In my previous post, I talked about how one the biggest issues in economic development is that many of those who are living in extreme poverty lack access to capital. They have the motivation and capacity to pull themselves out of poverty, but they lack the financial network to provide loans and other financial services that would allow them to leverage into productive work. If we want to put our money to work that allows us to maximize our individual impact, we can use micro loans to recycle the same money over and over again; helping multiple people with the same resource.
Micro loans however can be a weird subject. For some, it may seem like there’s an oppressive implication that people in wealthy countries are handing money to people in impoverished regions of the world and then asking for the money back, which is a valid concern. It is a fine line where a loan goes from supportive to oppressive and it has to do with interest rates. A loan is only constructive if the borrower is able to generate a profit from the loan that exceeds the loan and interest total. Thus a high interest rate will make that net positive outcome less likely to be achieved, and thus more likely that it is not supportive and may be oppressive. So as long as you’re not personally generating profit from borrowers, and the borrowers are in positions to leverage the loan towards productive means, then the service is indeed helpful. But even still, for some that may too delicate situation to participate in.
The Cash Transfer Solution:
If you want to just give people money and not have to worry about repayments, there is an alternative called “Cash Transfers.” Cash Transfers operate under the belief that many of the humanitarian work is highly inefficient; instead of coming in and giving free rice, mosquito nets, or shoes, what these people really need is just cold hard cash edmedicom.com. Instead of being an outsider that is trying to solve a particular issue, it’s better to infuse the community with capital and the money will be used more effectively to influence people’s lives.
With Cash Transfers, there are generally two types: Conditional Cash Transfers (CCT), and Unconditional Cash Transfers (UCT).
CCTs operate under the assumption that money is the most effective means of positive impact, but direction is still needed to guide the recipients to make positive choices. This approach acknowledges that many of the systemic long-term issues that hold down families in poverty generally are solvable by the families themselves; The problem is that short-term issues take priority and families sacrifice long-term solutions to address the short-term ones. CCTs aim to mitigate the short-term issue so that families can be free to address the long-term solution by financially compensating them once they’ve met a certain set of requirements that the giving organization is aiming to achieve. For instance, a Mexican government program, Oportunidades (Now renamed as Prospera), is one of the original CCT programs to encourage children to stay in school. There are many pressures that a family experiences that make it difficult for children to remain in school, and one of the most prohibitive aspects is opportunity cost. A child in school is a child not helping the family run the family store or helping on the farm. So Oportunidades created a CCT program that would provide cash payments to the mother of a child enrolled in school if the child had a consistent attendance rate in class (http://www.worldbank.org/en/news/feature/2014/11/19/un-modelo-de-mexico-para-el-mundo). By making the cash payment conditional to a positive act, Oportunidades was able to encourage a long-term behavior change in higher class attendance rates, while being paired with a short-term constraint that affects poverty-stricken families.
Unconditional Cash Transfers are similar, but they take the concept of Cash Transfers even further towards simplicity in that they do not make the payment conditional to a set criteria. The idea is more straightforward in that the main issue in the community is lack of capital, and the families are in the best position to cover their needs with that added capital. Both of these methods have been shown to have dramatic positive improvements in target communities, but certain societal and economic conditions dictate which method may be more effective in a given community.
So if you don’t want to make a loan out, you can just cut out much of the middleman and get involved with an UCT program like GiveDirectly.org. This organization operates in the East African region of Kenya & Uganda, where donations are lumped together to provide $1,000 UCTs to families via mobile payments. Which in Kenya, the median individual earns just $0.65 per day in the target regions that GiveDirectly operates (https://www.givedirectly.org/operating-model). You have the option to select which country you would like to give to, but you don’t have control on whom to individually be given to.
GiveDirectly has become a media darling in recent years due to its straightforward approach, but also by providing plenty of data for academic research and evaluation. Part of the process that GiveDirectly invests heavily into is in its monitoring process, as they have been able to track who they have given money to, and to follow up afterwards to see how much the recipient’s life has changed. This process has been the perfect setup for testing the actual effectiveness of UCTs, and its because this process of evaluation is called Randomized Control Trials.
RCTs first became popular in medicine, and it was the method to test if a particular drug was actually achieving its intended result, or if it was just a placebo effect (This particular test requires a double-blind test where both researcher and patient don’t know what they took). RCTs are a series of experiments where you select at random a pool of subjects that you will test the experiment on with a given treatment, and then randomly select a group who during that same time will not receive the treatment. You then compare and contrast how those who were tested differ from those who were not. Since the data was randomized, there shouldn’t be anything unique about the individuals that set either group apart other than one was given a treatment or not.
GiveDirectly conducts many tests on its operations, and one major RCT that was conducted in Kenya concluded that those who received an UCT from GiveDirectly saw assets increase by 52% and children went without food for 42% fewer days (https://www.thelifeyoucansave.org/where-to-donate/givedirectly), all the while no increase was reported in the money being blown on tobacco or alcohol.
GiveDirectly is also experimenting with Universal Basic Income, and so you also have the opportunity to give to cover the UBI of individuals in East Africa as well, starting at $30 per month. This is the largest recorded UBI project ever, and it is currently being carefully monitored by Give Directly and through the RCT method.
As of 2016, GiveDirectly has funded roughly 400,000 people with a total of $80 Million.
If you wish that you could just hand a person $25 directly, which they will then use to feed their family when otherwise they would have gone hungry, you can do that. No more do we have to guess what it is that people need from foreign aid and provide goods and services that either get siphoned off through corruption, or goes to waste due to mismanagement. We can give directly and give the all the decision-making power to the individuals. People need to just be given a chance; that is true everywhere but especially in environments where economic mobility is severely limited.