Evidence continues to pile up against the notion that giving poor people money discourages them from working. A new analysis of seven government-run programs in developing countries further bolsters the case that providing cash assistance does not foster dependency.
“Across the seven programs, we find no observable impacts of the cash transfer programs on either the propensity to work or the overall number of hours worked, for either men or women,” according to the report, written by Abhijit Banerjee, Rema Hanna, Gabriel Kreindler and Benjamin Olken.
The team looked at existing research on programs in Honduras, Indonesia, Morocco, Mexico, Nicaragua and the Philippines. Despite variations, each program essentially gives money to poor citizens – a form of welfare that gives people cash and allows them freedom to spend it as needed. Some people believe that such handouts can drive people away from work, but that just does not happen across all the studies:
The above table shows that regardless of whether people are given cash, they are equally likely to have worked recently and worked an equal number of hours.
Cash transfers were once a well-regarded way to deal with poverty, but it fell out of fashion in the 1970s and 1980s. U.S. President Reagan and U.K. Prime Minister Margaret Thatcher’s welfare policies and rhetoric swayed attitudes against these programs for the poor. The idea that handouts build dependency took hold.
Aid programs began to focus on empowerment and the teach-a-man-to-fish mentality of assistance that is a hand up, not a hand out. Microfinance embodied that idea. People took out loans to start businesses. The loans meant the money had to be repaid and it was considered a way to help ensure that people spent it well.
At the same time two other ideas took hold: that men in particular, are most wasteful spenders than women, and that the poor generally spend their money poorly. The Grameen Bank and its founder Mohammad Yunus won a Nobel Peace Prize for pioneering micro-loans that target women. Proponents argued that women spent the money better than their male partners, making such loans safer and more effective.
New York Times journalist Nick Kristof was one of many who seized on the idea of the wasteful poor. As he wrote in 2010:
There’s an ugly secret of global poverty, one rarely acknowledged by aid groups or U.N. reports. It’s a blunt truth that is politically incorrect, heartbreaking, frustrating and ubiquitous:
It’s that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.
The story is based on research on spending habits of poor people by Banerjee and fellow MIT economist Esther Duflo. They broke down how poor families spent their money by conducting surveys in 13 countries across Asia, Africa and Latin America between 2002 and 2003. Expenditures on alcohol and tobacco were as high as 8 percent (Mexico) of household spending. Because spending on education was so much lower, Kristof concluded that money was being wasted. But the very same paper says the lower spending does not indicate misplaced priorities – it might be that kids could attend free public schools.
The assumption that poor people spend wastefully and become dependent on handouts reinforced attitudes against cash transfers.
But the massive success of government-run programs in Brazil, Mexico and elsewhere showed that not be the case. Recent research continues to show that when the poor are given money, it is not wasted on frivolous things such as booze and cigarettes.
A study on cash transfers in Kenya published in late 2013 shifted the conversation among aid groups and policymakers. A randomized-control trial of the program GiveDirectly measured how people spent the money and its impacts on their lives. In short, the study found that giving people money was effective at increasing investments and spending on things like food, education and livestock. Very little of the money went to “temptation goods.”
There are lessons for the U.S. in all of this. With roughly 1.5 million Americans living in extreme poverty, cash transfers and welfare programs offer an opportunity to help people get out of poverty for good. Giving people cash is not a silver bullet, but it is becoming increasingly hard to ignore the impact of such programs.