Cash transfers are not investments in the poor

GiveDirectly and their unconditional cash transfer model have rightly taken the aid world by storm. The GiveDirectly model challenges social sector norms that presuppose nonprofits, rather than the poor themselves, posses the solutions to guide people out of poverty.

Like many in the social sector, I’ve written a lot about GiveDirectly and I am encouraged by much of what they do. However, others and I often refer to what GiveDirectly does as “investing” in the poor, a characterization I now believe to be incorrect.

Perhaps the argument I’m about to make is too steeped in semantics, although I think there is more than language in the distinction between a cash “transfer” and an “investment”. While cash transfers challenge the social sector norm that nonprofits are better stewards of charitable dollars than the poor, cash transfers, like most social interventions, are allocated based on deficits and needs.

Indeed, GiveDirectly goes through great lengths to identify the most impoverished individuals, then randomly selects households to receive a $1,000 cash transfer, equal to about one year’s wage in their target countries. The examples of how these households tend to use those transfers, such as building businesses or more robust homes are less examples of an NGO investing in households, and instead households taking a windfall to invest in themselves.

An investment on the other hand I believe entails a more merit based approach. At the Family Independence Initiative (FII) where I work, we provide capital to low-income families based on the positive initiatives people take, rather than the deficiencies we can quantify, a subtle but important distinction.

Needs and initiatives

The social sector exists to address social maladies. This focus on what is wrong with people often leads us to see people’s deficiencies, rather than their strengths. Transferring someone money because they are poor is an inherently needs based approach, even if the recipient uses that transfer to exhibit their strengths. Fundamentally it is no different than a welfare program that is means tested. In the United States, Temporary Assistance to Needy Families (TANF) is equivalently a transfer of cash to a poor family. As it is cash, it is up to the family to decide how that cash is spent.

TANF is not an investment. One qualifies for TANF based on what they are not (wealthy) rather than what they are (resilient, resourceful, etc.) An investment on the other hand is based on one’s accomplishments or potential rather than their needs or deficits. Venture capitalists invest in businesses based on past results and future potential. The poor are more than simply “poor”, and are worthy of real investment based on their potential rather than simply their poverty status.

Conditional cash transfers are not investments either

Before GiveDirectly popularized the concept of the “unconditional cash transfer”, governments were long experimenting with “conditional cash transfers”. As the name implies, a conditional cash transfer is a cash transfer based on a condition, such as a low-income family keeping a child in school. For each year a household meets a condition, like keeping a child in school, the household is transfered an amount of cash.

Although the conditional cash transfer is made with a purpose beyond simply one’s poverty status, the conditional cash transfer is not an investment either as the conditional cash transfer recipient is stripped of agency. The conditional cash transfer exists in the typical social sector mold whereby a nonprofit or government actor presupposes what is best for the impovershed individual or household and uses the cash transfer as an inducement to drive a given behavior.

An investment on the other hand is an investment in the agency of that individual or household. Inducing someone with cash to act a certain way rather than investing cash based on how someone acts are substantively different interventions. The former not only targets someone based on their poverty status, but also aims to manipulate behavior, while the latter recognizes the strengths and autonomy of the cash recipient.

Why cash transfers matter

I’m far from a critic of GiveDirectly. In fact, I’m a donor. While the GiveDirectly model, and cash transfers more broadly, are steeped in the traditional charity mold that recognizes the poor for their deficits, the evidence base that GiveDirectly is amassing makes a compelling case for investing in the poor, as the data suggests the households that get these windfalls invest in themselves.

Although much of the buzz around cash transfers focuses on the impact of the intervention, I think cash transfers are more powerful as a critique of the social sector itself. Every social program should have to demonstrate at the very least that its intervention is more effective than simply giving cash. This currently controversial concept should quickly become common sense.

But cash transfers are not the ideal end-game in the long run. Cash transfers are important because they highlight the investment worthiness of the poor. But they are not investments in the poor, as they are based on need and luck.

Investments should instead be based on initiative and merit. The problem of course is that various market distortions (where one was born, who one knows, etc.) mask the initiatives and investment worthiness of millions of poor people in the U.S. and billions around the world.

The cash transfer movement is an important investment in the future of the poor. But the future we need to aim for is one devoid of cash transfers at all, and instead one of ubiquitous, egalitarian investment opportunity.