Russ Roberts

Chris Blattman on Cash, Poverty, and Development

EconTalk Episode with Chris Blattman
Hosted by Russ Roberts
PRINT
D. G. Myers on Cancer, Dying, ... Continuing Conversation... Chr...

Chris Blattman of Columbia University talks to EconTalk host Russ Roberts about a radical approach to fighting poverty in desperately poor countries: giving cash to aid recipients and allowing them to spend it as they please. Blattman shares his research and cautious optimism about giving cash and discusses how infusions of cash affect growth, educational outcomes, and political behavior (including violence). The conversation concludes with a discussion of the limits of aid and the some of the moral issues facing aid activists and researchers.

Size: 32.6 MB
Right-click or Option-click, and select "Save Link/Target As MP3.

Readings and Links related to this podcast episode

Related Readings
HIDE READINGS
About this week's guest: About ideas and people mentioned in this podcast episode:

Highlights

Time
Podcast Episode Highlights
HIDE HIGHLIGHTS
0:33Intro. [Recording date: July 15, 2014.] Russ: So, you have been writing a series of articles and done quite a bit of research, and I hope we get into much of that. Arguing that giving people cash rather than more complicated forms of development or welfare might be the right way to go for helping people who are desperately poor. What's the basic argument? Guest: Well, the basic argument is not necessarily that cash is more effective than other forms of assistance, but that it's effective relative to its cost. It isn't always; but it can be very, very, very inexpensive to deliver. So if you have any kind of utilitarian view of the world and you want to help as many people as possible, then you pay attention to that. And so the question is: What is it good at? And there's a two-part answer. One is, like anywhere, people can use cash to buy the things they need. Maybe that's just shelter and food. And that can be here or that can be in the poorest country. But I think especially in a poorer country where a lot people have potential to be self-employed. Mainly because there aren't firms, so there aren't jobs, they are held back from self-employment because they don't have capital. And one of the cheapest ways to get them capital, to help [?] by a lot of things; but capital is really important. And cash can be one of the effective ways to put capital into their hands. But then the question is: When the poorest get cash, especially what people might think of as the more vulnerable or the more risky, high-risk young men for example, what kinds of decisions do they make with cash? We weren't surprised they didn't have access to it. But I think the big question has been: Do they invest it or do they spend it on "good things"? Russ: Yeah. We'll get into some of the details of what your research and that of others found. But I want to start with that philosophical question, which is the good-things idea. Economics generally--not always, but generally--argue that people are pretty good judges of what is helpful to them. And that argues for giving people cash. Non-economists are very uncomfortable with that sometimes. They argue that they'll "waste" it, on drugs and alcohol for instance or other things that the giver might decide is frivolous. I assume you've heard that argument before. Guest: Yeah. I see that in myself every day, as it turns out. I step outside my building in New York and there's a guy on my corner who is asking for money; and he doesn't seem completely well, mentally. And I hesitate to give him cash. So, here I am, this cash-transfer evangelist of sorts-- Russ: Mr. Cash Transfer. Guest: I will resist that particular label, [?] sometimes. But I'm not really an evangelist for this. I'm quite tempered, I think. But I don't give cash to him. I might. Maybe the absence of evidence on this population in New York is what holds me back. But [?] my wife and I give money to a charity that basically runs a food kitchen rather than cash out on the street who look quite poorly off. Russ: Yeah. I have a different perspective. I give money to food banks, also. But I also like giving cash to poor people, particularly [?]--I hate to say this; my offense on people, and I don't know if I've talked about this on EconTalk because, particularly if they are going to spend it on drugs and alcohol, I sometimes feel like it's good to give them cash. Because sometimes when you are desperately miserable, drugs and alcohol might be what you want. People say to me: Doesn't the donor have a right to decide what the money is spent on? Of course the donor can earmark it. You can give to the food kitchen if you want, or I can. But I like the idea that I respect the recipient, and I treat the recipient like an adult, not like a child, and I don't decide for that person what's good for them. I let them make that decision. And I think that's a dignified way to interact with desperately poor people. Even when they are a little bit off the beaten track, as you point out--the person you are dealing with may not be "normal." Guest: So, I think where a lot of us might draw the line is we wouldn't want to give people something that would lead them to hurt themselves or hurt others. And so, it might be that your smartest capital investment is in the slums of Monrovia, which is one place we've given cash to very high risk use. It might be that your best investment is to buy an AK-47 and then become a hold-up artist. It might be that if you are addicted to substances that a large sum of money might lead you to overdose. And that's different, I think, than: Do I really care if they use it to smoke a joint or buy a bottle of booze? I don't think they are going to really hurt themselves or kill themselves. But we did confront these extremities, every day, with one of the groups we worked with, in Liberia, which were these sort of high risk street youths. And so I think it's always there. But I think what's interesting is how seldom--how much we exaggerate that, and how much the average aid worker, aid program, either in the United States or abroad, exaggerates that risk and exaggerates, I think, their sense of paternalism. And what that does to programs in general. Russ: Well, of course, to some extent it's an excuse. It says: I don't have to help this person because he'll just waste it. Guest: But those people--you look at organizations--I work with organizations every day that their whole purpose and mission is to help people. And there's a real aversion sometimes--not always--some people and some organizations have your attitude. But there's a real aversion to really giving that person agency. To really letting that person decide. And also to go with something as stripped down as cash. And I get reactions ranging from puzzlement to hostility. Initial reactions, I should say, from puzzlement to hostility, usually in the hostility range. People come around and people think about it, and it forces conversations, I think that are really productive and interesting in the whole aid industry. That's the powerful thing that is coming out of here. One of my co-authors in the Foreign Affairs piece calls cash the 'index fund', the 'Vanguard index fund of development.' In that it's in some sense a benchmark for a lot of anti-poverty aid. It's just stripped down of all management costs and everything, and lets you see the impact of something that's very, very simple. Russ: And the argument on behalf of index funds, one of them is that those transactions costs, those fees, which are small because index funds don't have the costs that the other funds have, those fees compound over time to make a significant, dramatic difference. And I think we'll talk about it with some of your results, that sometimes a small difference actually turns out not so small. It makes a big difference. Just before we leave this topic, though, of excuses: I think the challenge for aid agencies and people in the helping game--and God bless them, many of them are doing extraordinary things on the ground, and I salute them. But of course they have a stake in the current system. Cash bypasses them, just like managers of actively managed funds will tell you what's wrong with index funds. So they are not really the best judge, necessarily, of what's good for poor people. Guest: Yeah; that's yes and no. I mean, cash isn't the good index fund for a lot of different, maybe even most of what aid or state intervention does. It's a substitute for I think giving people stuff--whether that's cows or blankets or bags of grain. And you might even say it's a substitute for a skills-training program. And giving people stuff and giving people training represents a huge amount of anti-poverty assistance, but still not, maybe not the majority of aid. So it's a substitute for a sense[?] of stuff. And I get your--I think the average organization would say, you know what, we would like to learn what we're better at and what we're worse at, and if there's a cheap substitute for this thing we're spending a lot of our time on, and let's us invest our energies in the thing where we can add value and we are really good at, we would like to do that. I think that would be generally true. Now whether or not they agree that cash is that substitute is then in some sense evidence-based, in some sense ideological. But it's--so there's a lot there still for aid, I should say. Russ: No, I totally agree with that. And we'll continue to talk about this, I'm sure, as we get into the results.
10:16Russ: Let's talk about a data point that's--speaking of cows--you point out that it costs in West Bengal, India, there's a nonprofit that spends $331--it costs $331 to have a cow given to someone via that agency. But the raw cost of the cow, the out of pocket for someone who had the money, is only $166. So there's sort of 100% overhead in that example that you give. Guest: Right. Russ: That's important. It's an enormous difference for somebody whose income might be $100 a year. Giving him a cow, as you point out in the article, is great. Given them $166 to choose to spend on a cow or maybe something else--maybe they don't really want a cow--might be a little bit better. Guest: Yeah. And that's one of the most efficient programs around. We mentioned another one in Rwanda that provides a set of other services in addition to the cow, but it's 10 times as much. So I think it's $3000 a person, is one estimate. And that, in my experience--a lot of the programs I've seen look more like the $3000 program--they are really gold plated in some ways--than the $300 program. The per person cost of a lot of programs is absurd when you actually look at that. Most people don't look at that, actually. Almost no organizations do. And it's kind of a big surprise to them, when you calculate those kinds of numbers. Russ: It's kind of a wake up call. The one you mentioned I think is Heifer International--that's the name of it. But you said in the article, the cost of donating a pregnant cow, with attendant training classes and support services, is $3000. Now the services and training might be worth a non-trivial amount. But as you say, it's a gold-plated program. Guest: Training programs in general really seldom pass the cost-benefit test. We don't have a ton of evidence--that's not a universal statement. The problem with anything that requires you to take educated people, whether those are elites from the capital or some elites from a foreign country, put them in a white SUV [Sport Utility Vehicle], fuel it with overpriced fuel, and send them out for the day to some village to give somebody training--the cost for that alone is so high that you just--and these people who you are helping are only making a dollar or two dollars a day. So the amount you actually have to help them increase their earnings is so great that--it's really hard to imagine almost any of these types of interventions being effective relative to something that can be sent over the wires. We don't even need wires any more. Russ: So, on the flip side, you quote the following numbers, that in the United States we give about $30 billion in foreign aid; collectively the developed, wealthy countries give about $150 billion. And if we think of Paul Collier's Bottom Billion, there's about $150 per capita, then, of aid. Of course, a lot of that doesn't go to the poorest people. It isn't even intended to. It has other purposes--foreign policy, helping [?] tractors, domestic builders, etc. It does suggest that--so if we took that $150 billion and we could find a way to deliver it in cash, I do think it might have a much better impact on an annual basis. On the other hand, it's a relatively small amount of money. And if we really said we're not going to try to achieve these foreign policy goals or whatever else is entangled with foreign aid, we are only going to try to help poor people, we don't give very much money. Guest: So, yes and no. I mean, the bottom billion maybe earn--if earning a dollar a day, then getting $150 more a year would increase their income by almost 50% per year. Which is not bad. When you are making that little, that little bit more is really, really important. But what's interesting--this is where a lot of the research has gone. Clearly my own work is that this just isn't $150 that falls on you and you eat it, and you are better off because you ate it. But it actually seems to unleash potential among people who are constrained by the absence of capital. And if that's true--and actually a regular transfer, there's some interesting research by two follows, Bobba and Bianchi, in REStud [Review of Economic Studies], I think a year or two ago, that found that getting regular cash transfers can also help people overcome a second really important financial constraint, which is risk, risk aversion, and an absence of insurance. And essentially two things happen. One is, you don't have access to credit, you don't have access to insurance. And this is really going to inhibit the likelihood that you can and will invest any funds. If you have potential, if you are smart, if you are able but you are very poor and you have no capital then you are below your earning potential. And if you give somebody this capital, they are likely to invest a big portion of it. And if they know they are going to get a minimum amount every year for the next few years--their evidence was from a Mexican program, Oportunidades, which gives conditional cash transfers--then it also means that you are more willing to take risks now with that money and invest in higher return enterprises and take chances and specialize. And so the potential for that $150 every year to basically help people start their own businesses and expand those businesses--and we can talk about some of the results from my own work in Uganda and Liberia and elsewhere. But it's not just helping people eat more. It's actually helping them increase their whole earning potential by relieving really important financial constraints. Russ: Yeah. That's the key, obviously. The way I would phrase it is: We'd like to find a cure rather than just a pain killer. It would be great to help people not suffer. It would be even better if we could help them rise to a level where they are actually well off. Guest: Yeah, actually I wouldn't even call it a cure. A cure, in some sense, is--most people don't want to be entrepreneurs. This is just an interim, this is sort of a band-aid solution until these countries develop firms and low transaction cost financial markets. And that's probably 30 or 50 years off for a lot of these countries. So it's still--it's more like there are better band-aids than others, might be one way to think about it. Russ: Yeah. Good point. One thing I want to emphasize is that in all your work, you are very restrained in your enthusiasm. Which is something I am fond of and very much appreciate. Your name has become associated with this idea of cash, and yet you don't oversell it. Which shows an unusual sense of humility and maturity as an economist. So, I want to congratulate you. And I'm not kidding. Guest: And I try that; and when I don't, the wonderful thing about economists, especially journal referees, is that they'll beat it into you. So it's in fear but it's also enforced. So I won't take all the credit. Russ: Yeah, but so many of our colleagues manage to overcome those lessons.
18:07Russ: Now you are skeptical--I want to talk about some alternatives and other ideas that have been championed as ways to jumpstart growth. One of them is microloans, which is awfully similar to cash. It's lending people cash rather than giving it to them. The evidence for microloans is not so encouraging. Give us a summary of that. And then give me some idea why cash might be different, at least in the experiments you've been involved in. Guest: Well, people clearly like microloans. By revealed preference; I'm sure there's a billion or two billion people with microloans in the world today. Maybe someone has the numbers. I don't have them at my fingertips. But it's a lot. It's just been explosive growth. So clearly people want this. And it does a lot of good things. It helps smooth out shocks, for one thing. And it also--it seems that people don't like borrowing when they can from family and friends. They like to depersonalize their finance. Depersonalized finance is something we like. And even if we don't mind some personalized finance, having another place in our portfolio, something else to put away a little money in or somewhere else to borrow from, in addition to the 20 other places or 20 other people we are borrowing from, is always a good thing when you live a risky life. So it's providing a lot of--some flexibility, some comfort, security for people. But what it's not doing is it's not pulling people out of poverty. Because people generally are not using this to make investments, whether it's investment in schooling so that you earn more, your kids earn more many years down the road, or investments in starting a small enterprise. And the reason for that is probably because the interest rates are very, very high. So, there are data now from places like Ghana and Sri Lanka and Uganda and elsewhere, and what people do, and how much they earn when they get cash, when they get capital. And you see these returns to capital among the poor of 20, 30, 40, 50, 60, 80, 100%. So these are big returns. People in some places seem to double their money. On average. Which means within that group there are people who can do even better. But the rates of interest in a lot of these micro-loans can be 5, often 10% per month. Even the nonprofit ones. So these turn into annualized interest rates well above 100% per year in many cases. Not always. Some are lower. Some are like 20 or 30%. But you have to have a pretty high return opportunity, whether it's sending your kids to school or a business, that you just have to be really, really, really good at that, and really, really, really constrained for you to borrow at those rates to run that business. So, unless microfinance can get down to really low rates of interest--I don't know what that would be; I'm guessing 5 or 10 or 15% per year--I'd be skeptical if that ever becomes the vehicle for the poor expanding their own businesses. Russ: Do we know anything about the default rates? Guest: I'm not--I'm starting to brush up against my ignorance here. I don't think default rates--the thing that's driving the cost of borrowing--my understanding is it's not the default rates. It's the fact that these are very, very small loans, maybe $50 or $100 or a few hundred dollars at most; and it just costs money. There are all sorts of really mundane transaction costs associated with finding those people, screening them, getting them the money, the payment plans, etc., etc. And that's a big impediment. I think this is one of the reasons that the Bill and Melinda Gates Foundation, I think, stepped back when they started thinking what is really important, what is nobody else working on, what can they do with the technology and inspired organization, foundation. One of their big efforts has been on trying to figure out ways to reduce financial costs and savings and credit, precisely through technology in many cases, just so that they can lower these transaction costs and thus make financial markets work better for the poorest. Russ: Well, what's interesting as you say those things is that those transactions costs and default risk and identifying the people, in many ways those are the equivalent of the overhead of the $331 cow instead of the $166 cow. It kind of highlights again cash as an index fund, this low cost, low--not as ambitious, but maybe more effective because of its cost. Let's talk briefly about the Millennium Village Project, which, we've of course--listeners will know that we've spoken about that program here with Nina Munk and then Jeffrey Sachs. It purports to aim very high: rather than saying, we're going to have a 50% or 100% increase in income with the cash infusion, we're going to do everything at once. We're going to give training, we're going to help people with skills; we are going to give them some capital; we're going to work on infrastructure. That would seem to be an effective way--it would seem to be a lot more effective than cash. And yet many people are skeptical of its effectiveness. What are your thoughts? Guest: So, um, you know--it's such a big topic in some ways. The Millennium Villages are--so I remember thinking--and I have talked to them here and there. Jeff Sachs is a colleague here at Columbia U., of course. And I've chatted with him informally about their evaluation plans. And I thought about: Would I recommend that they actually have comparison villages where they just give the equivalent in cash? Should I recommend the index fund approach? And I thought--you know what, I'm not sure that's what the, I've never been sure that's what the Millennium Villages are actually doing. I'm not sure if it's giving them the stuff or the technology or the resources that is actually making the Millennium Villages successful, to the extent that they are successful. I have no doubt that they are impactful. You give people stuff--you give inputs, there's more output. I think we don't need a--this isn't like a mysterious formula. But, you know, you read Nina Munk's book, and everybody who has read it should go back and re-read it, in my opinion. They should throw out all the stuff about megalomania and whatnot, and pay attention to what actually, the stories that she tells in the villages. It was so informative to me, having never visited one. The first thing that happens is the people who are essentially development officers, who are in charge of these villages, or who live in these villages and are in charge of the planning, are smart and they do their jobs. So, in some sense, the public servant does their job right. Which is not what's happening in most of the other villages in the country. And they are doing their job right because they are internally motivated, but also because everybody is watching. Russ: Yeah, someone's paying attention. Guest: And then secondly, there are also really good lobbyers. So there's this one story, I think he's a guy in Northern Kenya, lobbies--don't quote me--something like he lobbies the regional government to put the market--they are going to put a market somewhere, they are going to put the road somewhere, and they put it all in his village. Right? And so that's another thing they've got right. And that might be exclusive in the sense that not everybody can get that. Only some villages and not others can get that. But again, that's an aspect of collective action and governance. So, I wonder to what extent the Millennium Villages and any success they generate is about inputs and how much of it is actually about just getting governance right. For lack of a better term. Russ: Well, it's a huge part of it, obviously. Guest: Yeah. And so, cash--whether or not cash--that way, cash isn't necessarily a substitute for that, unless it maybe generates the same observation effects. I don't think it would ever generate the governance effects. So this is a good illustration of the limits of cash. Cash is never going to replace good governance. Which is maybe one of the most fundamental drivers of causes and consequences of development. And the worrying thing is of course cash on a really, really large scale has the potential to either make governance much better, or much worse. If governments were to move to really liberal large-scale cash transfer programs. Russ: It's a different level of experiment than has been run in most of these cases. That would be another interesting, but of course very expensive, randomized control trial, to give some people very large sums of money, rather than, say, building a road. Obviously, collective action people privately building a road, might be challenging and it might not be the thing that happens. Maybe something else would happen that would be also good. Who knows.
27:33Russ: Let's talk about your work. Let's start with the Uganda work. You have a couple of research projects and papers in that area. Let's start with the one in Northern Uganda where the government gave out money to groups of people who asked for it, who applied for it. Talk about how that project was constructed. How did it happen, to start with, by the way? How did the government come to think it might be a good idea, it sounds like a business plan competition, and give out money based on that? It's very unusual. Guest: It is and it isn't. It's actually a problem--if you the World Bank or if you are a government--so this is a World Bank credit to the government of Uganda--and you want to spend increasing amounts of aid, and you want it to be very pro-poor and you want it to get out into the hands of the poor, it's actually a real problem to figure out how you are going to spend $100 million dollars. Because you have to disperse it, and you have to do that pretty quickly, even if quickly means a few years. And so, you end up being forced to consider a set of strategies that basically are like basically dropping money out of helicopters. And this is a really, really common form of aid in Africa. Sometimes you'll hear them called 'community-driven development programs.' And communities will get $10,000 or $20,000 grants; they merely have to come up with some sort of plan for building a bridge or improving the school. And it's popular because it's decentralized; it's popular because it's often participatory in that the village is having a say, and so we think that maybe they have better information than the central planner. It's popular because these are often quasi-democratic, maybe even more democratic decision making processes. So all sorts of things with them that make these really, really popular programs for donors, and governments. And governments don't mind them because they think they are going to get political rewards for dropping cash on people. They might like to drop cash on people they prefer to get it, and they can and they can't do that sometimes. But they are open to this. And so it's a small step from these community driven development programs which are so common, to community group programs, where all of a sudden you get a group of youth who want to get training or start businesses. And you just drop money on them. And that was the little trick that the Ugandan government and the World Bank used to sort of justify this to themselves and to make it all look--the World Bank, and the governments, don't necessarily want to be in the business--I think they should, but they don't necessarily want--to be in the business of transferring money to people's mobile phones. But they can kind of convince themselves that it's not that if they give to groups and it looks like these community driven development things. So that's how it came up: The World Bank gave a $300 million dollar credit to the government of Uganda for local development; most of it was for community driven development; and they added on this piece, which was going to give money to groups of like 20 young people who had applied for--who said, Give us $8000 and we will go off and get our own training and buy our own tools and start a bunch of vocations. And the 20, as you point out in the paper, in the Quarterly Journal of Economics [QJE], you point out in the paper that some of that was just to keep the administrative costs down. It's easier to give money to a group, a small number of groups, than a larger number, 20 times number, of individuals. But how many of these applications, with, say, 20 people--I think the average was 22, the average group size--did they want to do something as a group, as opposed to just split the money up and go get their own training, each individually? How many of them proposed firms? Any of them? Guest: Almost none. None of the ones I saw, I should say; and certainly none of the ones we funded. Now, they were quasi-cooperatives in the sense that if they had to buy something heavy and big like a welding machine, they were going to do welding, and they'd share the welding machine in some fashion. And if they went off to do their own separate trades as welders or carpenters or tailors, when they got big jobs they might take them on jointly in order to manage it. Or they might be congregating in the same place so they might get contracted for the same time. So in a very informal and fluid sense they acted a little bit like temporary cooperatives. But for the most part they worked on their own. And this is what they envisioned from the beginning. Russ: And talk about the magnitudes of the money that was involved, and what happened. Guest: So, it was $8000 on average for the group. Groups varied in size and the amount they were [?] varied in size. But then that was what it was. So it worked out to about $400 on average, per person; which is roughly their annual income for the year. So, I remember at the time I was really skeptical of this and it felt like an albatross around my neck. I didn't know why I was evaluating it and I did not expect it to show up in the QJE several years later, to say the least. I was very skeptical. I had this instinct that there was no way that these guys were going to make sensible decisions with the money. I had a very low initial expectation of what the impact was going to be. And what they did and the results surprised me. For the most part, I'd say about three quarters of the guys--when they got the money, most of the group typically shared. In almost no case did one of the executive members run off with the whole sum. And in very few cases was somebody excluded entirely from the benefits. That was the first thing that surprised me. But the second thing that surprised me was that of the people who shared in the benefits, something like three quarters of them enrolled in some vocational training. They only spent about 15% of the money they received on vocational training. It was interesting that they--there are a lot of little, small institutes of varying quality around Uganda; and they hired their own. And they were in charge of all those decisions. Nobody said, you have to go to this school. Or whatever. And so they spent about 15% of the money on this, and more than three quarters used that to get a few months of training. And then they spent most of the rest of the money on tools and materials in order to become carpenters or welders or metal workers or tailors or run hair salons. Those are the most common ones. Russ: And these are young people? And it's a mix of men and women, correct? Guest: Yeah. It's a mix of men and women. It was about a third women. They are mostly in their 20s and 30s, which is "youth" in Africa. Youth is a social category: it means you are not a child and not an elder, essentially. And then generally worked--almost nobody quit their other work and just became a carpenter or hair salon person full time. Most people don't do that. When you are very, very poor, you usually do two or three or four things. You farm, you raise some animals, you do a little petty business, maybe you learn--if you have the capital you learn a trade and you practice that. And so they ended up working 5 or 6 hours a week more. And they were working those 5 or 6 hours a week in their trade. And they were doing it alongside all the other stuff they were doing. Russ: It's important to point out: they don't work many hours in the formal sector to start with. So 5 or 6 hours is a big increase. Guest: Right. Russ: I think it's 12. Guest: Exactly. So in the end they go from something like, I don't remember the exact number, but say it was from like 20 to 26 hours. Compared to the control group might have been working 20 hours a week on miscellaneous things and these guys might have been working 26. I don't remember the exact estimate, but that's close enough. And that's not everybody. Some people failed or they no longer--I think it was about half, after four years. We followed them up after 2 and after 4 years. So after 4 years about half were engaged in some kind of trade. And some of them had even hired other people. Although usually they'd hire other people to do agricultural work or something. But then it was generating employment. And their earnings were higher. Their earnings were up by about 40% on average compared to the control group.
36:18Russ: That's a stunning, giant number. Which got your attention, and it got the QJE, the Quarterly Journal of Economics's attention, too, obviously. As you say, you were surprised. How do we explain that? Guest: Well, the first thing I'll say is it's a stunning proportion. In absolute terms it's not that big a number. If you are only making $10 or $20 a month, then increasing that 40% is a small absolute number. But it's really meaningful. The marginal utility from a 40% increase when you are earning that little is actually high. So there's that caveat. So, what explains that is I think this idea of credit constraints. The idea that these are young people; young people the world around have accumulated a certain amount of human capital; even if that's not formal education, if you grow up, you learn to be a functioning human being and adult, you are released into the world. And you are probably below your potential in the sense that you haven't accumulated all the assets and capital and things that you'll one day use to make money. And you accumulate that slowly over time. And if you start behind, especially if you are very poor, what a cash grant to a young person can do is essentially jump start them. And essentially it helps you reach your potential sooner. So what we saw in the control group was that, especially the men, less so the women, but we saw with the men in the control group is, over the 4 years, they were saving and investing their capital, mostly in petty business; not in vocations, because vocations required this big lump sum payment that they could never afford. They'd start a lot of petty business and they were increasing their earnings; and they were increasing their employment steadily over time. And presumably that'll just keep going up steadily over time till it reaches some, maybe when they are 40 that's where they'll get to. And our guys were just consistently ahead of them. And what we probably did--I'm sure if we followed them up in 20 years they might look the same. And they'll look the same, and much richer. What we helped them do is we actually helped them get a 5 or 10 year jump start on their potential, because they were able to get this capital right away. Russ: I know you looked at a lot of different aspects of the activities of the people who got the money versus those who didn't. Anything about self-esteem in there that stood out? One thing that struck me, when you think, again our earlier conversation, 'Oh, we can't just give them money; they'll just waste it, or they'll have a big party or they'll be profligate with the money.' But they weren't. Because they are desperately poor. They are not stupid. They took care of that money and they used it to make their future brighter. Besides the financial aspect, were there any measurements of their well-being or other aspects of daily life that you measured that were different? Guest: So, we focused--I think we will go back in the near future and I think we'll try to focus on esteem and psychological wellbeing much better than we did. We were actually intrigued and focused a lot on what it did to their social status and their social interactions in the community. If they were women, the extent to which this was empowering in that maybe they had more independent decision making and autonomy. And we were often interested in aggression, because this was a post-conflict scenario. Now, this wasn't a highly conflict-affected population, but there were some opportunities for aggression, certainly everyday aggression and crime. And there were some opportunities for anti-government protests. And so that's where we spent a lot of our time and energy. And what we found is that there's very little, as it turns out. And this has been consistent across several of the studies I've looked at, where we've found these really large increases in employment and income, is that people's social support and family support increase a little bit. You know, when you are a net giver into the social system maybe [?] is a little less stressful and you have a little bit more support than otherwise. But it's very small and not always significant. I expected it to be much larger, especially--you know, if Africa if you are a young person, if you are a net taker from the kin network rather than a net giver, you usually have a very different social status. And we didn't see that. So maybe we overestimate that in reality. We didn't see any change in aggression, and we didn't see any change in anti-government attitudes or protest behavior. We thought we would, and there were some hints we would; there were some hints we'd see a decrease in male aggression. And we did not, in the end, when we went to measure it really well after 4 years. Russ: Now the women had a much bigger impact than the men in the sample. I think the women had on average an increase over the 4 years of about 70% relative to the control group, and only 28%, was my memory, for the men. Still not--a large number, but--did you think about or look into why that might be? Did the women have opportunities they were cut off from that the capital or the skills made a big difference? Guest: I think the women's reaction--the women who get into the program look very similar in trajectory. They start off poorer on average than the men. But their trajectory looks very similar to the men who get the intervention as well. So you might think the returns to capital are very similar. What drove the difference was that the control women stagnated in the absence of the intervention. The control women, it's just a flat line in real incomes. Which is unlike the control men, who, as I mentioned, by saving a little bit, accumulated over time. So the puzzle--which we have some ideas, we don't have a clear answer--the puzzle then is: What was it about the control women that prevented them from accumulating? It might have been the fact that women in general, because they start off poor--anyone who starts off poor is less likely to accumulate. They are so far below--their earnings are so low they can't save their way out. We see a little bit of that. But I don't think it really explains it all. It's a little bit of a puzzle. It might also have to do with the social status of these women in general or in the household. Maybe if you get a big dump of money then it's okay for you to start a business. If not, then maybe circumstances work against you.
43:09Russ: Talk about what you did in Liberia. Guest: So, the way I got into a lot of this employment work, I'd got into Uganda studying the war that had recently ended, what was still going on when I worked there--it was ended when we ran this intervention we've been discussing. But I began by looking at the impacts of the war and who participated and why and some of the determinants of why men rebel. And a lot of my work on employment programs was partly because I was interested in how employment programs can reintegrate and help people recover from conflict. But also because I was interested in this idea that comes from the economics of crime, and some of the economics of rebellion that greed is a motivator. And if you improve the economic opportunities to men, will they be less likely to rebel? We believe this is true; we have a lot of indirect evidence this is true. We don't have any individual-level evidence outside a couple of youth programs in the United States that this is true. Russ: It's an opportunity cost argument--if you have a pleasant job, you are less likely to head to the street. Guest: Right. So does that apply to rebellion, I guess is the big question. So, I went looking for a place and a population where it was safe enough to work but where there was a pretty good likelihood of an opportunity to rebel, or at least maybe an opportunity to engage in election thuggery, in intimidation, and other types of illicit activities and crime. And ended up, sort of in some ways by chance, in Liberia. Which--so this was maybe 2008 when I started working there and the war[?] ended in 2003, and there is this increasingly less fragile peace in the sense that the country was really stabilizing and growing; there was a United Nations [U.N.] peace-keeping force. But when I went there, there were probably 10-20,000 men in urban slums many of whom were ex-combatants, who were very poor, who engaged in petty crime, and were seen as a real risk to security at any time, whether it's rebellion breaking out at home, rebellion breaking out in a neighboring countries and then being recruited as mercenaries--there's a long tradition of that in the neighborhood. And also attraction into crime. And the United Nations estimated there were maybe 10,000, mostly ex-combatant, high risk young men in what they called 'hot spots' around the country. So, little resource-rich areas, like alluvial diamond and gold mining areas, and rubber plantations and logging areas, and these young men were occupying those areas and illegally extracting these resources, preventing the government from selling these concessions to--[?] returning the concessions to the families that owned them or selling those concessions off. Essentially this is going to be the main way that Liberia recovers its economy. Russ: And what happened? Guest: So, we stumbled upon one program that looked promising, that had nothing to do with cash. They were very, very opposed to the idea of cash. But what they were willing to do, and planning to do, was to go into some of these hot spots and persuade these young men to put down their mining picks and things, and go and learn to be farmers in a residential training center. And then after 4 months of training return and become farmers. And they gave them $125 in capital to return home. And at the same time, we started our own project, I'd say it's about a year later, where we started working with their urban counterparts. These also largely ex-combatant men, also engaged in illegal activities--in this case it was more drug dealing and petty crime in the urban slums of Monrovia. And we experimented with two interventions. One was a pure cash transfer of $200. And the other one was--you could think of it as an 8-week program of therapy looking a little bit like cognitive behavior therapy in the sense that they are practicing and learning, the objective was[?] some literature, practice and learn self-control in both aggression and a personal and financial sense; and the other objective was to adopt--I guess you could say, good behaviors. In the sense that they know what's right and wrong. You don't have to tell them it's bad to steal or bad to use drugs. They know that society thinks it's wrong, but they don't necessarily feel that they have to live by those rules because they are not part of that group. So it was also trying to persuade them that they want to be and could be part of like "good society." Russ: And what happened? Guest: Interestingly, so, in the first one where there was this ex-combatant reintegration giving training and capital, they do very well. They actually are interested in becoming farmers. Which I didn't know, didn't expect; a lot of people didn't expect. Most people are interested in becoming farmers, and you give them the skills and capital and they farm more. They actually ended up shifting about 20% out of these illicit resource activities and shifting about 20% or 30% into farming activities. So they were pretty fully employed, unlike the guys in Uganda. These guys could fill up 50 hours a week of work. They just shifted; and they had a portfolio of things they were doing--petty business and illicit resource extraction, like the mining, and farming--and they just mixed their portfolio differently towards farming. And what's interesting though is nobody exited. Very few people exited the illegal resource mining and their illegal rubber tapping. They just shifted their mix. And this is actually similar to what Steve Levitt and Sudhir Venkatesh found with Chicago drug gangs. When outside market opportunities improve, they don't exit drug dealing. They just do less drug dealing and more McDonald's work, or something like that. But what's interesting is that some of the guys ended up not getting the capital inputs. About a third of them chose animals as their capital inputs and about two thirds chose some kind of farming like vegetables. And they look almost identical, to our surprise, depending on what you chose. But if you chose animals, there was a supply interruption. It turns out it's really, really hard to get pigs and chickens into Liberia. You have to fly them in from Guinea, on like army planes. And they don't supply the journey. It's terrible. So more than a year later when we were running our follow-up study, these guys had not received their chickens and pigs. And they'd been promised in maybe a month or two we'll try to get you those; if not we'll give you a cash equivalent of about $100. What was really interesting--maybe as you'd expect, the guys who didn't get the capital had not shifted into farming. They hadn't farmed more. But they were mining less. And they were illegally extracting rubber less. And the reason was you had to go off into the bush and it may be a few days away to do that. And if you did you might miss the $100. Russ: Your pig delivery. Yeah. I have an image of the Amazon drone program playing a key role--I see pigs flying. Guest: Right. Russ: It's a world that can't be imagined, really.
51:01Russ: What happened to the people who just got cash? Guest: Well, let me actually tell you one more thing that's interesting about this, is that the moment we started running our--shortly before we ran our follow-up study, a war broke out in neighboring Cote d'Ivoire. There was a disputed election; both sides armed; there was increasing violence. And then full-scale war for about a month or two until a French invasion force came in and ended it. And in the meantime a few Liberian generals went over and started recruiting Liberian ex-combatants. And they really only pulled about 500 over-- Russ: Cote d'Ivoire generals. I think you said Liberian generals. Guest: Right. Neighboring country, [?] on either side. You can walk to the border in several days. And they mostly pulled them from the urban center, from Monrovia and the border towns, where we weren't working. So, nobody in our study went as far as we could tell. But all these recruitment activities started up. So the generals and all these sort of minions started holding recruitment meetings; and there started to be informal talk of contracts: like, if I come with a truck and I give you $500, will you get on? No. If no, $1000, would you get on the truck? People would start moving to the border towns to be ready to be recruited. These are some of the things. And the guys who--the people in the program were about 25% less likely to participate in these recruitment activities. Or at least tell us they'd tell us they'd participate in these recruitment activities. It was almost all--it was concentrated in the guys who were waiting for the cash. Because again, they'd have to leave the community and they'd miss their $100 for sure; and then they'd start their farm. So they essentially compared, I've got my skills, sunk cost, I can get $100 and then start my farm and stay here; or I can take $500 to jump on this guy's truck and then who knows what happens to me. And so they were more interested in the $100 option. Russ: Any longer term effects akin to the Uganda returns that you saw? Guest: We haven't gone back for those. Those were essentially 18 months after the baseline, 14 months after they finished the training. And we could go back now for essentially like a 3 or 4 impact assessment. I'm not sure it's worth--I think we're waiting for--I think it was interesting in large part because of the war breaking out. I think we might wait a little while and see if there is some other opportunity for them to participate in violence so we can go and measure. This is the tricky part when you, this is the moral quandary when you work in this kind of study field, is that you know what the consequences of violence are and you work on this because you want to minimize it. At the same time, your entire research career hinges on being able to find and measure these [?] conflicts. You end up being either the tornado hunter--there are too many to chase--or the guy who sits there and some small part of you kind of hopes for the tornado to come down no matter how bad you think it is. And so, anyway, so we're going back if that happens, and if not, it's not clear it's worth it. Russ: But wasn't the original--wasn't one of the key findings that the people who got the cash didn't "squander" it on drugs and alcohol? Guest: So, this is--yeah. The whole time we were doing this, we were thinking, gosh, this cash seems to be really important. We think they can spend cash well; we think you are wrong to mistrust them with cash and only give them capital. And then it looked like the cash was really important to their decision not to go. So when we tried this with the street youth in Monrovia--a lot of them were these guys engaged in petty crime and who were ex-combatants--we were actually really, really worried that they would use it to buy guns. Or they would get beaten up or stolen from. Or that they would overdose, because a lot of guys were casual, and some serious, drug users. And so we started with 100 guys that we recruited. And 25 got cash; and 25 got this therapy program; and 25 got both and 25 got neither. It was a random draw; they drew balls out of a bag with different colors. And we watched them really closely, going back after 2 weeks and 4 weeks and 5 months and 7 months, to be really careful that no harm came to themselves and they didn't do harm to other people. And we were really kind of amazed. There were almost no cases of this. They seemed to save and invest the cash and very little seemed to have been spent on drugs. And so we expanded over time to 1000 people, once we were comfortable with this model. And this is what we found: we found that when these guys get cash--and these are the last people on the planet you might think we ought to be giving cash to. Maybe not the last people, but like second or third to last. Because you think they might do harm to others, harm to themselves. And at the very least they might waste it. And we didn't find this at all. Almost overwhelmingly the money was saved or invested in some kind of small enterprise or in getting clothes or getting some decent shelter, because a number of these guys were homeless or often homeless. And we saw virtually no increase--they still spent money on drugs and alcohol and cigarettes and gambling and all the other things they spent money on, but they didn't spend any more than before. Russ: I can't help but think of the H. L. Mencken line, which I don't quite get right, but it's something along the lines of 'Puritanism is the haunting fear that someone somewhere is having a good time.' So they were having a good time, but no more. You didn't subsidize it; you didn't finance it. You let them do some other things. Which is very moving actually, thinking about it. Guest: What's different with Uganda--like the Uganda guys, a lot of them tried to start petty enterprises. They'd go and they'd buy big boxes of soap. One guy bought a big tub of liquor from a distillery. And they'd go and they'd sell it. That's kind of how you'd make your living. Or they get a wheelbarrow or a blanket and they'd sell stuff out of the wheelbarrow or on the blanket. Which is what you do to get by in a lot of these markets in Liberia. What's interesting and a little bit surprising is they were back where they started a year later. They had a better year: they ate better, had better housing. All the things that we want for the very, very poorest when we give any kind of welfare assistance. But they didn't pull themselves up by their own bootstraps and it didn't catapult them ahead like in Uganda. Russ: No jump start. Guest: Yeah. And it might be that the $200 wasn't enough, or it might be that something else held them back. One thing that cropped up--the data are not as good on this as I'd like--was property rights, for lack of a better description. They just had their stuff stolen from them. Whether it was their wares or their profits or whatever it was that they bought for themselves. A lot of it just got stolen and pilfered over time because they lived in these insecure environments. And a lot of the stuff was stolen by the police.
58:40Russ: Well, that comes back to the governance issue. I'm thinking about Bill Easterly's recent episode and book The Tyranny of Experts. In some of these places--I hate to say it--you want violence or something to stop the current system which oppresses people, doesn't give them options, doesn't allow them to use their skills. I don't know what kind of government Uganda or Liberia have, but giving them the money to pacify them and keep them out of the violent sector is on the surface probably a good thing. But maybe not, in a place where there is tyranny. Any thoughts on that? Guest: Yeah. Well, most states in Africa are too weak to be tyrannical. They end up being these sort of hybrid autocratic, democratic regimes that aren't tyranny--you actually have to be pretty capable, say, with a strong bureaucracy and a good police service and things to be an effective totalitarian and dictator. So, what you tend to see--there's lots of different types of regimes but what you tend to see increasingly, I think people call them like hegemonic parties. So on the paper it's democracy; and there are elections; and they might even be reasonably free elections. But this one party, sometimes this one leader, continually gets re-elected. And they are sort of autocratic in their approach-- Russ: It's like an American city. Guest: Yeah, maybe. Russ: One party rule. Petty oppression and corruption. You're right; it's not a dictatorship. Just a cheap shot. Go ahead. I apologize. Guest: No, no. Another example closer to home is Mexico under the PRI [Partido Revolucionario Institucional] for many years. So, here's what's interesting, actually, about the Uganda case, is that Uganda is a perfect example of this sort of hegemonic party. The guy who is president has been president since 1986. And he's pretty good in many ways. The economy has been growing. There are more human rights enjoyed in the country and more press and political freedoms than at many points in the country's history. It's still not completely free. It's somewhere in the middle. And they, he needs to maintain a lot of support. He wants to maintain as much popular support as possible. And so, throwing money to these under-developed rural constituencies, especially the North of the country where he has a history of support, seems like a good idea. And so they probably thought the political returns were going to be good. We wanted to see this. So we went back, and we were working with the World Bank and the government at first for the two-year survey. And they literally took, they took a red pen--I guess they wanted to know the answer but they didn't want it published. Or they didn't want it, they didn't want to know and they didn't want to seem to be asking, seemed to be what was going on. So they took a red pen to the survey and they cut all the political questions. So, we weren't able to see what the effects were on political support. I think they were scared to be seen to be opportunists. So we went-- Russ: [?] No, go ahead. Guest: So we went back after 4 years, with private money, and asked those questions. At which point we were allowed. Had the right permissions. They just didn't want to be the ones to be asking. And what we found was interesting. If anything, the people who got the money--and the communities that got the money--supported the government no more. In fact, they supported them even a little bit less. Not always significantly so. What was interesting is people who got the program were actually more likely to support the opposition, and support them openly. Meaning they'd attend rallies, or they'd work on the opposition. Russ: I just can't help but think about whether the world would be a better place if the World Bank didn't do that kind of thing. If, even though it helps some people and raises their wellbeing a little bit, it keeps a system in place that's maybe not so good for poor people. Guest: Well, that's what's interesting about this result. I would have thought this was the danger: the World Bank is essentially strengthening the hegemony of this hegemonic party. Russ: Yep. Guest: And what it might actually be doing is the opposite. We haven't published this result yet. We've talked about it. So I'll be interested to see how the government reacts when they see it. They probably won't notice. But it suggests that--it may be--and there's a few other people who have found similar stuff in Indonesia and elsewhere that when people get richer, when the poorest get richer, in some sense they are a little harder to buy off. And they maybe vote with their ideas and their heart or their principles more than their pocketbook. And that would be consistent with what we find. And so, in some sense, inadvertantly, these kinds of programs, these decentralized programs, essentially were giving a lot of agency to the poor and helping them get wealthier. Might actually stengthen democratic accountability and freedom in the long run. Russ: It's a nice thought. I wonder-- Guest: It's a big extrapolation. Russ: No, I think it's interesting. I think--I'm [?] thought. I think it's--my word would be when the Ugandan government finds that out, they'll just make sure that World Bank channels that money differently. But we'll see. We're out of time-- Guest: Yeah, well, I think--well, sure-- Russ: No, go ahead. Guest: I was going to say--what weak states in Africa have to and will learn to do is target that money better towards supporters. I think that's the danger. The danger point may be with aid, when it starts going to this--when the states when they are receiving it are strong enough to re-use it effectively for their own political plans. I think right now a lot of states in Africa don't have that organizational capability the same way maybe states in Latin America have developed it. And that's--I think that's when it will become trickier.
1:04:47Russ: So, let's close with the following question; and your work really brings this to the forefront of my mind, at least. You talk a lot in many of your papers about skills versus capital. And we've talked about it today. You give somebody a grant, or just cash and they decide how much to invest in skills, how much in raw materials, how much in a piece of equipment might help them. And there's an obvious Hayekian knowledge problem that's being solved by the person close to the problem. There's some advantages to that. What I worry about--and this is what Nina Munk concluded, fairly or not, or accurately or not, she looked at the end of the Millennium Village Project; she said, when I interviewed her, she said: Well, nothing grew. There were no occupations. There was no industry. There's no long run effect. There's no transformation. There were no markets. And when you describe these deperately poor people earning $350 a year, and now they can be a hair stylist or they can do something else--they can provide a service--there are no companies. There are no firms. There is no capital that is being aggregated in a way that happens in Western society--the way we've described it as economists. There are not really markets. There are markets for skills in the sense that people other people to hire other people to do stuff for them. But you don't get that next level. And that seems to be--that's what real growth allows and creates. And that's what we really would like to hope for. What are your thoughts on that? And let's close with that. Guest: So, I agree. Something like the Millennium Villages or the kinds of programs I've studied are not going to achieve this kind of, what people sometimes call 'structural transformation.' The whole, the shift to an industrial economy and large firms. Um, this is going to--this kind of cottage industry is providing growth. It's helping these individuals in these villages do well. And doing 10 or 20 or 40% better than before is actually a pretty big improvement. In historical terms, along with historical terms, that's a great improvement, especially over a few years. So, that strikes me as a really good thing to still do. But it's a little bit like what I said toward the beginning, which is that that's not really what, you know, big development is about, in terms of the structural transformation. And there are really two different processes and two different objectives. And, um, if I'm going to include in that, related to one another. So I think they are just happening on very different levels, and have very different drivers. So you could think of what I'm talking about as in some sense the kinds of things one can do to relieve the worst forms of poverty. Because it's not--these people, the bottom people, who I've been dealing with, are not the ones who are going to initially share in any industrial gains. But it's just like Uganda and Ethiopia, where I also work, and Liberia, are industrializing in some ways. I think you'll see Africa, Ethiopia, Kenya, maybe Uganda industrialize a great deal in the next 20 years. But the people I'm working with are not going to share in that. For generations, potentially. And so, you could think of this as another focus of development that's really aiming at relieving the worst forms of poverty for that "bottom billion", as this other process is going on. The problem is when the aid industry--which I think has happened, and I think things like the Millennium Villages contribute to--the thing is when those draw the attention of the average scholar, or the average politician, or the average U.S. President away from the important thing. Which is the kind of thing that drives structural transformation. When it pulls attention entirely away from those. And you can go in to U.N. Millennium Development Goal strategy documents for 15 years. And you can do a search, as I have, for the word 'firm', or 'industry', and you can fail to find it. So that's a problem. We need to sort of--there's two balls. And there's policy individuals or citizens, or whatever we are. We need to keep our eye on both of them and not let one of them overtake. Not let any one of them overtake the other in importance. Russ: What strikes me is we are not very good at one of those balls, that structural transformation. What I am impressed by about your work is that you actually--it seems like we actually might make some difference. Positive difference. And that's what worth something. And it shouldn't be ignored or treated as unimportant. Guest: Yeah, you know you have to--structural transformation might be more important, but we might know less what to do about it. I'm a little more optimistic than some. But that might mean we focus more on the thing we know more about how to do. But I think it also means we in the scholarly community, we in academia maybe have to invest more energy and resources in that basic research or understanding, in learning more about that thing that has higher impact, the structural transformation.

COMMENTS (13 to date)
Rick G writes:

The conversation at the end struck me. In a Hayekian worldview, shouldn't empowerment of people at the smaller scale (e.g. development of cottage industries) led to emergent larger scale changes? That is, perhaps good governance is something that can emerge from a populace that is less concerned about merely putting food on the table and a roof over their head.

Obviously there are still potential barriers to emergent good governance, particularly a totalitarian state the robs the populace to fund violent oppression. But it seems there is a synthesis here, wherein first world nations can act to limit the violent oppression such that the sown seeds of growth on the smaller scale can flourish.

Perhaps the recognition needs to be that we cannot institute good national governance, that it must emerge. Thus, absent a sufficiently well developed local economy and political culture, cutting the head off the exist autocratic regime simply clears way for the next. So our goal should be to do what can to support local growth.

big al writes:

very interesting conversation - thanks. there is now a whole set of podcasts you've done, russ, with different people about development issues, and i think i need to come up with the list of them so i can send it easily to people i know. the whole issue of aid and development, especially in africa, is such a fascinating nexus of various economic ideas and real-world experiments. much to learn about the value of letting people make their own decisions.

[There is a list of the EconTalk podcast episodes on our Poverty and Development category page.--Econlib Ed.]

big al writes:

re Rick's comment and comments in the podcast: my read of history is that much of the development of "democratic" societies is based on increasing economic security of individuals in the society. the less an individual is dependent on an overlord or the government or any other organization, the more freely the individual is to stand up for his/her own rights. also, the more that prosperity is spread around in a society, the less burdensome is the existing level of corruption.

big al writes:

re: [There is a list of the EconTalk podcast episodes on our Poverty and Development category page.--Econlib Ed.]

excellent! thanks very much for the link and for organizing the podcasts in such a useful way.

[Glad to help. --Econlib Ed.]

Olson writes:

Why not use bitcoin as the mechanism for reducing overhead for micro-loans? there is a company 37coins trying that very thing, using SMS and phone numbers as, essentially, an ultra low-cost bank. here's a link http://www.coindesk.com/37coins-plans-worldwide-bitcoin-access-sms-based-wallet/ about it.

Mike G writes:

I worry that this form of aid might have inflationary effects if it were carried out on a larger scale. Have researchers investigated whether prices rose in the local economies in which the cash was injected?

Totoro Cato writes:

For the first ten minutes or so I was very confused. I was thinking, "what kind of joke is this? The voice is clearly Mike Munger, but the name in the title claims it's some other guy".

As for the substance of the discussion, I am really interested in the moral aspect of giving cash rather than goods. Russ, I read The Invisible Heart where you discuss this more.

I really like the episodes where you have guests on that disagree with your way of looking at things and you two discuss your differences in a polite way (ex: Ricardo Reis, Robert Skidelsky). Is it possible you can have someone on who can make the moral case that it is better to have the recipient receive certain goods at the donor's discretion?

Jerm writes:

I found this episode to be a nicely restrained look at different perspectives.

I don't know how appropriate it is to compare the services of the Heifer charity to a no-frills cash equivalent of the cow, since Heifer has such a strong religious component (and the direct relation to the "give a man a fish" story) to their animal husbandry program. I'm actually surprised that the "gold plating" in heifer only amounts to half of the total cost of donation. From what I've heard, their training is substantial and long-lasting. I think it would be useful to quantify the "non-cow" part of their charity, especially if they are going to be held as an example of a non-cash charity.

And as a side note, I really liked your recent contribution to Planet Money, Russ.

Russ Roberts writes:

Jerm,

The cost of the cow+training under Heifer International is actually closer to 20 TIMES the raw cost of the cow. That's a lot of gold plating. I would not assume that the training is worthless. But like you, I'd like to see how what it actually accomplishes.

Glad you liked the Planet Money episode. Hope to post something on it with a link soon.

Jerm writes:

Thanks for the clarification, Russ. While listening to the podcast, I mixed up Heifer with the "$300 cow" mentioned earlier. Heifer's literature always mentions the cost of the cow being around $500, but the true cost being much higher opens up discussions about average cost and marginal cost, exchange rates, and how the price of a pregnant cow in Rwanda can be generalized to the entire world.

But I still think that Heifer is a loaded example, as the only part of their program the interviewee found worth quantifying is the value of the cow. So it's not really a comparison between "cash donation" and "non-cash donation." It's a comparison between "cash donation" and "one of the largest full-service non-cash donations out there."

Maybe the math goes:
Necessary Donation = (Raw Cow) + (True Value of Training) + (Gold Plating) + (Overhead)

And the best Heifer-like charity would minimize the gold plating and optimize the overhead. The value of the cow seems rather easy to get. I'm surprised that the value of the training is a complete mystery. Couldn't someone at some cow university come up with an estimate?


Heifer spends a lot on overhead (23%, from what I've seen), and I have the junk mail to prove it. But even some of the cash-donation charities have 15% or so in overhead. And unless we are to believe that gold plating exists only for the unenlightened cow charities, then it's either already in the cash charities or just waiting around the corner.

In this instance, I believe in the free market. If Heifer is so wasteful, then surely there will be a leaner and more efficient cow charity to defeat them. Or if Heifer's animal husbandry program provides so little value, then a raw cow charity will eclipse them.

At a basic level, cash charities seem like an extension of the "Cash Christmas gift" idea that economics people like to use (to alienate themselves from society at cocktail parties). But comparing cash charities to Heifer seems more like comparing "going to a steakhouse" to "cooking a steak at home." Sometimes it's more than just the cost of the raw cow.

Gandydancer writes:

Viewed as a mechanism to deliver money I suspect the "efficiency" of Blattman's projects is not greater than that of Heifer's delivery of cows. Of course his projects are "research" rather than operational, but the point is that I don't see that there's the slightest indication that he's solved the cost-of-information problem that he points to in micro-lending. And if you're going to explicitly make a program non self-sustaining, because you have to track the identity and quality of recipients anyway, subsidized loans are not obviously inferior to or more efficient than gifts.

Daniel Barkalow writes:

It seems to me that the efficiency of cash is largely tied to the availability of useful things for sale local to the recipients of the money. This would suggest that it would be a big help to the poorest of the poor in places with large inequality, but not so much in places where everyone is poor. If there are enough cows to feed everyone, but they aren't actually feeding everyone, money would probably help a lot (including if the issue is that the cows aren't getting milked). If there aren't enough cows, then cows have to be imported (or bred), in either case requiring that buyers with money stick around for a while before getting cows, and an aid agency may be more efficient at sourcing cows than a brand-new trade market is. Either the $160 cow or the $300 cow could be more efficient, depending on whether you're going to run out of $160 cows.

Ted Selig writes:

I listened to the Blattman podcast today. Made me think of www.ShopSoko.com. The commercial startup is fronting cash to artisans (their suppliers) when an order is taken. The artisan uses the cash to buy materials required to produce jewelry. Soko and the Artisans make a profit when the jewelry is delivered. Is this similar to giving cash?

Check out the description of the process at http://shopsoko.com/pages/about-us

Comments for this podcast episode have been closed
Return to top