This House would give cash to the poor to reduce poverty

One of the reasons why poverty does not get eliminated is that it is governments who provide the subsidies that are intended to do just that. Many countries spend their money for subsidies poorly, for example in Indonesia before fuel subsidies were combined with cash subsidies in 2005 the top income decile received more than five times the amount of fuel subsidy as the bottom decile making the policy highly regressive despite it being politically sold as a subsidy to the poor.[1] No matter the intention such subsidies are clearly not fair. When the government provides lots of different subsidies for different things; fuel, food, housing etc., and especially when some of them are universal, it is clear that it will never be possible to distribute the money fairly on the basis of need.

[1] ‘Winds of Change East Asia’s sustainable energy future’, The World Bank, May 2010, Pp93-5

Subsidies are much fairer than providing cash. Subsidies can be directly targeted to provide the things that the poor need rather than letting the poor buy what they want. The government should not be providing money that is then being spent on cigarettes, instead it should be spent on food, heating, or the children’s education. Yes some subsidies are poorly targeted but this simply shows that these subsidies are poorly implemented, not that they cannot be the solution to poverty.  

Direct cash transfers can obviously be done very simply through simply handing out cash but this is clearly open to corruption. Instead money should be sent directly to the poorest’s bank accounts. In India the proposal is that the payments will be linked to the new biometrics based ID system that assigns a unique number to everyone based upon physical traits[1] (although this is not yet fully implemented) this will reach the whole population including those who currently have no identity papers.[2] This will enable those who get these ID to set up a bank accounts to enable the cash to be transferred to them as it will in effect be giving them with new ID.

[1] Glassman, Amanda, and Birdsall, Nancy, ‘Can India Defeat Poverty’, Foreign Policy, 8 January 2013

[2] Majumder, Sanjoy, ‘World’s biggest biometric ID scheme forges ahead’, BBC News, 13 February 2012

This is exactly why simply giving money to the poor is a bad idea; not everyone who is poor will have a bank account. Indeed those who are the poorest are by far the least likely to have one. In India only 21% of the poor have a bank account.[1]

[1] Glassman, Amanda, and Birdsall, Nancy, ‘Can India Defeat Poverty’, Foreign Policy, 8 January 2013

Most methods of attempting to eliminate poverty through state intervention are bureaucratic and inefficient and therefore inevitably are not very helpful. The subsidies India has previously provided to the poor is a case in point. In reference to food subsidies that provide for a 50% subsidy for those below the poverty line a 2010 study by the Asian Development Bank found that in rural areas 73% of recipients were above the poverty line so should not have been receiving the subsidy.[1] Providing money directly into bank accounts on the other hand is efficient as it is transferred electronically and can be set up to transfer without any human intervention. For the same reason it is very difficult to embezzle because it is going straight to a bank account from central government funds without passing through anyone’s hands.

[1] Jha, Shikha, and Ramaswami, Bharat, ‘How Can Food Subsidies Work Better? Answers from India and the Philippines’, ADB Economics Working Paper Series, No.211, September 2010, p.13

Providing money may in the long term reduce corruption for the reasons outlined but in the short term it may mean more corruption. With India’s program there have been accusations that the government is only enrolling people in districts that support the ruling party.[1]

[1] Thakur, Pradeep, ‘Why divide india into UID, NPR states?’, The Times Of India, 6 January 2013

All the evidence is that providing money directly to those who need it works much better than providing a mishmash of subsidies and credits decided by government. Providing money directly has been working with limited programs around the world, most prominently with Brazil’s Bolsa Familia which has meant millions of children get primary education because of a small cash incentive.[1]

In India the state already spends a huge amount on inefficient poverty reduction programs. If all the money that is spent on these programs was transferred to providing for the direct cash payments equally among the 70million households below the poverty line then it would provide a monthly transfer of 2,140 Rs; more than the poverty line income for rural households.[2]

[1] Economist, ‘Give the poor money’, 29 July 2010

[2] Kapur, Devesh, et al., ‘More for the Poor and Less for and by the State: The Case for Direct Cash Transfers’, Economic and Political Weekly, 12 April 2008, p.3

When it comes to the use of cash transfers on a large scale this is so far just wishful thinking; it may work but we don’t yet really know. How can the proposal of all subsidies being changed to cash be compared to a small stipend for sending the children to school? 

One of the reasons why poverty does not get eliminated is that it is governments who provide the subsidies that are intended to do just that. Many countries spend their money for subsidies poorly, for example in Indonesia before fuel subsidies were combined with cash subsidies in 2005 the top income decile received more than five times the amount of fuel subsidy as the bottom decile making the policy highly regressive despite it being politically sold as a subsidy to the poor.[1] No matter the intention such subsidies are clearly not fair. When the government provides lots of different subsidies for different things; fuel, food, housing etc., and especially when some of them are universal, it is clear that it will never be possible to distribute the money fairly on the basis of need.

[1] ‘Winds of Change East Asia’s sustainable energy future’, The World Bank, May 2010, Pp93-5

Subsidies are much fairer than providing cash. Subsidies can be directly targeted to provide the things that the poor need rather than letting the poor buy what they want. The government should not be providing money that is then being spent on cigarettes, instead it should be spent on food, heating, or the children’s education. Yes some subsidies are poorly targeted but this simply shows that these subsidies are poorly implemented, not that they cannot be the solution to poverty.  

Direct cash transfers can obviously be done very simply through simply handing out cash but this is clearly open to corruption. Instead money should be sent directly to the poorest’s bank accounts. In India the proposal is that the payments will be linked to the new biometrics based ID system that assigns a unique number to everyone based upon physical traits[1] (although this is not yet fully implemented) this will reach the whole population including those who currently have no identity papers.[2] This will enable those who get these ID to set up a bank accounts to enable the cash to be transferred to them as it will in effect be giving them with new ID.

[1] Glassman, Amanda, and Birdsall, Nancy, ‘Can India Defeat Poverty’, Foreign Policy, 8 January 2013

[2] Majumder, Sanjoy, ‘World’s biggest biometric ID scheme forges ahead’, BBC News, 13 February 2012

This is exactly why simply giving money to the poor is a bad idea; not everyone who is poor will have a bank account. Indeed those who are the poorest are by far the least likely to have one. In India only 21% of the poor have a bank account.[1]

[1] Glassman, Amanda, and Birdsall, Nancy, ‘Can India Defeat Poverty’, Foreign Policy, 8 January 2013

Most methods of attempting to eliminate poverty through state intervention are bureaucratic and inefficient and therefore inevitably are not very helpful. The subsidies India has previously provided to the poor is a case in point. In reference to food subsidies that provide for a 50% subsidy for those below the poverty line a 2010 study by the Asian Development Bank found that in rural areas 73% of recipients were above the poverty line so should not have been receiving the subsidy.[1] Providing money directly into bank accounts on the other hand is efficient as it is transferred electronically and can be set up to transfer without any human intervention. For the same reason it is very difficult to embezzle because it is going straight to a bank account from central government funds without passing through anyone’s hands.

[1] Jha, Shikha, and Ramaswami, Bharat, ‘How Can Food Subsidies Work Better? Answers from India and the Philippines’, ADB Economics Working Paper Series, No.211, September 2010, p.13

Providing money may in the long term reduce corruption for the reasons outlined but in the short term it may mean more corruption. With India’s program there have been accusations that the government is only enrolling people in districts that support the ruling party.[1]

[1] Thakur, Pradeep, ‘Why divide india into UID, NPR states?’, The Times Of India, 6 January 2013

All the evidence is that providing money directly to those who need it works much better than providing a mishmash of subsidies and credits decided by government. Providing money directly has been working with limited programs around the world, most prominently with Brazil’s Bolsa Familia which has meant millions of children get primary education because of a small cash incentive.[1]

In India the state already spends a huge amount on inefficient poverty reduction programs. If all the money that is spent on these programs was transferred to providing for the direct cash payments equally among the 70million households below the poverty line then it would provide a monthly transfer of 2,140 Rs; more than the poverty line income for rural households.[2]

[1] Economist, ‘Give the poor money’, 29 July 2010

[2] Kapur, Devesh, et al., ‘More for the Poor and Less for and by the State: The Case for Direct Cash Transfers’, Economic and Political Weekly, 12 April 2008, p.3

When it comes to the use of cash transfers on a large scale this is so far just wishful thinking; it may work but we don’t yet really know. How can the proposal of all subsidies being changed to cash be compared to a small stipend for sending the children to school? 

The beauty of direct cash transfers is that it simply adds a new income stream but this is also its Achilles heel. Providing direct cash transfers will create dependency upon the transfers and reduce the incentive to be earning money from elsewhere. There are several reasons for this.

• First because the transfers from the government will be reliable, unlike much of the income the poorest have, the transfers will become the recipients main form of income. This will mean that there is less incentive to be earning money from other sources, which would often mean hard work, so as a result both harming the individual as they do not earn as much and the economy as they will not be contributing to the economy.
• Secondly people will take up less work in order to qualify for the transfers; there is no reason to work more if that is simply going to mean that money you would have got from the government is taken away.

The advantage of in-kind transfers is that they help avoid expectations of long term assistance or the state essentially providing everything.[1] Dependency has happened with food aid in Ethiopia where more than five million people have been receiving food aid since 1984; far from getting better the food security situation has if anything been declining during this time and there could be much better use made of Ethiopia’s own resources; only 6% of the country’s irrigable land is used for agriculture.[2]

[1] Holmes, Rebecca, and Jackson, Adam, ‘Cash transfers in Sierra Leone: Are they appropriate, affordable or feasible?’, Overseas Development Institute, Project Briefing No.8, January 2008, p.2

[2] Elliesen, Tillmann, ‘Imported Dependency, Food Aid Weakens Ethiopia’s Selfhelp Capacity’, Development and Cooperation, No.1, January/February 2002, pp.21-23

Dependency is potentially a problem for any form of transfers with the intention of eliminating poverty while it is slightly different to be dependent on transfers of food the effect is the same. Direct transfers can however be made conditional upon the recipients doing what the government wants them to. In Brazil for example small cash transfers have been made conditional upon parents keeping their children in school.[1] There is little reason the conditions could not include earning some money from other sources if it is suspected that individuals are becoming dependent.

[1] Economist, ‘Give the poor money’, 29 July 2010

Governments have accepted, in documents like the universal declaration of human rights, that one of their primary roles is to provide a basic standard of living for their citizens. When the state simply hands out some money this responsibility is not fulfilled. The state is simply leaving the poor to fend for themselves with a little extra money. Governments provide subsidies in kind or for specific products and services for a reason; those are the things that are necessities rather than luxuries. If money is transferred directly then the person who is getting the money can use the government’s money on anything. Some may use it on the things the government was providing before but others will spend the money badly on tobacco, alcohol, or drugs. Subsidies however can be targeted at the things that the poor really need. This means the state provides subsidies for food, free or cheap housing and healthcare, fuel for cooking and heating etc. 

This is simply creating individual responsibility. A few will spend the money badly but most will realise that they need it for necessities. The whole point of the system is that it is flexible rather than limiting in the way other subsidy systems are. It should be considered that while some may misspend their money as suggested on drugs others may find ways of investing it so that they make more money and pull themselves out of poverty which then saves the government in the long term. Ultimately however it is the government that controls the flow of money; if someone is misspending it they can always halt the transfers. 

With subsidies at least the government knows what their money is being spent on. This is not the case with cash; it just gets taken and can be spent on anything. As already mentioned the most obvious examples are where the individual uses the money they are given on drugs or other harmful products not what they need. Yet there are times where individuals may simply not have their own best interests at heart for various reasons, particularly because they know no better. This does not just happen in economic situations but also in public heath. For example development agencies know that cooking on open fires in homes leads to thousands of deaths every year and is costly in terms of fuel. So thousands of clean smokeless stoves have been given out yet they are not being used despite them being cheaper to run and potentially a life saver.[1]

[1] Duflo, Esther, et al., ‘Up in Smoke: The Influence of Household Behavior on the Long-Run Impact of Improved Cooking Stoves’, MIT Department of Economics Working Paper, No.12-10, 16 April 2012

There are of course some occasions where the individual may use their money unwisely, but if they do then this is their choice. Those who receive aid are as deserving of being free to choose how to use their money as any wage earner. This choice only comes from providing cash rather than subsidies.[1]

[1] Glaeser, Edward, ‘Cash Is Better Than Food Stamps in Helping Poor’, Bloomberg, 28 February 2012