Cash Transfers: A magic Bullet for development

Anmol Jain
Ashutosh Kedia
Academic Year: 2016-2017
Development Economics

Introduction

As the name suggests, cash transfers involve the direct credit of benefits
to a persons account in the form of cash. Such transfers may be
conditional or unconditional. Cash transfers are a widely researched and
debated upon interventionist tool to alleviating poverty. We believe this
topic is extremely relevant in a country like India where there has been a
digitization push recently after the demonetization drive and the
precursory opening of no-frills accounts for every individual as well as a
new programme of direct subsidies transfer effected by the present
government. It becomes important to research this topic so as to envisage
what the future of the country may behold and analytically predict the
future success of these schemes. Moreover, with below poverty line
people making a large chunk of the population it becomes indispensable
to device an appropriate strategy to uplift this section of the society. Thus,
to aim for a national development of India as well as other such
developing countries long term enablement of this section of the
population is necessary. Cash transfers, if applied properly can potentially
go a long way in achieving the same and thus needs to be analyzed
properly.

Cash transfer programmes of various types have been gaining popularity

recently. These are perhaps the only interventionist schemes that have
been studied in depth and empirical evidence is available both on their
success and failure.
Cash transfer, as the name suggests involves transfer of money to
recipients as a way to help them out of the vicious poverty cycle. Cash
transfers can be categorized as:

Unconditional cash transfer (UCT) programs that aim to reduce

poverty by providing welfare programs without any conditions upon the

receivers' actions. (Source: Wikipedia)

Conditional cash transfer (CCT) programs aim to reduce poverty by

making welfare programs conditional upon the receivers' actions. The

government (or a charity) only transfers the money to persons who meet
certain criteria. (Source: Wikipedia)
Examples of conditional cash transfers may also include subsidies for
weaker sections of the society to purchase essential items, like in the case
of removing subsidized LPG prices and transferring subsidy amount to the
needy persons to reduce the subsidy net.
The rationale for launching a conditional cash transfer program can be
two-fold

Keeping the marginalized out of the poverty net and misery- This
can include food stamps, unemployment allowances and small sums
of money for purchasing essentials for survival.

Effecting a generational change- This can include paying the parents

to send the children to school, paying the unemployed to attend skill

development workshops to increase their chances at employment

and eventual stopping of state benefits. Thus, CCTs seek to help the
current generation in poverty, as well as breaking the cycle of
poverty for the next through the development of human capital.

Aiding the poor in kind is obviously going to cost the government more
that transferring cash and letting them help themselves. In developing
countries like India, in order to support the poor, the central government
initiated a Public Distribution System where grains at a subsidized prices
were distributed to them. But such a system lead to several inefficiencies;
corruption and misrepresentation of economic status to name a few. A
study done by the Finance Ministry of India showed that transferring rupee
worth of benefit to such channels cost the government INR 3.65 (Shaikh
and Bhavsar, 2014). GOI then launched the Direct Benefit Transfer scheme
to deposit cash directly into the bank account of the eligible people. Along
with reducing the aforementioned inefficiencies, it also aided the
government in providing complementary schemes like scholarship,
pensions etc. to such families. The most important benefit that it brought
to the entire system was prevention of leakages of benefits (by rendering
the corrupt middlemen void) and reducing delay in the transfer of
benefits.
This scheme will help the poor in boosting their incomes and will promote
development as the right benefit is reaching the right person in the right
amount of time. Also, in order to garner the benefits of this scheme, the

poor are opening bank accounts which would further their push for social
and economic upliftment.

Measures taken by the Department of Social Welfare and Development in

Philippines gives an interesting case in point regarding the impact of
Conditional Cash Transfer schemes among poor Filipino families. They
launched a Modified Conditional Cash Transfer for Homeless Street
Families (MCCT-HSF) program wherein money would be given to those
families on the condition that they would send their children to school
regularly and engage in protective health care. Thus, short term
upliftment of the poor is achieved with the promise of developing long
term growth by creating educated, healthy and productive members of
the society. Cash transfer is subject to the behavior of the recipients
regarding the above conditions. Attendance and Immunization were found
to be 96% and 95% among children of the recipient families as recorded
by Department of Social Welfare and Development.

On the community level, these measures have helped reduce conflicts

substantially. Getting direct aid from the government negates the need for
petty crimes performed for mere sustenance. It also reduces the
enticement of joining terrorist or insurgent groups for money. Money,
disease, living conditions were some of the factors which led to unrest and
communal strife but all of those causes are now being eradicated from its
roots. Children who are growing up to be educated and responsible
citizens would further lead to reduction of crimes. Also, if the common

men feel that the govt. is doing something for them, they have done their
part and passed on information on insurgents (Crost, Felter and Johnston,
2012). A seamless flow of aid from government to its citizens would create
a sense of responsibility among the citizens towards the government and
thus ensuring a wholesome development of the country.

Cash transfers also inspire trust in the government, which can prove
beneficial in conflict-prone zones like insurgencies etc. A recent example
from India would include the demonetization drive- the poor workers have
forbade the rich employers to operate their own accounts to launder their
ill-gotten wealth due to a fear of snatching away of state benefits like cash
for food grains and gas subsidy.

Cash transfers also remove the fallacy of dual benefits. Somebody who
becomes gainfully employed will stop receiving the unemployment
allowance once his bank statements show regular receipts of income.
Similarly, the opportunity cost of joining the insurgency increases as such
a step would involve giving away the state benefits.

Another important aspect of the cash transfer scheme has been

empirically observed by several researchers wherein recipients of the
benefits have been seen to make productive investments of the cash.
Those who owned land made investments to further their agricultural
earnings. They also invested in purchasing livestock. Those who did not
own land either invested in land and started agricultural activities or got

involved in other sustainable activities. Although concerns regarding the

recipients getting overly dependent on the cash transfers have been
repeatedly raised, the aforementioned evidence goes to showing that
people are making an attempt to thoughtfully upgrade their livelihood.
Others can be driven towards the same through tacit driving force in the
local community as well as by government intervention. In Mexico,
consumption increased by 34% over 5.5 yrs with a 17.5% return in terms
of income per peso invested (Kabeer, N., Piza, C., & Taylor, L., 2012)

Any one program in individuality cannot work to solve the problems of

poverty alleviation. Although cash transfers may help in effective
distribution of aid to the most marginalized groups, investment in social
institutions like schools and healthcare need to be paired up so as to
ensure that the cash is spent in the right direction. Steps must be taken to
ensure that the unemployment allowance does not result into a poverty
trap where the net benefits of working gainfully are zero vis-a-vis living on
unemployment allowances. Similarly, benefits transfer must not be at the
expense of existing marginalized communities. An increase in allocation
for reducing drop-out rates for girls must not come at the cost of
eliminating financial incentives for families to send their boys to school, or
worse, put them out of school into hard jobs to augment family incomes.
This is where CCTs come into picture and can be regarded as a better
model of direct benefits transfer.

References

1. Shaikh, N., Bhavsar, R. (2014). Direct Cash Transfer- A Boon for the Aam
Admi
2. Crost, B., Felter, J., & Johnston, P. (2012). Conditional Cash Transfers
and Civil Conflict: Experimental Evidence from the Philippines.
3. Kabeer, N., Piza, C., & Taylor, L. (2012). What are the economic impacts
of conditional cash transfer programmes?.