Nova workboard

a blog from young economists at Nova SBE

Cash Transfers – A debate of conditionality

Cash Transfers refers to a form of redistribution of wealth in form of direct cash grants by government to section of people it identifies as eligible for social security programs, instead of indirect programmes. They have become increasingly popular over the past decade in developing countries, who have started to realize the benefits seems to outweigh the risks they anticipated.

There were a number of myths prevailing around the risks of cash transfer to the poor and underprivileged. A common misconception is that handing money to poor households will lead to increased consumption of alcohol and cigarettes, cause dependency, lead to price inflation in the economy due to more money in the hand of the public. Research by UNICEF across African nations of Ethiopia, Ghana, Kenya, Lesotho, etc. has proven otherwise. There was no evidence of an increase in expenditure on alcohol or tobacco; there was a positive effect on the local economy due to increased consumption, and an increase in productive agricultural activities across six countries. While it is generally accepted that market forces would be the most appropriate means to reduce poverty, it does need a push from time to time, in form of direct government intervention like these.
However, the real crux of the debate lies in the nature of cash transfers. The opinion is split between whether cash should be given unconditionally to a particular set of identified households, or there be some conditions and actions necessary to be performed by the households before any transfer. Proponents of direct transfer argue that it is morally difficult to justify denying households assistance if they miss certain conditions, and result in exclusion errors. Proponents of conditional transfer suggest that these conditions lead to investment and spending on human capital factors – such as education, healthcare, etc. that has better long-term benefits.
Developing nations too, seems to follow different policy prescription. One of the biggest star of conditional cash transfer has been Bolsa Familia conditional cash transfer scheme of Brazil. It translated to a monthly stipend of 32 reais per school-attending child, who also had to have regular medical check-ups, to all families whose household income were below 140 reais per month. This programme saw a fall in extreme poverty from 8.8% in 2002 to 3.6% by 2012, at a 0.5% of GDP cost to the nation annually.
On the other hand, India launched Direct Benefits Transfer in 2012, which focused on substituting, and at some places complementing, existing food, fuel, & scholarship benefits. The government has since saved nearly $7 billions annually in form of leakages and corruption. Despite these, the program has been criticized for its implementation without existing infrastructure of financial inclusion and reliable cash disbursement in remote areas.
Economists suggest a combined approach is the way to go ahead. It is critical to identify the reasons of failure in education and healthcare, and tailor direct transfers with conditions specific to demographics features of the nation. As for results, only cross-country, time series experimentations will shed some light.

Abhaas Mohan

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Author: studentnovasbe

Master student in Nova Sbe

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