The cash option

Published : Mar 11, 2011 00:00 IST

CASH TRANSFERS THAT allow poor people to buy some food and other essential commodities in private shops will be much less effective in a period of rising prices of such goods. Here, at Pipari village in Uttar Pradesh, a daily-wage labourer feeds her child. - ALTAF QADRI/AP

CASH TRANSFERS THAT allow poor people to buy some food and other essential commodities in private shops will be much less effective in a period of rising prices of such goods. Here, at Pipari village in Uttar Pradesh, a daily-wage labourer feeds her child. - ALTAF QADRI/AP

Cash transfers, the latest global development fashion, involve several risks in India, not least the risk of forgetting the need for continuing structural change.

WHEN I was growing up, several decades ago, middle-class society in India was always a little delayed in catching on to Western fashions whether in music or dress or in other aspects. The past decades of globalisation seemed to have changed all that. Modern communications technology has ensured that at least the upper income deciles of the Indian population now have immediate access to knowledge about the latest trends and fashions in most parts of the world. And so there is hardly any time gap in the adoption of such fashion here as well.

Except, it would seem, in the matter of development policy. In this case, for some reason, Indian policymakers and practitioners tend to be behind the curve, taking up the fads emerging in the global development industry only with a lag, sometimes even after the ideas have been discredited in their place of origin.

As it happens, the area of development policy and within that, specifically of poverty reduction is hugely characterised by fads. This is also because of the tendency of the international development industry (including not just aid donors and multilateral organisations but also the huge range of researchers, experts and consultants funded by them) to keep searching for the single universal panacea, the magic silver bullet that will finally solve the problems of poverty and backwardness.

Within the span of just the past few decades, we have seen the fads move from an obsession with the Washington Consensus combination of macroeconomic and micro policies, to the extolling of microfinance, to the concentration on governance. The latest fad is that of cash transfers, which are now being cited everywhere as the solution to the problem of poverty. There has been a veritable tsunami of books and articles hailing cash transfers as the most necessary, obvious and imperative strategy for poverty alleviation.

These cash transfers can be conditional (subject to households meeting certain demands) or unconditional; targeted (given only to households or individuals meeting particular criteria) or universal. But essentially they amount to just what they sound like the transfer of money to people by governments, rather than the provision of goods and services.

The basic idea sounds so simple and easy that a toddler could think of it: Why are people poor? Because they have no money. So let us give them money then they will not be poor anymore. The proponents of cash transfers tend to present this as a radically new idea, some even suggesting that this is the recent creation of governments in the South, especially Latin America. In reality, of course, this particular idea has a long history.


Kautilya's Arthasastra specifies a system of taxation payments from the rich in order to enable transfer payments to the poor, including not only financial assistance during calamities but welfare payments to the chronically indigent and those unable to earn their own livelihood. Islamic rulers in the Middle Ages were required to follow the tenets of zakat, using state revenues to provide income transfers for the poor, the elderly, orphans, widows and the disabled. Other historical examples abound, including from Europe.

The basic idea of cash transfers (although not all schemes are identical) is to provide poor people with money and give them the freedom to choose what to do with it, rather than spending the money on what are seen to be cumbersome and inefficient public services.

Of course, this then generates other choices that have to be made: who gets the transfers? And how much? If they are universal, that will usually imply spreading the money around rather thinly, to the point where they account for very little. But if they are targeted, then the familiar problems of targeting (unfair exclusion, unjustified inclusion, large administration costs, possibilities of leakage) all become significant.

It is increasingly recognised that if they are to be effective at all, cash transfers have to be assured, relatively easy to deliver and monitor and large enough to affect household income. But that also means they have to be reasonably significant chunks of public spending. And this begs the question of what expenditures they are replacing.

Several of the more well-known success stories that are usually highlighted involve targeting and conditionalities upon recipients that range from light to onerous. Brazil's Bolsa Familia is a grant provided to families with less than a threshold monthly income, with the requirement of attendance at government clinics and 85 per cent school attendance. Another commonly cited example is the Oportunidades programme in Mexico, which is a highly conditional cash transfer system based not only on a complex system of eligibility (age, gender and level of education of each family member, electricity and tap water, household assets) but also requiring family members, especially mothers, to meet various time-intensive conditions such as attending talks about health and meetings and providing voluntary community labour.

By contrast, the South African scheme of universal pensions and child support grants is also described as a system of cash transfers, even though it is more akin to standard welfare payments that are common in almost all developed countries.

There is no doubt that progressive redistributive transfers are desirable. Indeed, redistribution is a major, even critical element of any fiscal system of taxation and public expenditure. Minimum income schemes for the destitute, pension payments for the elderly, child support grants, unemployment benefits and other forms of social protection are obviously desirable in themselves and constitute requirements for any civilised society, even the poorest one.

They also contribute in the short term to more effective demand and, therefore, have positive multiplier effects, and in the long term to healthier, better educated and more secure populations.

So the question then is not whether or not to oppose cash transfers in general, but rather what specific importance to give them in an overall strategy of development and poverty reduction. Cash transfer cannot and should not replace the public provision of essential goods and services, but rather supplement them. However, the current tendency is to see this as a further excuse for the reduction of publicly provided services, and replace them with the administratively easier option of doling out money.

In many countries, the argument has become one of encouraging governments to give the poor cash transfers that will allow them to access whatever goods and services they want that are generated by private markets, rather than struggling to ensure public provision.

Such a position completely misses the point. In Brazil, for example, Bolsa Familia can be based on minimum school attendance because there are enough public (and free) schools of reasonable quality that children of poor households can attend, which required prior public investment in quality schooling and teacher education.

Providing small amounts of cash to allow people to visit local private quacks will hardly compensate for the absence of a reasonably well-funded public health system that provides access to preventive and curative services. Cash transfers that allow poor people to buy food and other essential commodities in private shops will be much less effective in a period of rising prices of such goods.

This is important because it is not as if the discussion about cash transfers is operating in a policy vacuum. Ultimately, social and economic policies are all about choices, and this is most starkly evident than in the allocations of public expenditure. Governments typically do not have the luxury of being able to ensure enough spending to provide good quality public services and provide cash transfers that are large enough to be at all meaningful. In most developing countries, the choices to be made are not only about having good quality schools versus transfers that incentivise parents to send their children to school but even more basic choices: road or health clinic; electricity or piped water; schools or higher education institution; one airport or many railway stations; this region or that one?

In India, where much of this basic part of the development project still remains woefully incomplete, the urge to adopt (however belatedly) the latest international development fashion involves several risks. Not least is the risk that we will forget the necessity of putting in place the basic physical and social infrastructure required for a reasonable quality of life for all the people, and ensuring access to productive employment with good conditions of work. The need to provide direct transfers of income to disadvantaged sections of society is obvious and urgent, but it cannot allow us to forget the continuing need for structural transformation.

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