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Offering Cash Alone to the Poor Is Not Enough

June 5, 2014

Thomas Kaydor

Cash transfer (CT) is a form of social assistance that occurs in three forms. It can be cash given to individual households, cash grants or cash for work and voucher programmes, and cash as an alternative to in-kind transfers such as agricultural inputs or non-food-items (Farrington et al. 2006). These three forms of CT are intended to address risk, and reduce chronic poverty and vulnerability. Cash transfers have proven to be a cost effective intervention for poverty alleviation. Although they have a positive impact on poverty reduction, mainly education and health outcomes, evidence remains inconclusive on the sustainability of such approach especially on sustainable economic growth and development (Arnold et al. 2011). This paper argues that offering cash to the poor is not enough to reduce and alleviate poverty. It proposes that CT should be matched with basic social services like free and compulsory government funded education, free public health system, and low cost housing for the poor. Structurally, the paper analyses and synthesizes the advantages and drawbacks of CT, and recommends free public education and health as well as low cost housing for the poor as a supplementary basic social service package that should be matched with cash transfers if poverty must be contained and alleviated.

Cash transfer (CT) programmes provide basic social protection by giving a set minimum cash amount to vulnerable groups facing significant risks of remaining in or falling into the poverty trap. Such programmes increase poor households' real income as a response to chronic poverty and food insecurity or other development challenges. Cash assistance takes variant forms, such as periodic or occasional needs-based transfers, non-contributory pensions and family allowances in the form of regular or occasional benefits paid to families with children under a certain age, amongst others. This practice has become widespread mainly in developing countries where social cash transfers are linked with certain behavioral requirements. In this regard, cash transfers can be used to increase school enrolment of children from poor families, or encourage poor families to do regular medical check-ups. Such cash transfers are called conditional cash transfers (CCT). Mexico was the first country to introduce a nation-wide CCT program in 1997, where cash transfers are conditioned on school attendance by the children of beneficiary households, and regular visits to health centres by household members (Lomeli 2008).

Mexico and Brazil are credited for good implementation in terms of targeting, administration and impact evaluation, raising optimism about a stronger role such programmes can play in poverty alleviation. Cash transfer programmes have a positive impact on poverty alleviation, especially with regards to health and education, and can potentially be used as a rapid and cost effective tool for poverty reduction. On health related gains, for instance, a 2008 study estimated that the birth weight of Mexico's CCT programme beneficiaries were on average 127.3 grams higher than non-beneficiaries, and incidence of low birth weight 44.5 per cent lower among beneficiaries. This improvement in birth outcomes was explained by better quality of prenatal care as well as the empowerment of women to demand and negotiate better care from health providers (Barber & Gertler 2008). Additionally, the Mexican CCT programme confirms a significant increase in enrolment rates of girls and boys in primary and secondary schools, with the transition rate to secondary schools for girls increasing by 15 per cent. Nevertheless, it was discovered that the impact of the programme is more limited on the quality of school performances and achievements (Hyun 2008).

Another positive aspect of CT is the impact of non-contributory pension programmes on poverty households. These pension programmes have reduced poverty amongst older people by 19 per cent in South Africa, and 53 percent in Brazil (Schubert 2005). Such outcomes have a trigger down effect on vulnerable children and orphans who normally care for older people in developing countries because the benefits are used to also support the kids in school and provide feeding. Contrary to in-kind benefits that can undermine local production and trade because they tend to undermine price levels and provide incentives for dependent on aid, cash transfers also have a positive spill over on local economy, through a stronger demand for local goods and services and increased investment on the supply side. A Zambian Kalomo pilot case study on social cash transfer reveals that while the local economy was inspired by the buying of essential goods like soap, blankets, food and agricultural inputs, some of the beneficiaries saved cash and later invested in animal husbandry and income generating activities (Schubert 2005). Comparatively, cash transfer intervention is considered cost effective compared to commodity-based assistance programmes whose transaction costs are higher.

For recipients, cash transfers present a more practical and cost effective solution, as cash is easily carried compared to food that must be transported from the distribution site thus placing additional burden on them. Beneficiaries sometimes trade the commodities at cheaper prices in return for cash to meet their priority needs. This provides beneficiaries with economic freedom, whereby they can decide to ration the utilization of their cash based on equally competing households' needs and preferences.

Despite these recorded gains of social cash transfer programmes, there are a number of drawbacks and challenges limiting CT impact on poverty alleviation. First, it has pitfalls and errors in resource allocation to individuals outside of the targeted population and sometimes excludes legitimate households (Lomeli 2008). These targeting errors normally occur due to wrong programme design and implementation, corruption, fraud, and deficient targeting methodologies. Beneficiary lists are sometimes manipulated through false reporting, bribery, deliberate exclusion of eligible or inclusion of non-eligible households (Van Stolk & Tesliuc 2010). For example, while in the Mexican CCT scheme some of the poorest households and qualified communities were denied health and education services, the Brazilian experience unveils concocted and deliberate targeting errors (UNDP 2006, The World Bank 2007).

Second, cash transfers sometimes create inflationary risks that undermine the intended benefits of the program. The injection of cash into the local economy at times causes inflation thereby diminishing beneficiaries' purchasing power, although cash transfers programmes in 15 Southern and Eastern African states show less proof of the causal link between cash transfers and inflation in targeted communities (Devereux et al. 2005).

Third, cash transfer programs are expensive to administer during the start-up, implementation and monitoring stages. However, administrative costs quickly decrease in subsequent years of implementation and reduce the average annual costs over the entire period of implementation. For example, in Mexico, the cost of targeting during the first year of implementation represented 65 per cent of total cost of the programme, followed by monitoring at 8 per cent and actual delivery of transfers at 8 per cent. Three years later, the major cost component of the programme was the actual transfers (41 per cent) followed by monitoring of conditionality (24 per cent), while targeting costs dropped to 11per cent of the program's costs. The cost effectiveness of such approach also depends on the selected payment modality (Hyun 2008;Hevia de la Jarra 2008).

Lastly, CT programmes are associated with security risks and corruption (Grimes et al. 2009). For instance, in Liberia, during the disarmament and demobilization process, vehicle carrying cash intended for ex-combatants that were rehabilitating highways was ambushed and high jacked by unknown gun men (NCDDRR 2004). In Ethiopia, there was a swap from food to cash transfers in all Red Cross programmes, in order to significantly reduce the theft, fraud and wastage that were associated with food distribution (Harvey 2005).To remedy this situation, CT programmes in post-conflict and emergency contexts use cash vouchers, since well-developed banking systems are usually scarce in such settings (Harvey 2007). Nevertheless, cash transfers have been successful in Indonesia, Thailand, Sri Lanka and India in response to the Tsunami disasters (Gore et al. 2006), and in conflict-affected contexts such as Liberia, Somalia and Afghanistan, though with extreme risk. In these contexts, private remittance companies were used to ensure reliable and safe cash delivery.

Using this analysis on CT, and drawing insights from its merits and demerits, poorer households benefiting from CT programmes experience a significant leap in reducing poverty (Kunnemann et al. 2008). However, cash transfers cannot singularly alleviate poverty because recipient families usually divert the cash received to other pressing problems instead of the purposes for which the cash is intended (Ahmed 2006). Social cash transfers therefore have to be supplemented and matched with the provision of basic social services like free and compulsory public education, free public health and low cost housing for the poor. With these essential social services, efforts to lift poor households out of poverty through cash transfers will be sustained and poverty will be alleviated in the long run.

Education grants to poor households and school feeding programmes make a significant impact on school enrolment in poorer communities (Arnold et al. 2011), but such programmes are not sustainable because they are cost intensive and short run due to scarce resources. Such interventions therefore occur in emergencies and conflict or post-conflict settings and are cut off once conditions stabilize. These schemes are therefore not the most appropriate right based approach to address illiteracy amongst the poor (Kunnemann et al. 2008). Governments in developing countries should therefore provide free and compulsory public education for vulnerable children whose parents cannot afford the high cost associated with education. With compulsory and free education public school system, governments could ensure that most, if not all, poor parents sent their children to school on a compulsory basis since there would be no fees and tuition payment as prerequisite for enrolment. The enforcement of such policies should entail punishments and sanctions on poor parents who refuse to send their children to school. Sanctions and penalties will incentivize poor parents' decision to implement the government's free and compulsory education policy. Matching cash transfer with free and compulsory public education would thereby guarantee that the cash given poor households is mostly used on feeding, essential goods and income generating initiatives from which the families can gradually get out of entrenched poverty.

Although free and compulsory public education complimented with cash transfers might boost school attendance amongst children of poorer households thereby decreasing illiteracy and ultimately increase living standards of poor families as education empowers the weak, vulnerable and poor health could constitute one of those services on which cash given to poorer families is spent since they often do not live under healthy conditions and can contract various infectious diseases, like malaria in the case of Africa's poor (Adato et al. 2008). In view of this, free public health programmes should form an additional part of the social service programme package in poor communities (Arnold et al. 2011). If poor households have access to free public health care system, cash given them through the CT schemes would be used either on food and other domestic needs. With free public health and education programmes, households would be better off saving their cash and investing in other income oriented ventures that will lead to sustained income growth, raise living standard and ultimately reduce and alleviate poverty.

In addition to lack of affordable access to education and health amongst poor households, the lack of affordable housing is usually one of the major problems poorer families face. Poorer households hardly have the means to construct decent homes to live in. Most of them in urban areas live in slum communities amidst poor sanitary conditions and thus risk contraction of infectious diseases leading to premature deaths. Lack of or poor and inadequate housing for poverty households is execrated by lack of money to pay for education and health related costs (Kunnemann et al. 2008). Poor and destitute families consequently live unhealthily in squalors, bear their children who grow up in poor environment and in turn are themselves entrapped in poverty. These children grow up without gaining affordable access to education, thus perpetuating the vicious circle of illiteracy amongst the poor. They are entrapped in a poverty web such that public policymakers have initiated the transfer of cash to support the poor meet basic livelihood supplies insufficient for alleviating poverty. These social cash transfer programmes therefore need to be accompanied by a comprehensive social service scheme to include construction of low cost housing in addition to free public health and education systems for poorer households (Arnold et al. 2011). With decent low cost housing facilities, free public health care service, and free and compulsory education system, destitute and very poor families will become better off using their cash on food and possibly investment in income generation activities that will create sustained growth, increase wealth and raise living standards amongst the poor.

To conclude, cash transfers to poorer households substantively reduce poverty and pave the way to poverty alleviation (Arnold et al. 2011). However, such programmes are inadequate to alleviate poverty because cash transferred to beneficiaries is used for various competing alternatives and imperatives. Cash transfers alone therefore cannot sustainably reduce curb or alleviate poverty. In lieu of this, developing countries should design and provide an additional assistance through the provision of free education and health care system, and low cost housing to compliment CT. A combination of social cash transfers and this basic social service package (free public education and health system, and low cost housing) will permit poorer households make trade-offs and direct their cash to productive ventures like agricultural activities for food sufficiency and purchase of essential goods to lift them out of poverty. Offering cash to the poor is therefore not enough. This needs to be complemented with basic social services to get the poor out of poverty.

References

Adato, M & Hoddinott, J 2008, Lessons from cash transfers in Africa and elsewhere: impacts on vulnerability, human capital development and food insecurity, IFPRI Presentation to Regional Inter-governmental Experts Meeting, Cairo, Egypt.

Arnold, C, Conway, T & Greenslade, M 2011, 'Cash transfers literature review', Department of International Development (DFID), University of Sussex, Britain.

Barber, L & Gertler J 2008, Empowering women: how Mexico's conditional cash transfer program raised parental care quality and birth weight, viewed 6 April 2014,

Devereux, S, Marshall, J, Macskill, J & Pelham, L 2005, Making cash count: lessons from cash transfers in east and southern Africa for supporting the most vulnerable children and households, Save the Children UK.

Farrington, J & Slater R 2006, 'Introduction to cash transfers: panacea for poverty reduction or money down the drain?', Development Policy Review, vol. 24, no.5, pp. 499-511.

Gore, R & Patel, M 2006, Cash transfers in emergencies: a review drawing upon the Tsunami and other experience, UNICEF, Bangkok, Thailand, >.

Grimes, M & WÄngnerud, L 2009, Curbing corruption through social welfare program? The effect of Mexico's conditional cash transfer program on good government, QoG Working Paper Series, viewed 6 April 2014, >.

Farrington, J, Harvey, P & Slater, R 2005, Cash transfers: mere "Gadaffi syndrome" or serious potential for rural rehabilitation and development?, ODI , viewed 5 April 2014, >.

Harvey, P 2007, Cash based response in emergencies, Humanitarian Policy Group, Briefing paper, viewed 5 April 2014,

Hevia de la Jarra, F 2008, 'Between individual and collective action: citizen participation and public oversight in Mexico's Oportunidades programme, State Reform and Accountability: Brazil, India and Mexico', International Development Studies, vol. 38, viewed 20 March 2-14, http://www.scribd.com/doc/10076161/Hevia-Felipe-participation-and-social-accountability-in-progresaoportunidades-mexico.

Hyun, S 2008, Conditional cash transfers programs: an effective tool for poverty alleviation, Asian Development Bank Economic and research Department Policy Brief Series N°51, viewed 6 April 2014,

Kunnemann, R & Leonhard, R 2008, A human rights view of social cash transfers for achieving the Millennium Development Goals, Brot Fur die Welt, Stultgart, Germany

Lomeli, E 2008, 'Conditional cash transfers as social policy in Latin America: an assessment of their contributions and limitations', Annual Review of Sociology, vol. 34.

National Commission for Disarmament, Demobilization, Rehabilitation and Reintegration (NCDDRR) 2004, Annual Report, NCDDRR. Government of Liberia, Monrovia.

UNDP 2006, Social protection: the role of cash transfers, poverty in focus: conditional cash transfers in Latin America, International Poverty Centre, viewed 6 April 2014,

Schubert, B 2005, Social cash transfers, reaching the poorest, GTZ, Germany.

The World Bank 2007, Control and accountability mechanisms CCT: a review of programs in Latin America and the Caribbean's: 7 case studies', Operational Innovations in Latin America and The Caribbean, vol. 1, no.1, viewed 1 April 2-14,

Van Stolk, C & Tesliuc, D 2010, Toolkit on tackling error, fraud and corruption in social protection programmes, World Bank, viewed 19 March 2014,


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