail to have their children attend school on a regular basis, don’t get them vaccinated, or miss regular medical checkups, payments are suspended. All Bolsa Familia beneficiaries are centrally registered and publicly listed on a government website.

The results have been dramatic. A 2013 study by The Institute of Applied Economic Research estimated that Brazil reduced extreme poverty by 89 percent over a decade, lifting 36 million families above the $1.25 threshold during that time. In just five years, the program helped reduce infant mortality rates by 20 percent. The high school completion rate for poor families that stay in the program is now actually higher than the national average, a stunning accomplishment. Brazil’s immunization rates are on par, and in some cases better than, those of the United States. All of Brazil’s major political parties now support the program.

With more resources, and more predictable resources, numerous evaluations have found that participants of Bolsa Familia appear to be making strategic decisions to invest in the future of their families. Mothers with a bit of extra money from the program are more likely to buy food, shoes, and school supplies, rather than waste the money on things like alcohol or luxury items. And, contrary to the old conservative line about welfare mothers procreating to engender better benefits, the number of births per woman in the lowest income category dropped 30 percent, significantly faster than the national average. According to Brazil’s National Household Survey, the program has not discouraged work.

For all its success, however, Brazil’s program is not without its problems. Some left-wing critics, such as Lena Lavinas of the Institute of Economics at the Federal University of Rio, for example, have been critical of the program for not doing enough to alter the fundamental dynamics that drive income inequality. But despite its detractors, conditional cash transfers quickly became the hot new approach in development.

One of the early champions of the approach was Nancy Birdsall, the president of the Center for Global Development who argued in 2004 that, ‘"these programs are as close as you can come to a magic bullet in development." High praise indeed. In 2012 alone, more than 120 different delegations from around the world visited Brazil to learn more about Bolsa Familia, and more than 30 countries now have some form of conditional cash transfers in place, reaching 750 million to 1 billion people around the globe.

But if conservatives were too skeptical of cash transfers, development experts and politicians run the risk of being too enthusiastic. With all things in development, the design of these programs is crucial. An effort by former Mayor Mike Bloomberg to import the conditional cash transfer model into New York City fizzled after a three-year pilot, in part because the program was built to reward school attendance — but school attendance was already high. In addition, the New York program rewarded improved test scores, but didn’t do much to help those students achieve those higher test scores. The New York program paid for performance rather than participation, but raising overall achievement is complicated.

As an excellent review of the impact of cash transfers by the British aid agency Department for International Development (DFID) makes clear, cash transfers can be enormously powerful in driving up the numbers of people able to access key social services like schools and health systems, but the power of such gains are muted if a country isn’t able to simultaneously improve the quality of such systems. It doesn’t do a country much good if it gets everyone to go to school but the schools are still lousy. Along the same lines, the Overseas Development Institute found that cash transfers weren’t very successful in actually lifting families out of poverty in a lasting fashion unless they are coupled with other efforts such as vocational training. The New York schools program probably would have worked better if it offered students mentoring and other help alongside the cash payments.

The relative success of conditional cash transfers has also encouraged policymakers and NGOs to experiment with an even bolder idea, unconditional cash transfers, i.e., giving money to the poor with no strings attached. The jury still seems to be out on the long-term effectiveness of this approach.

At the end of the day, this idea of giving cash to the poor has changed the debate because these programs — when well-designed — can be cost effective, help break inter-generational cycles of poverty, and promote greater economic equality. But with big money rushing into these programs, and their backing by the IMF and the World Bank, it is perhaps best to paraphrase former U.S. Speaker of the House Tip O’Neill, and remind practitioners that in the end all development is local.