March 18th, 2016 - Posted by Mark Presser
Distributors of welfare (namely government disbursements) face a common dilemma; are cash payments or in-kind transfers (purposeful remittance) more effective in helping those in need? In-kind transfers can take almost any form, really. They could be food vouchers, rent assist, or other types of non-cash welfare payments. In contrast, cash payments are, well, just that – cash straight into the pockets of welfare recipients.
In the NGO sector, we are increasingly seeing a trend toward cash transfers as the preferred method of giving, with organisations such as GiveDirectly, who utilise direct transfers, receiving generous donations from Facebook founders and other high profile philanthropists. A study released at the end of 2013 confirmed the positive short-term impact GiveDirectly has had on communities in Kenya through no-strings-attached cash payments that were delivered on the M-PESA mobile money platform.
Despite the higher costs (government research, administration, etc.) associated with in-kind transfers, we see an opposite trend in many government disbursement models. In the US, where it once made up around 40% in the late 60s, cash-based social welfare has dropped to 15% of total welfare disbursements. This defies traditional economic logic that suggests cash is the most efficient way to improve welfare because the recipient knows best what they need. The traditional logic seems to have been further validated by charitable organisations like GiveDirectly, who have recorded welfare improvements from direct cash payments.
One of the key reasons why in-kind transfers might be dominating government disbursement models is because of the targeting efficiency of such programs. For example, you can design an in-kind welfare model providing goods/services that appeal specifically to the people you are trying to reach, which in most cases is low-income individuals needing basic goods and services. This cannot be done as effectively with cash because it has a uniform, tangible value. Cash is worth the same dollar amount to everyone, so it is more difficult to get it to those who need it most while minimising incentives to earn less. For example, a program like food stamps appeals to someone who is hungry and cannot afford food and would be valued less by someone who can easily access food.
However, that is not to say the targeting issue can’t be avoided by well-designed cash payment programs. For example, low-income tax rebates that taper off slowly rather than sharply as income increases can stimulate the cash flow of low-income earners while incentivising higher wages. This way, governments can break dependency cycles and avoid providing an incentive to maintain lower incomes and receive welfare. If a tax rebate ends at an arbitrary threshold, people might not want to cross that threshold which can result in welfare dependency.
Another reason for the prevalence of in-kind transfers is the fear of misuse when cash is provided. How can taxpayers be sure money given is being spent in the best interests of the recipient? I guess the reality is that they cannot be sure. However, the vast majority of welfare recipients (who are legitimate users) are aware of their own, nuanced needs, and thus, should have the freedom to spend their cash most efficiently. It is disappointing to see individual liberty restrained because of a noisy media and a minority of welfare recipients. Preferencing in-kind transfers on this basis alone ignores other causative factors, such as lack of education, that lead to the misuse of welfare. More practical school curriculum and easier access to financial services are some of many measures that would address the root of the issue rather than cover it up.
Furthermore, the opportunity for fund misuse also exists with in-kind transfers. Despite (hopefully) best intentions, while bureaucrats are in charge of directing welfare, there will always be agency issues. Lobby groups, amongst a variety of other third parties, unduly influence the flow of in-kind transfers, resulting in an inefficient social security system. Essentially, in-kind disbursements add a layer of bureaucracy that gives rise to more opportunity for the misuse of valuable and scarce tax resources. This is a clear-cut advantage of cash payments; the final call of where the money ends up lies with the consumer. In other words, the money is always spent by, rather than for, the end user.
While there are clearly some differences between the objectives of welfare programs in advanced economies and NGO work in emerging economies, governments can still learn something from the cash-focused models that are increasingly popular in the charitable sector. At the end of the day, the goals of each program should be similar: to lessen the financial burden of the needy, so that eventually they be not needy.
Using mobile money platforms, the cash given by GiveDirectly has not been abused, but rather used to generate self-employment and put roofs over heads – literally. Exactly how much should be given and to who is a question beyond the scope of this post. But governments who are looking to save by minimising agency and friction costs can simply give directly instead, in a time where there have never been more ways to move money. This leaves the door open for more efficient welfare programs and thus better outcomes for society.