Apr 24, 2014

Why Giving Cash Helps Alleviate Poverty

This is an interesting piece on cash transfers by Christopher Blattman and Paul Niehaus. They mention and discuss some issues new to me, such as a possible effect of cash transfers on inflation, and why transfers do not work in certain instances: when there are positive externalities of specific types of aid, for example. 
... the forms of aid most likely to outperform cash will be those that address collective problems, or what economists term “public goods.” Consider health, for example. Say you were buying a vaccine to reduce your child’s risk of getting sick. A big part of the social value of this purchase would be reducing your neighbors’ risk of illness, too. If you had little cash to spare, the vaccine might cost more than it was worth to you but less than it was worth to the community at large. In this case, an outside group would be better placed to tend to the greater good by subsidizing the vaccine or even providing it for free. A cash transfer wouldn’t solve the social problem if the recipient had more pressing needs to spend the money on than the vaccine.
 And
Another concern about rolling out cash transfers on a large scale in developing economies is that an influx of money could lead to disruptive inflation. Whether that fear will materialize remains unclear. It will depend in large part on what the macroeconomic effects of cash transfers are compared to -- whether food aid, universal education, or other goods and services. Any large-scale influx of goods or currency has the potential to be disruptive, and so the real question is whether giving cash is worse than giving something else.
As the authors mention there is a long way ahead before transfers become the norm. The incentives, motivations, and mental models of individuals working for aid agencies are important. They might see cash transfers as simple, which takes "the fun" out of aid. That might not be the most important barrier, but worth considering. 

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