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Reality is not yet matching rhetoric in moving from “billions to trillions” to finance the SDGs—how can we accelerate sustainable development finance?
To meet the Sustainable Development Goals, the world must ramp up development financing from billions to trillions. We must think beyond aid, to private finance and unlocking developing countries’ own resources. How development financing is mobilized and allocated must also change. Shared problems like climate change and the threat of pandemics can only be addressed through international cooperation. In addition, the rise of China as a major bilateral development partner and the emergence of new development agencies raise the question of whether the existing multilateral financing system is fit for purpose.
Our research focuses on four questions: How can international finance produce sufficient funding for development? How should it be allocated to meet both ongoing needs and future challenges, such as climate change and pandemics? How can financing most effectively mobilize private capital, safeguard public monies, and keep debt levels sustainable? And how should existing institutions be changed to best assist?
The paper critically reviews the arguments for and against both employment guarantees and income guarantees when viewed as rights-based policy instruments for poverty reduction in a developing economy, with special reference to India. Evidence on India’s National Rural Employment Guarantee Act does not suggest that the potential for either providing work when needed or reducing current poverty is being realized, despite pro-poor targeting. Instead, work is often rationed by local leaders in poor areas, and the poverty impact is small when all the costs are considered.
Drawing on six sweeps of household surveys of Nigeria that together span 1980–2010 with a pooled sample size of about 97,000 households and data on Nigeria’s age-gender-specific life expectancy from the World Health Organization, this paper shows that about 72 percent to 91 percent of Nigeria’s poor are at risk of spending their entire life below the poverty line.
Last week, CGD co-hosted an event with the International Rescue Committee (IRC) with a simple premise that contradicts much conventional wisdom: refugees are not a burden, but a development asset. That premise compels the question: what policies, financing, and partnerships are needed to realize the promise of mutual benefit?
Jordan is among the pioneering countries trying to flip the script. The country hosts more than a million Syrian refugees and is partnering with the World Bank, European Union, and others to recognize and support refugee rights, while expanding development gains for all. A key anchor for this effort is funding from the World Bank’s Global Concessional Financing Facility (GCFF), which provides lower-rate loans to middle-income countries to help meet the development needs of refugees and host communities. These loan subsidies are a recognition of the public good generated by the investments. By promoting refugee protection and well-being, Jordan is providing benefits beyond its borders, such as supporting regional stability and fulfilling international moral and legal obligations.
GCFF’s efforts to incentivize investments in global public goods come at a critical time. So we brought together some of the leading actors and thinkers in this space to discuss the successes and challenges in implementing this new approach. How we can build on GCFF’s innovation in differential pricing of loans to spur investment in other public goods, such as disaster preparedness and climate change mitigation and adaption? World Bank CEO Kristalina Georgieva, Jordanian Minister of Planning and International Cooperation Imad Fakhoury, CGD President Emeritus Nancy Birdsall, and International Rescue Committee President and CEO David Miliband engaged in a candid and lively discussion steered by Devex Editor in Chief Raj Kumar.
Our five key takeaways
We must keep our focus on displacement, even when the headlines stray. These new approaches will be ineffective if the international community loses focus as the 2015 wave of migrants to Europe recedes in memory. The fact remains that there are still over 20 million refugees around the world, and more than 40 million internally displaced people who could become tomorrow’s refugees. We need to stay focused to address the crux of the humanitarian-development divide: displacement is often protracted, and requires longer-term partnerships. The need for sustained effort is even more needed when it comes to prevention and preparedness.
We need to reshape our approach so that support follows need. In an era of global challenges, the level and type of response cannot be based on rigid classifications. As Georgieva noted, Syrians fleeing the war are as—or more—vulnerable than many in low-income countries. But before the creation of the GCFF, the World Bank did not have a way to offer concessional financing to Jordan to help meet the needs of Syrian refugees or cope with the shock of the crisis. Beyond the near-term fiscal cost of hosting refugees, Jordan has lost important trade and economic opportunities that could stall development gains for years to come. Funding and attention are frequently directed to places where responses fail. Minister Fakhoury emphasized the need for incentives that encourage the international community to offer support throughout the cycle of a crisis that matches the changing needs.
Developing appropriate incentives requires clarity on the desired outcomes. Having financing available to host countries is one challenge, but structuring implementation in a way that delivers tangible results is another. As we lay out in our new policy paper with the IRC and as highlighted by Miliband, incentives could have been better aligned with desired results in the Jordan Compact. A quota on refugee work permits does not necessarily translate to creating jobs for refugees and hosts. An emphasis on work permits has largely led to the formalization of existing jobs; while this has important benefits, greater attention to other measures (such as formalizing home-based businesses) may have done more to increase incomes and spur the local economy. A clear and shared definition of success can help ensure incentives and programs are pulling toward the same outcomes.
The GCFF changed the game by introducing a financial innovation to better meet needs. In 1960, the Bank’s International Development Association (IDA) brought new and groundbreaking innovation to how the global community did development assistance, creating a platform to lend to developing countries on favorable terms by leveraging multinational donor backing. As Birdsall noted, half a century later, the GCFF has potential to push the envelope further. The Bank has raised the level of ambition in responding to protracted displacement crises through the GCFF and a $2 billion IDA sub-window for low-income refugee-hosting countries—and is setting the example on how flexible financing can help tackle 21st century problems.
This innovation can and should be adapted and applied to a host of 21st century challenges. As we detail in the CGD-IRC policy brief, based on the initial funding provided through the GCFF, we have strong evidence that the model can enable a better and more sustainable approach to refugee crises. Building on proposals for the World Bank and other institutions to focus on global public goods, this innovation could be adapted to help respond other current and emerging challenges, such the need for low-carbon energy or pandemic preparedness. During the World Bank/IMF Spring Meetings this past Saturday, the Bank announced a capital package endorsement by shareholders, part of which encourages a boost to engagement around global public goods.
Minister Fakhoury perhaps captured the discussion best in one simple point: if we don’t get the financing right for refugee hosting countries, it will be impossible to get the moral responsibility right—for refugees and for host communities. The same could be said of other global challenges of our time.
Developing countries have made considerable progress in raising taxes in recent years. Between 2002-2014, average tax ratios rose by 2.8 percent of GDP in sub-Saharan Africa, and by 3.6 percent in the Western Hemisphere and emerging and developing Asia (see Figure 1). The IMF has long argued that there is potential for generating additional tax revenues in these regions, and since the Addis Ababa 2016 Financing for Development Conference, the World Bank, UN, OECD, and bilateral donors have joined the IMF in support of increased “DRM,” that is, domestic resource mobilization, by developing country governments.
A large proportion of revenue gains over the last two decades has come from countries’ efforts to improve the design and compliance of consumption and other indirect taxes, particularly the VAT (value-added tax); in doing so, the objective has been to minimize VAT’s regressive effects by exempting sales of small businesses below a threshold (where the poor typically tend to buy) as well as imposing zero tax on certain food and other products which take up a large proportion of consumption of poor households.
Less attention has gone to expanding the coverage of potentially more progressive taxes, such as personal income and property taxes. The challenge of these more equity-friendly taxes is that they have far more demanding requirements on government administration, data and systems than indirect taxes, and therefore are likely to yield less revenue in the short run. In advanced economies, the personal income tax generates somewhat more than the VAT on average; in developing countries the VAT generates more than twice the income tax.
We believe it is now time for countries to begin in earnest investing in the systems that support these more equity-friendly taxes.
Property taxes have been mostly neglected
Property taxes consist mostly of annual taxes on immovable property (houses, commercial buildings) and the sale of that property. The OECD countries on average generate around 2 percent of GDP in property taxes (or 5.5 percent of total taxes). The average tax-take is lower in emerging markets, at 0.6 percent of GDP (but still 3.4 percent of total taxes—reflecting their relatively lower overall tax/GDP ratios). It is even lower for low-income developing countries at 0.3 percent of GDP (or 1.8 percent of total taxes) (See Figure 2). Over 120 countries have property taxes in place with different tax bases and rates.
It’s not surprising that property taxes have been neglected. In most countries, property taxes are collected by local governments—although higher level governments may play a role in their design and operation—where administrative capacity to record ownership titles and collect revenue is not well developed. Good information on property ownership and on the base for valuing property is hard to obtain in developing countries’ thin markets for property transactions. In low-income countries, agricultural activities take up a relatively large share of land area and income derived from agriculture is relatively low. In many developing and emerging countries, urban middle-class property owners naturally resist paying property taxes; that may lie behind governments’ often providing extensive tax exemptions to different classes of property owners (for example, Kenya, South Africa, and Tanzania exempt different classes of land and give the minister and local authorities a wide latitude in granting exemptions). In Kampala, Uganda, the exercise to revise property valuations started last year and will continue until 2019—the last property valuation was carried out in 2005.
Against this background, conventional wisdom has been for developing countries to focus on revenue sources with substantially larger potential—at least until administrative capacity, particularly of local governments improved.
Six reasons to revisit property taxes
We urge a revisit of property tax potential, for at least six reasons (and for IMF endorsement, see page 12 of this book).
First and perhaps most important: Property taxes are inherently progressive—as Marx observed, it is the rich that own property, and as is the case everywhere, the rich own more and more valuable property. Where income is concentrated at the top of the distribution, property taxes will reduce post-tax income inequality. Income distribution in many developing countries has worsened since the 1980s, though less so than in the US and UK, among other advanced economies. In fact, in all countries wealth inequality is twice as high as income inequality.
The sense of fairness matters—including for ensuring tax compliance. There is global consensus that developing countries must raise more revenues domestically to finance priority spending on Sustainable Development Goals, as set forth in the Addis Financing for Development agenda. But tax compliance is a challenge everywhere; the middle classes will accept a rising tax burden, including on their own modest properties, only if they see that the visibly wealthy are contributing a fair share.
Second, property taxes can reduce corruption when adequately enforced—adding to the sense of fairness in many developing countries in which the majority of citizens believe their government is corrupt. With rapid urbanization in Asia and Africa in the next several decades, governments will be investing in more roads, mass transit, power and sanitation projects, and public housing. That will raise land values. In the past it is wealthy land developers and political insiders that have too often reaped the resulting enormous rents; a system that imposes property taxes will discourage rent seeking and related inefficient land use as well.
Third, property taxes are less distortive; they do not have the bad incentive effects of taxes on labor, and they do not reduce investment. The supply of urban land is fixed and its taxation does not negatively affect urban investment. Rather it creates incentives for land owners to use their land more productively.
Fourth, more urbanized cities attract more educated and productive middle-class workers who capture a share of unpriced benefits of urban life, including the rising value of their urban property. From the perspective of fairness, these workers (or their landlords) should pay property taxes (and be subject to progressive income taxation as well).
Fifth, property taxes have the advantage of creating accountability to the local citizenry—a political benefit in terms of good governance.
And finally, the advent of new technologies means that it is possible to do things now that we could not do as well before. Technological innovation can help overcome the capacity constraints that developing countries currently face in levying property taxes. Property registers can now be digitized, and use of satellite data and computer-aided mass valuation systems can make valuation of property and updates of values cheaper and quicker. Many Indian municipalities are complementing property surveys with satellite imaging to value property with significant increases in revenues. The computer systems are now being used to appraise property values in Slovenia and Tanzania.
A bottom line
Of course, we have to be realistic. More equity-friendly taxes face even greater political and technical obstacles to effective implementation as the more tried-and-true VAT (and excise taxes and the corporate income tax). The process of implementing property taxation will have to be gradual, the rates will have to be reasonable—not 10 to 30 percent as in Egypt and Kenya which has resulted in poor compliance—and exemptions from the tax will have to be minimal.
But the time for action is now. The IMF, World Bank, and bilateral donors have committed to scaling up their support for building tax capacity of developing countries as part of the Addis agenda. We urge them to ramp up support for strengthening the systems and infrastructure critical to collecting equity-friendly property (and potentially progressive personal income) taxes. Though in some countries it will take many years, the returns (in revenue, a sense of fairness, reduced corruption, greater compliance, and better local governance) can be substantial—contributing directly and indirectly to measurable progress on the SDGs by 2030.
The UK Labour Party recently set out its ideas on international development in a paper titled “A World for the Many, Not the Few.” There is much to like in the policy paper, including pledges to put in place an effective whole-of-government development approach, to advance DFID’s monitoring of whether aid reaches the most vulnerable and excluded, and to communicate more honestly with UK taxpayers about the successes, challenges, and complexities of development.
But its core innovation is a proposed change in legislation to add reducing inequality to the required criteria for aid spending (alongside reducingpoverty), while at the same time “reducing the importance of GDP growth.”
Jonathan Glennie, Director of the Sustainable Development Research Centre at Ipsos, offers a helpful mental model for the difference between reducing poverty and inequality:
Imagine two cars racing, one substantially ahead of the other. Now imagine the slower car speeding up—that’s poverty reduction. . . . If the car in front goes even faster—that’s widening inequality.
As Branko Milanovic has highlighted, global inequality has grown over two centuries, driven largely by inequality between countries (to use the racing cars analogy, if we imagine country populations are teams of cars, the largest gaps opened up between the teams of cars, with teammates bunched up together, rather than between cars on the same team). Since the 1980s, emerging economies have started to close the gap with richer economies through sustained economic growth, at the same time that inequality within some countries has widened. As levels of poverty have fallen faster than ever before in human history, there are fewer cars travelling at extremely low speeds.
In “A World for The Many, Not the Few,” Labour states that it would adopt a standard metric to assess progress on national inequality. The risk is that this metric will, perhaps inadvertently, characterise hundreds of millions of people who would be considered poor by rich-world standards as getting too rich too quickly. With poverty and global inequality still stark—700 million people remain in extreme poverty (below $1.90 a day) and the majority of the world’s population lives below $10 a day—should the UK really be shifting its focus away from poverty reduction, national development, and broad economic growth towards tackling inequality within poorer countries?
Confusing the richest 10 percent in poor countries for the global elite
The Sustainable Development Goals includes a target on national inequality which, in motor racing terms, divides each country’s population between 10 cars and focuses on accelerating the last four cars to close the gap with the pack ahead. “A World for the Many, Not the Few” argues for “raising the bar on SDG Goal 10” by focusing on the gap between the last four cars and the car at the very front of the team (this is known as “the Palma ratio”: the ratio of income between the richest 10 percent and the poorest 40 percent of the population). The paper says that a Labour government would adopt this as the metric for assessing progress on inequality by its development partners. It would encourage all countries to pledge to halve their Palma ratio by 2030 and achieve a ratio of 1 by 2040 (Sweden, Denmark, and the Netherlands each have a ratio of 1).
The chart below shows the income levels of the top 10 percent and the bottom 40 percent together with the Palma ratios for 12 of the 20 largest recipients of UK bilateral aid.[*]
The data shows that the poorest people are very poor, with average consumption amongst people in the lowest decile in DRC, Ethiopia, Kenya, Malawi, Sierra Leone, and Uganda less than $2 per day, and in the other countries a dollar or two more. But people in the top decile are not recognisably rich. In DRC and Sierra Leone, the richest 10 percent of people consume on average less than $10 a day, a level considered impoverished in rich countries. In Ethiopia, Malawi, Nepal, and Uganda, the mean of the top decile is only a few dollars more (these are purchasing power parity dollars, so it is not that the cost of living is less). In Bangladesh the mean income of the top decile is 20 percent less than the Asian Floor Wage, which its promoters argue is what a worker in a garment factory with a dependent family should be paid to have enough to live on (this tells us something about why living-wage campaigns have been so intractable, but it also makes clear that the threshold of the richest 10 percent in Bangladesh is a long way from the global elite).
The chart below shows income by decile for the same set of countries, with the UK included. In none of the 12 countries is the average income of the top 10 percent higher than the UK’s minimum wage.
It is notoriously difficult to assess income distributions (particularly at the very top of the range), and some of these measures rely on surveys that are several years old. Still, the overall pattern is clear: while there will be a small proportion of very rich people at the top of the distribution, there will also be many more people within the top 10 percent earning less than the mean.
Lant Pritchett points out something similar in relation to the quality of education globally. In most developing countries it is not that “the rich get a good education and the poor get a bad one” but “the rich get a bad one and the poor get none at all.” For example, in standardised educational test scores, 15-year-old students from Thailand, Mexico, Mauritius, and Chile fall below the 20th percentile of students in Denmark. Students from Qatar, Ghana, Saudi Arabia, and El Salvador fall below the 5th percentile when compared to their counterparts in Australia.
“A World for the Many, Not the Few” argues that “what people need and want in the UK, people need and want everywhere: our needs, our rights and our struggles to achieve them are one and the same.” Yet at the same time it suggests a development target which counts improvements in the living standards of people who would be considered amongst the poorest in the UK as eroding progress, suggesting that their advancement should be slowed down. What moral authority can the UK have to tell people whose incomes are barely comfortable, and whose priorities are overwhelmingly for jobs and economic growth, that their ambitions and aspirations should be put on hold in pursuit of “happier and more harmonious societies”?
Beyond crude measures
There are certainly reasons to be concerned with inequality within countries. Angus Deaton argues that we should view inequality not so much as a cause of economic, political, and social processes, but as a consequence. Some of these processes are good (areas of economic growth in poor countries), some are bad (uneven access to opportunities), and some are very bad indeed (extractive political institutions and monopoly rents). He argues for sorting the good from the bad in order to understand inequality and what to do about it. As Nancy Birdsall highlights, a rising number of people with steady jobs, a secondary education, and a stake in rule of law and protection of private property rights is a development good, not a development bad, not only for those people directly, but because growth of a middle class in emerging economies has been intimately linked with poverty falling.
DFID should support efforts to address damaging causes of inequality—rigged markets and politics, rent extraction, lack of political voice and agency—and work to increase the productivity and market power of the poor and the emerging middle of workers, traders, and consumers. But if DFID manages-to-the-metric, it might mean refusing to support any investment that would have a first-round effect of increasing incomes in the top decile, including improving the lives of Malawians earning more than $10 a day or Sierra Leoneans earning over $5. It might also mean prioritising projects supporting the 40 percent poorest in Kenya over the poorest 40 percent in the DRC, because even though they are richer, their country’s Palma ratio is higher.
More broadly, the goal of achieving some mathematically Scandinavian level of equality in poor and middle-income countries, and the general disparagement of economic growth in the paper, suggest a zero-sum view of prosperity, which is not in line with people’s aspirations, or their possibility. As Simon Maxwell notes, the paper focuses on the “narrative of predation” but misses out on a companion “narrative of accumulation,” by which countries and people prosper: trade, technology, migration, and mobilisation of finance. Migration, probably the most powerful lever that developed countries for enabling poorer people to improve their lives, barely gets a look-in. As E. Glen Weyl highlights, much migration exacerbates inequality both in sending and receiving countries, and yet reduces global inequality. It is a difficult political issue, much harder to communicate than the story of venal global elites, and it is a gaping hole in Labour’s articulated vision of a fairer world.
Domestic taxation, public services, and redistribution are important, and the consensus, (including from researchers at the IMF) is that moderate redistribution does not impede growth. But it is easy to fall into an overoptimistic vision of what can be achieved through taxing the rich and domestic redistribution. The truth is the many are too poor, the middle too few, and the elite just too tiny for evening up income levels while “reducing the importance of GDP growth” to be the answer for broad prosperity in poor countries.
[*] Where data is available. I also left out Jordan and Lebanon because a large proportion of aid to those countries is focused on refugees rather than on the general population.
When US Treasury Under Secretary David Malpass appeared before Congress just five months ago, he indicated that the World Bank “currently has the resources it needs to fulfill its mission” and went on to characterize the bank and other multilateral institutions as inefficient, “often corrupt in their lending practices,” and ultimately only benefitting their own employees who “fly in on first-class airplane tickets to give advice to government officials.”
From that standpoint, it would be hard to imagine US support for a significant injection of new capital into the World Bank’s main lending arm, the IBRD, as well as the bank’s private sector lender, the IFC.
And yet, that’s exactly the surprising outcome just announced at the World Bank’s spring meeting of governors. Not only is the Trump administration supporting a $7.5 billion capital increase for the IBRD (and at that, one that is 50 percent larger than the capital increase supported by the Obama administration in 2010), it has also signed on to a policy framework for the new money that makes a good deal of sense.
Here are the highlights:
The capital increase package will better enable the institution to deliver on its commitment to be a leader on climate finance and more broadly in support of global public goods, aligning with key recommendations from CGD’s 2016 High Level Panel on the Future of Multilateral Development Banking. Under the agreement, the climate-related share of the IBRD’s portfolio will rise from the current 21 percent to 30 percent. The IFC’s share will rise even higher to 35 percent. New ambition on the climate agenda also includes commitments to screen all bank projects for climate risks and incorporate a carbon shadow price into the economic analysis of projects in emissions-producing sectors. For global public goods more generally, the agreement newly commits a (very modest) share of IBRD annual income to global public goods.
The package introduces the principle of price differentiation based on country income status, with higher income countries paying more than the bank’s other borrowers. This proposal, which was also put forward by CGD’s High Level Panel in 2016, will generate additional revenues for the bank and asks more of countries that have less financing need. While the introduction of the principle marks an important step forward, the actual price differentiation is extremely modest—at most, the spread between high income borrowers will be just 45 basis points on IBRD lending rates of about 4 percent.
The package assigns new guidelines for the IBRD’s overall lending portfolio to channel 70 percent of the bank’s resources to countries with per capita incomes below $6,895 and 30 percent to countries above this so-called “graduation threshold.” These targets would not be binding when it comes to crisis lending. In practice, these new guidelines seem to align with the existing pattern of IBRD lending, as indicated in the figure. In this sense, the idea that these guidelines amount to cutting China's access to World Bank loans appears exaggerated, though over time, as more countries join the higher income category, the 30 percent share will be allocated across more borrowers.
The package also attempts to identify a new financial framework that requires greater discipline when it comes to tradeoffs between lending volumes, loan pricing, and the bank’s administrative budget. This framework, which reportedly was a priority for the US government, may not ensure that this will be the last ever capital increase for the World Bank (as an unnamed US official promises), but it does appear to introduce a greater level of coherence around financial/budgetary decisions that have historically proceeded in a disjointed fashion within the institution.
Finally, even as the agreement seeks greater differentiation among countries, it reaffirms the World Bank’s commitments to stay engaged with all its client countries, including China. In fact, given US rhetoric, it’s surprising that the agreement does not stake out any new ground on the subject of country graduation. In fact, it seems to go out of its way to reassure all current bank borrowers that they are still welcome and that the decision to graduate from assistance is theirs to make. In the end, as much as ending China’s borrowing from the bank would have been a political prize for the Trump administration, US officials appear to have taken a sensible policy path that favors good incentives over polarizing fiats.
New results from a famous experiment in Kenya have sparked heated debate over whether lump-sum cash transfers have any long-term benefits for those who get them, or even do harm to neighbors who don’t.
“Just give people money.” For several years now, that has been the mantra of some of the leading voices in development economics, like those of Chris Blattman and Paul Niehaus who argued back in 2014 in Foreign Affairs that foreign aid is wasted on cows and chickens, microcredit, or vocational training, and we should focus instead on just giving people what they really need—cold, hard cash. So the wonkier corners of the global development blogosphere and twitterverse got quite worked up a couple weeks ago when the World Bank’s Berk Ozler dissected the results of a new long-term study of cash transfer recipients run by the NGO GiveDirectly in Kenya, arguing there was little evidence of long-term benefit, some evidence of harm to neighbors, and accusing cash transfer advocates of ignoring inconvenient facts.
Unless cash recipients literally spent the money on gasoline to set fire to their neighbors' farms, the scope of negative spillovers required to explain the Kenya results seems implausible. Ozler is right that we can’t formally rule out the possibility, but for policy audiences this is probably too pessimistic a summary of what happened in Kenya.
Nevertheless, the Kenya results can’t be read in isolation, and the pessimistic reading matches several recent findings of negative spillovers from cash, as well as mixed long-term effects from lump sums. The totality of the evidence seems to point in the direction many governments are already headed: toward sustained, periodic cash transfers as a social safety net that is carefully targeted or even universal, rather than once-off cash drops to encourage everyone to become an entrepreneur.
So what happened in Kenya? Some simple, unsatisfying arithmetic
In 2011, a new charity called GiveDirectly picked a random sample of a few hundred poor households in rural Kenya and gave them about four-hundred dollars in purchasing-power parity terms, no strings attached, transferred directly to their phones via Kenya’s ubiquitous mobile payments system, M-Pesa. GiveDirectly became the darling of Silicon Valley philanthropy world, and journalists from the around the world flocked to Western Kenya. Now fast forward to January 2018. Johannes Haushofer of Princeton and Jeremy Shapiro of the Busara Center for Behavioral Economics in Nairobi have just released the results of a three-year follow-up to the GiveDirectly randomized trial. What they found was a bit puzzling.
Households who had been randomly selected to receive cash were much better off than their neighbors who didn't. They had $400 more assets—roughly the size of the original transfer, with all figures from here on out in PPP terms—and about $47 higher consumption each month. It looked like an amazing success.
But when Haushofer and Shapiro compared the whole sample in these villages—half of whom had gotten cash, half of whom hadn’t—they looked no different than a random sample of households in control villages. In fact, their consumption was about $6 per month less ($211 versus $217 a month).
There are basically two ways to resolve this paradox:
Good data, bad news. Cash left recipients only modestly better off after three years (lifting them from $217 to $235 in monthly consumption), and instead hurt their neighbors (dragging them down from $217 to $188 in monthly consumption). Taking the data at face value, this is the most straightforward interpretation of the results.
Bad data, good news. Alternatively, the $47 gap in consumption between recipients and their neighbors is driven by gains to the former not losses to the latter. The estimates of negative side-effects on neighbors are driven by comparisons with control villages where—if you get into the weeds of the paper—it appears sampling was done differently than in treatment villages. (In short, the $217 isn’t reliable.)
The logic of the first option was laid out in excruciating and quite persuasive detail in Berk Ozler’s series of posts on the World Bank website. The question is whether this is “just” a damning critique of the most optimistic readings of the Kenya results, or an actual explanation of what happened. I’m skeptical of the latter.
Giving people cash can hurt their neighbors, both psychologically and even nutritionally—but that’s unlikely to explain the Kenya results
In order to explain away the gap in consumption between cash recipients and their neighbors, the negative side-effects in Kenya would have to be enormous. While half the sample got treated, in the broader population, only 9 percent of the 100 households per village was treated. If negative spillovers are real, there’s little reason to think they’re limited to the research sample. Extending the results to the broader population would imply giving $400 to nine poor households in a village raised their consumption by just $17, while reducing the consumption of the other 91 households by about $30 each. That’s $2,530 in harm and just $153 in benefit per month.
Nobody has suggested any plausible mechanism by which the program could have done an order of magnitude more harm than good.
Apart from plausibility, there are other reasons to distrust the spillovers estimates. They’re somewhat less statistically robust, as they rely primarily on a comparison of 60 treatment and 60 control villages, rather than the roughly 1,200 treatment and control households. Furthermore, there’s no baseline for the control villages, and the sampling criteria—which selected households with thatched roofs—was applied after the fact in the control villages, rather than at baseline. In short: comparisons with control villages are somewhat suspect.
That is not to say negative spillovers from cash transfers aren’t a thing. They definitely are.
While those are “just” psychological effects, there is also evidence of more tangible harm to neighbors through the channel of inflation. In Mexico, researchers found that the government's flagship anti-poverty program that covers 5.8 million households had a positive but negligible effect on food prices. In the Philippines, the problem was much more severe. Just last month the World Bank concluded that the Pantawid program that distributes roughly $20 per month to 4.5 million poor households increased the price of protein-rich foods by 6-8 percent, and led to a 12 percentage point increase childhood stunting among non-beneficiaries in the treatment villages.
How can we avoid these pitfalls? The Mexico study found that distributing food in-kind reduced food prices for beneficiaries and non-beneficiaries alike, as the laws of supply and demand would suggest. The authors of the Philippines study argue that where the program covers a large majority of rural households, making it universal would be a simple way to avoid harm to neighbors.
For the research community, there’s an even more obvious lesson: ethics committees should probably greet future research proposals to randomize cash distribution at the individual or household level with considerable skepticism.
If poverty traps are real, one-time cash transfers should have permanent effects. Evidence is mixed.
Think of the GiveDirectly experiment as part of a scientific enterprise searching for a once-off, permanent “cure” for poverty. That search is built on textbook theories of poverty traps, the idea that poverty is inherently self-perpetuating. Contrary to what the name might imply, many economic models of poverty traps yield quite optimistic predictions about the effectiveness of welfare programs. One big push—a chunk of cash, or maybe a cow or chickens, perhaps with some business training and a savings account—is all you need to break the cycle of poverty and lift people to a new equilibrium.
It sounds a bit quixotic, but there’s evidence this isn’t entirely crazy.
An experiment in Sri Lanka published in Science in 2012 distributed grants worth $100 to $200 to relatively poor people running micro-enterprises. While women saw virtually no increase in profits, men saw fairly dramatic gains equivalent to a real return on capital of about 6 to 12 percent per month. Most importantly, when researchers tracked the entrepreneurs down five years later, the gains for the men had persisted: they were still seeing profits from the initial capital injection.
Alas, those long-term gains for Sri Lankan men haven’t been replicated quite so successfully anywhere since.
In Ghana, a similar experiment found increased profits in the short term, but after three years the results were inconclusive: there were still some signs of increased profits, but most of the differences were no longer statistically significant. And in Nairobi, giving female entrepreneurs grants of about $200 raised their incomes by 50 percent several months later, but one to two years later all the income gains had disappeared. A parallel treatment arm that included business training fared no better.
Sheep, goats, chickens, and cows have gotten a lot of hype recently too. More precisely, two big randomized trials spanning seven countries found that giving poor households livestock assets together with lots of hand-holding—in the form of business training and savings accounts—led to big consumption gains that endured three years after the asset transfer. The program is expensive though, and only pays for itself if the benefits hold up in perpetuity. Time will tell if that holds true.
Once again, there is a risk here of not just failing, but doing real harm. In a recent presentation of the Nairobi paper above, Pam Jakiela from the University of Maryland noted that while cash hadn’t lifted young women’s incomes in the long term, it had affected their occupational choices—pushing them away from wage employment, toward self-employment in the informal sector, with possible negative consequences for their long-term human capital accumulation.
The idea that we want every poor person to run a bigger microenterprise is not entirely innocuous.
Meanwhile, policy remains focused on sustained, targeted safety nets
Silicon Valley philanthropies may be fascinated by one-off cash drops, or even a Universal Basic Income, but most large-scale government programs have focused on cash transfers that are (a) sustained over time, and (b) targeted at poor households. That includes the Kenyan government’s own Cash Transfer for Orphans and Vulnerable Children program, which is an order of magnitude bigger than GiveDirectly, but gets much less media attention. The idea is not to cure poverty with a single big push, but rather to provide a permanent, reliable system of social insurance and a supplement to the incomes of very poor people.
Measured on their own terms, these sustained, targeted transfer programs work well.
Across a dozen randomized experiments in sub-Saharan Africa, households consume 74 cents of every dollar received, most of it on food. There is consistent evidence internationally that almost none of the additional spending goes to temptation goods like tobacco and alcohol, and there’s little evidence of cash transfers discouraging work. On the contrary, in the African experiments transfer recipients worked more and earned 16 percent more income.
Kids’ human capital, not business growth, is the likely channel for long-term effects from these programs. New evidence suggests cash transfers in Mexico that were conditional on school attendance boosted employment and earnings in adulthood. Even the distribution of casino revenues to Cherokee households in North Carolina has had long-lasting effects on children's education, future criminality, and even personality traits.
At this point I'm singing from the hymnal of cash-transfer advocates. But we shouldn't pretend that we have this all figured out.
This month the World Bank released its annual report on The State of Social Safety Nets 2018, showing that in low-income countries, only one in five people in the poorest quintile benefit from any kind of safety net program. Sustained, government-run cash transfer programs amount to large-scale redistribution, and redistribution is expensive. That's sort of the point. But in countries with very little budget to redistribute, it makes sense to keep looking for affordable programs with permanent effects on assets and incomes—and to admit when the new evidence is not quite as clear as we’d hoped.
Pascale Hélène Dubois will discuss the global impact of World Bank investigation and prevention activities and then join a panel with Kathrin Frauscher, Deputy and Program Director, Open Contracting Partnership and Hasan Tuluy, Partnership for Transparency Board Director, former World Bank Vice President, to dive deeper into what more can be done at the World Bank and other international institutions to combat corruption.