analysisBy Jacob Kushner
Siaya, Kenya — According to proponents, direct cash transfers not only cut out admin costs and losses to corruption. They are also more empowering and effective.
In December 2011, Special Inspector General for Afghanistan Reconstruction Major Gen. Arnold Fields warned that the amount of US aid wasted in Afghanistan since 2002 reached "well into the millions, if not billions, of dollars."
Shortly afterwards, James Petersen, an auditor for US Agency for International Development in Afghanistan, suggested Fields had hardly even scratched the surface. "A mere 30 cents out of every dollar for Afghanistan goes to aid" after accounting for NGOs' administrative costs, he wrote in a January 2012 article. "[But] it gets worse," he continued. "Of that 30 cents, frequently only half reaches the intended recipient. The remainder is lost, stolen or misappropriated by Afghan workers and officials."
An 85% loss rate would be unacceptable in almost any other sector, and although perhaps not as stark, huge proportions of aid budgets are lost to administrative costs and corruption in many other countries too. A growing number of aid critics insist that this shouldn't be tolerable.
Fortunately, some people believe they have the solution. Instead of handing over billions of dollars to bureaucrats to devise ways to help the world's poor - and make aid vulnerable to 'leakage' in the process - why not just send one-time disbursements of cash directly to recipients so that they could lift themselves out of poverty?
Gimme some money
In Afghanistan, two NGOs put the theory to the test, and with impressive results. In a programme run by Oxfam, the British aid organisation initially offered food vouchers to Afghans willing to work on development projects in their communities but soon switched to paying participants in cash. According to an audit of the project, 90% of that money was spent on food. This meant that Oxfam avoided the overhead of procuring food itself, which was instead purchased by individuals in their own communities, re-infusing cash into the local economy.
When US-based Mercy Corps made the transition to cash transfers meanwhile, the majority of its Afghan recipients immediately used the money to pay off longstanding personal debts to local food and livestock traders in a demonstration of sound fiscal responsibility.
Equally promising results are now being observed in similar schemes in Africa.
The single largest experiment of unconditional cash transfers to date took place in Uganda. There, Columbia University political scientist and leading academic researcher of cash transfers, Christopher Blattman, spent four years monitoring and conducting randomised trials of a large government programme that gave one-time cash transfers to nearly 2,500 Ugandans.
Blattman found that "the program increases business assets by 57 percent, work hours by 17 percent and earnings by 38 percent." He also found that farmers and businessmen receiving cash grants saw returns on those grants in the range of 40-80% per year. The findings suggested that with the capital and freedom to do so, rural Ugandans invested their money gainfully.
All the way home
While the Uganda case was the most robust and long-term government cash transfer investment to date, Kenya is currently the leading recipient of private cash transfers thanks to the work of the GiveDirectly. The US-based charity makes transfers of approximately $1,000 - more than the average annual income of $780 - in two major instalments to some of Kenya's poorest families. An independent study of the programme compared 500 of the families that received cash to 500 that did not. It found that those receiving money saw their assets increase an average 58% over the course of a year and their monthly income increase 28%.
Last month, I travelled to western Kenya to interview some of the recipients of cash transfers in those communities. (My research was funded by GiveWell, a non-profit organisation that vets the work of international charities).
Most people said that they spent their money primarily on improvements to their homes such as buying a tin roof (instead of thatch) or even building a new home entirely. Many also used the money to pay their children's school fees.
A tin roof might not seem like the sort of investment that earns a return, but it can save a family hundreds of dollars over the lifetime of their house. Tin roofs can last up to 20 years, but thatch roofs must constantly be replaced, a costly and time-consuming process. Meanwhile spending on school fees not only invests in a child's future, but immediately infuses cash into the local community by paying the salary of a teacher or administrator who is likely to then spend that money locally as well.
According to a randomised control trial of the GiveDirectly scheme which compared the finances of those who received transfers in one community to those who did not: "Receipt of transfers increased households' non-land assets by an average of $279. The largest categories of asset increases were livestock ($85), durable goods ($53; primarily furniture), and savings ($10). Transfers also increased the likelihood that a household had an (tin) roof by 23 percentage points."
Two cash recipients I met went even further: They invested their money in assets that would continuously generate returns. One woman bought a pig that has already given birth twice to a total of 13 piglets, which she sells at about $10 each. Another man bought a water pump to irrigate his corn patch. He expects this will more than double his production. He says that he will use the corn to feed the chickens he intends to buy using the second and final cash transfer that he is due to receive in July.
"People used the money in different ways, to pay their children's school fees, to buy a motorbike, to build a new house like you see my neighbour has done here," the man explained. "I think everybody has used it well according to their own needs."
This is precisely what makes cash transfers different, and superior, to traditional forms of aid, proponents say. In an article for the Cato Institute Journal, former Lead Economist in the World Bank's research group, Branko Milanovic, wrote: "By delivering aid in cash, we do not tell poor people what they should do... and how they should spend their money. We just allow them to decide, without paternalism, on their own. And we improve, ever slightly, their condition."
Caroline Toth, Kenya Field Director for GiveDirectly, put it this way: "We view this as a much more respectful aid intervention. It doesn't assume that we know better what people need to improve their lives."
One cash recipient echoed these ideas eloquently, saying: "I think GiveDirectly might be ahead of all these [other] organisations, because now it is you who could fail. GiveDirectly has done their work."
Cash on delivery
Although GiveDirectly is a private charity, the success of the Ugandan government cash transfer programme suggests this new form of aid deserves a place in government foreign aid budgets as well. Indeed, the political climate in Washington is ripe to consider a major shift towards cash transfers. The Director of USAID, Rajiv Shah, recently urged Congress to replace in-kind distributions of US food aid with cash, which would allow people facing severe hunger during emergencies to procure their own food locally and quickly. USAID estimated the plan would also save $240 million per year.
Critics of cash transfers argue that cash will not help everyone equally. Studies of Ugandan and Kenyan cash transfer investments did find some anomalies - for example, people who spent their money in a manner that did not generate future income such as on alcohol. But proponents suggest that equality of outcomes is not the objective of such programmes. Cash transfers are not welfare, and only those who use transfers wisely will succeed.
As Abhijit Banerjee and Esther Duflo, the authors of Poor Economics, point out, the premise of a successful cash transfer investment is ensure that every individual gets a chance. The evidence suggests that with direct transfer schemes across the world, this may be happening.
Jacob Kushner is a freelance journalist currently based in Nairobi. He is the author of China's Congo Plan, an eBook from the Pulitzer Centre on Crisis Reporting avaiable on iPad, iPhone and Kindle. He reports on international peacekeeping, foreign aid and development, offshore tax havens, and Chinese mining and other investments in Africa.