04 April 2011

Evidence *against* cash transfers

If an area is at all isolated with limited access to markets, cash transfers are going to be less effective, as they create a shock to demand with no increase in supply, raising prices for everyone. In-kind transfers increase supply and so don't raise prices in the same way. This paper test this theory, finding that the price rise caused by cash transfers to Mexican villages reduces the transfer value by 11%.

Is 11% a fair price for some choice, control, and dignity? I suppose you'd have to ask those Mexicans...


Amanda Glassman said...

I both like this paper and your point. I didn't read closely, but the authors don't take the administrative costs and leakage costs of in-kind distribution into account, do they?

Lee said...

I don't think so, but I did slightly misrepresent that headline stat:

"for in-kind transfers, the price eff ects represent an indirect bene fit equal to 12 percent of the direct benefi t. Thus, choosing in-kind rather than cash transfers in this setting generates extra indirect transfers to the poor worth over 20 percent of the direct transfer."

They also make these 2 important points;

1. "The fact that producer households adjust supply raises the question of how long-lasting
the price e ects would be. It is likely that supply would further adjust in the longer run, at least if there are no barriers to expansion or entry. We leave the question of the long-run
eff ects of the program for future work since the available data do not allow for such an

2. "The policy decision of whether to provide transfers in-kind or as cash includes many other
considerations besides price e ects. For example, in-kind transfers constrain households'
choices, which has costs, but also might help policy makers achieve a paternalistic objective.
Another important consideration is how e ciently the government can provide supply. It
could still be the case that an uncompetitive private sector creates more surplus than when
the government enters as a supplier; if the government is an ine cient producer, then the
gain in surplus generated by the fact that it maximizes welfare rather than pro ts may be
outweighed by other sources of ine ciency that it introduces."

Great paper.

Skeptical Bandit said...

Lee, the key point is that 20% figure is from Mexico, hardly a 'remote' market economy compared to most parts of rural Africa.

I remember having this quarrel with you earlier. In areas like South Sudan (and possibly disaster-hit areas), cash transfers would be ineffective and maybe even damaging - not everyone gets the transfers but prices rise for the whole market.

"Is 11% a fair price for some choice, control, and dignity? I suppose you'd have to ask those Mexicans..."
Hand-outs are demeaning. Period. I don't see why it is less demeaning to receive money than receive food. To draw a (maybe unfair) comparison, the 'choice, control, dignity' catch-phrase sounds a lot like Tory prevarication on the NHS right now..!

Lee said...

1. Make this a regular program and supply will adjust.

2. Just give everyone the transfers. This also solves the perverse incentive effect, and the richest who don't need it just won't bother collect. Or it can be recouped through a progressive tax.

a) In-kind handouts are more demeaning than cash.

b) If you are a citizen of a resource-rich country you have a right to a claim on those resources - it isn't a handout.

c) Extreme poverty is immoral. If we didn't use force to arrest the globalization of labor markets that extreme poverty would not exist. I think there is a pretty good moral and rights-based case for giving the poorest a larger claim on global production. Rights are not demeaning.

Skeptical Bandit said...

On your last comment:

1. "Make this a regular program and supply will adjust."
Maybe. Depends on a bunch of other things:

a) Most obviously, the cost of increasing market access vs. the magnitude of transfers - especially in low population density areas, the magnitude of transfers would need to be IMMENSE for it to be worthwhile for 'the market' to solve issues of road accessibility and security, which are key constraints to the development of markets, esp in Africa.

b)To the extent that issues affecting market access are common across traders, there is a coordination problem to be overcome - everyone has an incentive to free-ride and its a classic Prisoner's Dilemma.

c) Private solutions to common problems (lack of electricity, roads) are expensive. It breeds monopolists (or at best oligopolists) which goes hand-in-hand with high prices. Think Jit and VamP in Juba. NOt a good situation for basic services and primary goods.

2. "Just give everyone the transfers."
I agree. Although not sure how well progressive taxation can work in countries with mostly informal economies and very weak information base on taxable income. India still has an issue with this, most African countries are significantly worse. Redistribution of resource rents is a much more promising approach.

3. "a) In-kind handouts are more demeaning than cash. "
To take an extreme example, giving food to temple-priests is not demeaning, giving coins to beggars on the street may be. Is there any basis for this assertion?

b) "If you are a citizen of a resource-rich country you have a right to a claim on those resources - it isn't a handout."
Yes, if the transfer is being funded entirely by the national government, which frequently transfers are not.

But, apart from source of funds, what does this have to do with in-kind vs. cash transfers? The claim over resources is as strong or as dubious in either case. I don't see where the 'dignity' referred to in your post comes in.

c) "Extreme poverty is immoral..... Rights are not demeaning"
Agreed. But again, what does this have to do with the form in which transfers are made?

In choosing the form of transfer, its efficiency in raising welfare is the key determinant. If, by giving in-kind transfers, governments can reach the same welfare gains for less, the savings can go to more market-friendly investments - like roads, for instance. In the long or even medium term, this may do more for improving market access than just cash transfers.

I think a much more relevant concern is the one Amanda raised in the first comment. Can governments do in-kind transfers without greater leakages than cash transfers? The jury is out on that one but its pretty clear that often in-kind transfers are pretty badly done - look at the Indian food subsidy!

I know this sounds trite but there really is no 'right' answer. General rules of thumb that seem reasonable to me:

1. Cash transfers can work but supply needs to be elastic, competition present and barriers to market entry low.

2. Coordination problems make in-kind transfers the best feasible solutions sometimes. Building a school may be better than giving cash transfers for school enrolment if no schools exist.

3. Dignity isn't related to the form of the transfer but the nature of claim over the resources and how the transfers are packaged.

In short, let's not treat cash transfers as 'articles of faith' and create a religion out of it :)

Lee said...

Agreed on 1 and 2, but I still think cash is more dignified that in-kind transfers. Mainly because I'm a liberal and I have faith in individuals to make up their own mind about what they want. A common rationale for in-kind transfers is paternalism, which I find distasteful and patronising. I also think that choice is empowering, which is of course an empirically testable question...

c-sez said...

"evidence against cash transfers" is a bit of an overblown statement don't you think? granted, "evidence of the need for a good market analysis and before selecting your intervention approach" is waaaay less catchy.

there are areas in what one might consider the arse end of south-central somalia, that are plugged into about four separate external markets/sources for basic commodities. markets are more resilient than you think.

c-sez said...

Don't really have time to read the paper properly (lazy blog commenting at its finest eh?) but I read the intro and results.

I'm just a simple guy but I reckon there are very many program circumstances where you can put cash in the hands of villagers a darn sight more than 10% cheaper than doing it GIK; and it goes w/out saying that you monitor and adjust your payment size to the inflation of the price of a basket.

But then I'm more or less in the unconditional cash grants school. If that means bone idle big-brother watching welfare-bludging but well-fed and in-school south sudanese for the next decade, I'd do it tomorrow and call that a win. /fantasyland

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