The longstanding criticism for giving poor people money is that they will waste it on alcohol and tobacco. A new review of 30 studies from Latin America, Africa and Asia disproves that notion. In fact, people spend less on “temptation goods” after receiving a cash transfer.
“There is a sideshow on this belief that people are poor because they are spending their money on alcohol and cigarettes,” David Evans, a senior economist at the World Bank and co-author of the study, told Humanosphere. “This study tries to close the door on the sideshow. ”
Evans and his co-author Anna Popova looked at studies that either surveyed cash transfer recipients about spending habits or directly tracked spending. In all cases, from India to Kenya to Peru, the average recipient spent as much or slightly less on alcohol and tobacco after getting the money. The major exception is Nicaragua where two studies observed significant decreases in spending on those goods.
“This absolutely puts the questions to bed. We find that almost without exception that there is no significant impact and even in some cases a significant negative impact of cash transfers on alcohol and tobacco. And that is striking,” said Evans.
The spending impact is significant regardless of the type of program. In some studies, money was given with conditions. Recipients had to spend the money in a certain way or do specific things in order to get it. Others had no conditions, the money could be spent as people felt necessary. In both cases, people spent less on tobacco or alcohol. The same went for programs that gave a lot or a little bit of money and studies that tracked over the short term and long term.
Some studies tracked other types of personal spending. Researchers in the Congo looked at how much people spend on doughnuts and in Peru spending on chocolate was tracked. By comparing results across various dimensions, Evans feels confident in his conclusions.
“We do have estimates from Peru that beneficiaries are more likely to purchase a roasted chicken at a restaurant or some chocolates soon after receiving their transfer, but hopefully even the most puritanical policymaker would not begrudge the poor a piece of chocolate,” Evans and Popova wrote.
Another recent study on cash transfers found that they do not decrease the incentive to work. The two new studies effectively disprove the two leading criticisms for giving the poor money: they will stop working and they will spend it on beer and cigarettes. For Evans, the conversation can now shift to when cash transfer programs are appropriate and effective.
“When we think about cash transfers, the right question is, ‘do we make people better off?’ We see in the short run people are happier and in the long run they are using the money to improve their livelihoods,” he said. “Hopefully what these studies do is create an accurate depiction of the poor. The poor are hard-working people trying to make better lives for their families, like everyone else.”
Decreased spending on alcohol and tobacco may be due to what economists call the “flypaper effect,” he said. People or institutions are more likely to spend money as it’s intended when it comes with a clear label for use. In the case of transfers, telling people that the money they are getting is meant to help pay for the family may influence people to do that, rather than go out and buy a bottle of beer.
Many of the evaluated campaigns were accompanied by specific messaging around how to spend the money. Ecuador’s program also featured a public campaign encouraging families to invest in their children. Recipients in Zimbabwe were encouraged not to waste their new money.
It may also help that most programs give the money to women, instead of men. The idea that women are more likely to spend money on family needs than men is the backbone for microfinance programs. Evidence supporting that notion is mixed. Research on cash transfers in Burkina Faso and Morocco found that giving money to the mother or father did not affect outcomes on health clinic visits and school participation, respectively.
“We can’t rule out which of these effects are driving the reduction, but if I were to place a bet, it would be on the flypaper effect,” said Evans.
Understanding factors that prevent people from spending more on alcohol and tobacco is important. It is the kind of question Evans thinks should be discussed and tested. Research is currently under way to examine how complementary programs, such as training and mentorship, can amplify the benefits of cash transfers.
Whether people spend the money on alcohol and tobacco is no longer up for debate, he said.
“The fear that the poor will spend the money on alcohol or tobacco is not a reason not to do a cash transfer program,” said Evans.