The Big Story

Changing poverty with a simple handout

Changing poverty with a simple handout

Posting in Finance | From issue 05 December 16 & 23, 2014

What if we just give cash — no strings attached — to the world's poorest people instead of building infrastructure?

In some of the poorest villages on earth, places where people subsist on less than a buck and a quarter a day, a single text message is pulling them out of poverty.

Governments, charities and development banks have spent billions of dollars and decades trying to help by building roads, schools, hospitals and other infrastructure. They've offered microfinancing, affordable housing and free medical care or focused on broad efforts to build a market economy that will lead to better jobs.

These programs might take different angles to break the poverty cycle, but they often use the same model by setting up big, bureaucratic agencies to run them.

But what if there were a simpler, more direct and maybe even cheaper way to end poverty? What if, instead of building schools, offering agricultural training or placing conditions on financial support, we just handed poor people a bunch of cash with no strings attached?

GiveDirectly is doing just that. The organization, which has attracted funding from Silicon Valley companies such as Google and people like Facebook co-founder Chris Hughes, who also sits on the board, is sending money via a direct mobile payment system to poor people living in villages in Kenya and Uganda. The recipients, who receive on average $200 a person or $1,000 per household over one to two years, can spend the money on anything they want. No advice. No conditions.

The results have been surprising. A long-awaited evidence-based study of the program challenges widely held beliefs that poor people aren't responsible enough to spend money wisely. Instead of confirming expectations that the money would be wasted on alcohol, tobacco, prostitution or gambling, the evaluation suggests the poor have a better sense of what they need than agencies, charities and philanthropists do.

"When people think of cash transfers they think of it as something you do exclusively as a palliative until you solve the real problem," said Michael Clemens, a development economist at the Center for Global Development. "What GiveDirectly has shown, through very transparent evaluation, is that for some people the absence of cash is the fundamental problem."

GiveDirectly has received much of the media attention in recent months, particularly after its findings were released in October 2013. Funding announcements, like the one in early December by Good Ventures to match funds up to $5 million on donations made through Jan. 31, 2014, have kept up the media buzz.

But it isn't the only organization to challenge the status quo. A number of groups and even governments are using technology or trying innovative approaches that disrupt the methods and beliefs of the international aid sector.

There is Landesa's new project with FrontlineSMS, which Google has backed with a $1.5 million grant, to use mobile technology to help 80,000 families in India secure land rights to their homes. Or the recognized seasonal employee scheme in New Zealand that has not only helped the country's horticulture and viticulture industries, it's increased the annual income of low-wage foreign workers from nearby Tonga by 1,000 percent.

And there's Charity: water, a nonprofit whose goal is clean drinking water for everyone. The group has revolutionized charitable giving through a mix of inbound marketing, brand partnerships and well-crafted content such as essays, videos and photos.

In some cases, the innovation isn't so much about how aid is given, but asking if it's working.

The Abdul Latif Jameel Poverty Action Lab, or J-Pal, and Innovations for Poverty Action have in many ways disrupted the standard practices in the international aid industry by promoting randomized controlled trials.

While they might be the gold standard in medical research, in the world of charity and economic development, randomized controlled trials were an anomaly until J-PAL and IPA came along. NGOs and governments often rely on case studies of a few targeted households, anecdotal evidence or retrospective analysis -- oftentimes leading to the continued funding of programs that don't really work.

Changing How Charities Give

Giving cash to the poor is not new. Governments have experimented, some quite successfully, with conditional cash transfers -- programs that give poor people money in exchange for meeting certain conditions like sending their children to school or going to job training.

Government-to-person cash payments are common in developing nations. An estimated $400 million in government-to-person cash transfers (G2P) were made to residents in developing countries without a bank account in 2009, and they're projected to hit $550 million in 2015, according to a World Economic Forum study prepared in collaboration with The Boston Consulting Group.

And then there are remittances, the money sent by foreign workers back to their families, sometimes as cash literally stuffed into envelopes. In some developing nations, annual remittances exceed international aid.

But there's a problem with cash transfers. That money is often lost through "leakage" and G2P payments, or that cash in the envelope, never make it to their intended recipient. They're lost through scams, misidentification, misreporting and underpayments. There's no conclusive study on the extent of leakage. But some estimates suggest leakage from G2P disbursements affects between 5 percent and 25 percent of total benefits routed and accounts for 75 percent of total losses, according to the BCG report.

"We don't know where that money went," said Michael Faye, director of GiveDirectly's board. "How do I know that these people got it? There's really no way to know. I put cash in an envelope, it's not auditable, it's not transparent. We'd like to fix that."

Some governments have switched to mobile financial services to better track G2P payments. And there's evidence that it has cut down on corruption and so-called "leakage." Switching to mobile financial services for G2P payments could allow developing nations to realize economic benefits of $100 billion a year by 2015, according to the BCG report.

So what makes GiveDirectly so innovative?

For one, the organization has taken the idea of conditional cash transfers common in developing countries, removed the conditions and made it available to private donors in the United States, said Jeremy Shapiro, who co-authored with Johannes Haushofer the first independent study, using a randomized controlled trial of GiveDirectly's cash transfer program. Shapiro is also a co-founder and former director of GiveDirectly.

Today, individuals can make donations through GiveDirectly's Web page. The donation moves through a payment-processing service to GiveDirectly's account. Small donations are sometimes pooled together and then distributed to the recipient. GiveDirectly also receives large donations and grants from foundations such as Good Ventures and Google.

The organization stands out for its lack of focus on the donor experience. Donors don't know who they're giving money to and the organization doesn't allow donors to "sponsor" a particular household. Instead, the organization is almost obsessed with the "customer" or user experience. After every campaign, a separate field team goes in the village and evaluates how well people were treated and whether they understood the program.

GiveDirectly also uses randomized controlled trials to judge whether the program is even working. Shapiro and Haushofer, with Innovations for Poverty Action handling the field tests, conducted a randomized controlled trial of the unconditional cash transfer program implemented by GiveDirectly in Western Kenya between 2011 and 2012.

"Part of the innovation is just raising the idea to challenge a lot of the ways that charities have been run," Shapiro said. "In some ways, that was more of the innovation rather than the cash transfers themselves."

And it's relying heavily on technology.

"A lot of people focus on what we do," said GiveDirectly's Faye. "We're actually more excited about how we do it, which is this technology and management platform."

GiveDirectly begins by using census data to identify the poorest sections of Kenya. Field workers go in and map an entire village and take a GPS-tagged picture of every house.

The tagged pictures are uploaded to GiveDirectly's server and satellite imagery is used to put a red circle around the GPS location. That picture is then spit out to a crowdsourced platform that asks people simple questions, such as "Is there a house in the red circle?" and "What is the house made of in the red circle?"

The crowdsourcing speeds up the task of locating homes with thatched roofs, which in the area where GiveDirectly operates is an indicator of poverty. The process has dropped costs and time of identifying these households by 85 percent, Faye said.

Field workers go back into the villages and register people who live in the thatched roof houses. Data is put into the server to screen and verify the recipients and to spot abnormalities. The beneficiaries are then given a mobile phone, the cost of which is deducted from their cash transfer, and GiveDirectly sends them a token transfer.

Once they've confirmed that it's gone through and that the beneficiary understands how the program works, GiveDirectly sends them the full transfer via Kenya's mobile money transfer system, M-PESA.

Technically, recipients don't even need a mobile phone to receive a cash transfer, Shapiro said. They just need a SIM card. The mobile phones are convenient because recipients receive a text message when the cash transfer has occurred.

GiveDirectly has conducted other cash transfer campaigns that use criteria besides the thatched roofs. In one campaign, they only gave cash transfers to women. In another, they experimented with giving money to every household in a poor village.

Right now, it's difficult for most folks to track their private donations, Faye said. And donors are also spending a lot of money on things the poor may not need or want, such as job training.

When GiveDirectly's founders started their cash transfer experiment, they set it up to be auditable, efficient and scalable.

For two years, GiveDirectly founders -- all graduate students with doctorates in development -- used their own money to see if operationally the cash transfer system would work. It did, and in 2011 they opened it up to the public.

But the real test still lay before them. A core tenet of their experiment was they planned to use hard evidence to determine if the program was pulling people out of poverty.

Results and lofty goals

Faye and Paul Niehaus, a co-founder and assistant professor of economics at the University of California San Diego, intentionally didn't pay themselves and held off hiring many full-time people before the evaluation results came out because they wanted the option of shutting the whole thing down.

The independent study, led by Shapiro and Haushofer, implemented by Innovations for Poverty Action and funded by the National Institutes of Health, found cash transfers have big, positive and sustainable impacts on poor people and the villages they live in.

The results of the randomized controlled trial, found recipients used the money to buy 58 percent more assets, with investments concentrated in livestock, housing and household durable goods. Business and agricultural income increased 28 percent of the average grant size, implying a 28 percent annual rate of return.

Children were 42 percent less likely to go entire days without food. And expenditures increased in nearly every category, but the researchers found no evidence of increased spending on temptation goods such as tobacco, alcohol or gambling.

Revenue went up in recipients' households as well. Revenue from animal husbandry increased by 48 percent and total revenue from self-employment rose 38 percent as a result of the transfers.

The study also found that psychological well-being improved and domestic violence against women fell, not just in recipient households, but in neighboring ones as well.

"It looks like there is a spillover effect," Shapiro said. "It would be interesting for someone to go back in and examine that further."

The transfer did not affect all indicators of poverty. There was little to no impact on health or education over the time considered in the data, according to the study.

Despite the generally positive evidence, the program still has critics and some bilateral aid agencies don't see the public good and social value of a cash transfer, Clemens said.

GiveDirectly has been clear that they don't believe cash is a panacea for poverty. But that message hasn't always gotten through.

"A lot of the reaction is, 'What do you mean that we shouldn't be funding any initiatives?' Or 'Do you think that just transferring money will eradicate small pox?'" Clemens said. "There's no danger that we're going too far (with cash transfers). What percentage of the UNICEF portfolio or the World Bank portfolio is giving cash to people to make their own decisions? Zero. So we don't have to worry about swinging too far. If 90 percent of money was used for funding public collective action and 10 percent of people got to decide how they could spend it, that would be way beyond the most optimistic scenario that they're envisioning."

The folks at GiveDirectly have lofty goals.

To date, the organization has transferred or committed $6.3 million, which includes a campaign underway in Kenya. On the heels of the positive independent study, the organization plans to build out its technology, scale up and eventually serve governments.

"We want to use cash and use cash transfers as a benchmark, and say before we do all of these other programs, some of which may be worthwhile, we should at least ask the question of whether or not giving the money directly to the poor does more good," Faye said. "That should be the benchmark."

Photo: Christine Olson/Flickr

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Kirsten Korosec

Contributing Editor

Kirsten Korosec has written for Technology Review, Marketing News, The Hill, BNET and Bloomberg News. She holds a degree from Northwestern University's Medill School of Journalism. She is based in Tucson, Arizona. Follow her on Twitter. Disclosure