Cash transfers
Encyclopedia
Cash transfers are direct transfer payments of money to eligible people. Cash transfers are usually provided by the state and federal government.

Targeting

Cash transfer programmes in developing countries is constrained by three factors: financial resources, institutional capacity and ideology. Governments in poor countries have limited financial resources are therefore highly limited in the amount they can invest in cash transfers and the money required to ensure the programmes are effective. The amount invested is influenced by ‘value for money’ considerations, as well as by political and ideological concerns regarding ‘free handouts’ and ‘creating dependency’.
As random allocations as not particularly effective, there are to main forms of targeting:
  • means tested
  • universal (everyone is a designated social, geographical, age or other such category)

Means testing potential recipients of cash transfers is the more politically acceptable, as money is not perceived to be wasted by including those who do not have a desperate need for the money ("leakage"). This can either be achieved through a screening process of potential recipients, or else by making the benefits of the transfers so low only the most desperate will apply. Yet there are also many problems associated with this method as the transaction costs of screening are very high, due to the need to pay for assessment, the travelling cost of candidates to and from the assessment and also the potential risks for corruption. There also may be a negative effect on social capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...

 as resentment develops of those who receive support by those who do not.

A universal approach, i.e.selecting all the under 5s, or pensioners, disabled, female led households, etc., does have many advantages as it increases social unity amongst a section of society benefitting from the programme and avoids the transaction costs of screening. A universal approach requires carefully selecting a target group as some groups may cover a greater number of poor families, but include the less needy. Similarly a more narrow recipient group risks excluding many of those who do actually need support.

Lump sums

One method of managing a cash transfer is to provide all the money at once in a lump sum, rather than in small regular amounts. Researchers at the Overseas Development Institute
Overseas Development Institute
The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...

 carried out a study on the effectiveness of the Swiss Agency for Development Cooperation's experiments with lump sum cash transfers and came out with the following six findings:
  1. Lump sum transfers work better in post-emergency than developmental contexts as their potential to be rapidly transferred to the recipients suits the urgency of post-emergency requirements.
  2. Success of lump sum transfers greatly depends on the local market and whether there are long-term income generating investments to be made. Areas affected by illness (e.g. HIV
    HIV
    Human immunodeficiency virus is a lentivirus that causes acquired immunodeficiency syndrome , a condition in humans in which progressive failure of the immune system allows life-threatening opportunistic infections and cancers to thrive...

    /Aids) or other such problems are likely to benefit more from regular small payments.
  3. Economic conditions other than limited markets or limited investment opportunities are also important, for instance, if the scale of the transfer greatly exceeds several years of local incomes recipients are unlikely to be able to know how to prudently invest the cash. Where there is a clear investment potential, care should be made to support the recipient while lump sum investment matures, e.g. someone who buys a cow still needs to eat while waiting for the long term benefits (calf, milk) and so must be helped in order to ensure s/he doesn't sell the cow.
  4. While business planning, skills enhancement and training support is useful, if a clear investment opportunity (fishing boat, cow, etc.) is available, that is normally enough.
  5. Context must be considered, e.g. people cannot build a house if they have no access to land.
  6. Large cash transfers risk reating corruption or being used as a tool to gain political support for the government.

Wider economic, political and social implications

Many governments in poorer countries, where cash transfers could potentially have the most impressive impact, are often unwilling to implement such programmes due to fears of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 and more importantly, dependency
Dependency theory
Dependency theory or dependencia theory is a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former...

 on the transfers. Quite often it is NGOs who encourage the schemes. If this schemes are introduced there are aften directed at the non-working poor (the DfID backed Hunger Safety Nets Programme is a notable exception). In sub-Saharan Africa
Sub-Saharan Africa
Sub-Saharan Africa as a geographical term refers to the area of the African continent which lies south of the Sahara. A political definition of Sub-Saharan Africa, instead, covers all African countries which are fully or partially located south of the Sahara...

 transfer values are normally limited to 10 to 30% of the ultra poverty line, though donors are now recommending the provision of a transfer level equivalent to 100%.

Whether due to the cautious approach or not, studies have shown that inflation is often avoided as traders increase their stock in anticipation of the schemes. Furthermore, the projects have often helped to build the state's legitimacy as it helps ensure citizens survival and programmes are targeted at marginalised groups and support their integration (e.g. in Nepal
Nepal
Nepal , officially the Federal Democratic Republic of Nepal, is a landlocked sovereign state located in South Asia. It is located in the Himalayas and bordered to the north by the People's Republic of China, and to the south, east, and west by the Republic of India...

 successive governments have used cash transfers to help integrate marginalised groups and reduce the risk of conflict).

Examples

  • Temporary Assistance for Needy Families(TANF)
  • Social Security
  • Children's Allowance
  • Newborns' Allowance
  • Worker's Compensation

Case Study: Sierra Leone

Research has been carried out by the Overseas Development Institute
Overseas Development Institute
The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...

 into the challenges of implementing cash transfers in Sierra Leone
Sierra Leone
Sierra Leone , officially the Republic of Sierra Leone, is a country in West Africa. It is bordered by Guinea to the north and east, Liberia to the southeast, and the Atlantic Ocean to the west and southwest. Sierra Leone covers a total area of and has an estimated population between 5.4 and 6.4...

 and in ensuring their success. After a decade of conflict over 70% of the population lives in poverty and over 25% in extreme poverty
Extreme poverty
Extreme poverty, as defined in 1996 by Joseph Wresinski, the founder of ATD Fourth World, is:"The lack of basic security connotes the absence of one or more factors enabling individuals and families to assume basic responsibilities and to enjoy fundamental rights. The situation may become...

 (defined as being unable to achieve the bare minimum nutritional food intake). Given the poverty and the high levels of fragmentation in society, cash transfer schemes have been small scale to date, but include:
  • Meeting immediate income needs;
  • Putting cash into the community and stimulating the local economy; and
  • Empowering people by enabling autonomous decision-making over expenditure.

Any expansion of the system has to take into account:
  • The risk (both real and perceived) of dependency
    Dependency theory
    Dependency theory or dependencia theory is a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former...

  • Infrastructure
    Infrastructure
    Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...

  • Institutional capacity
  • Risk of corruption
    Political corruption
    Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...

  • Affordability.


Researchers at the Overseas Development Institute
Overseas Development Institute
The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...

 found that the perceived risk of dependency was very high and that transfers of tools, sewing machines, or agricultural inputs have proved to be more popular. Furthermore, organisations such as the World Food Programme
World Food Programme
The World Food Programme is the food aid branch of the United Nations, and the world's largest humanitarian organization addressing hunger worldwide. WFP provides food, on average, to 90 million people per year, 58 million of whom are children...

 was of the belief that giving food, instead of cash, in payment for public works was more culturally relevant, in an area where workers had traditionally been paid this way. Yet the actual risk of dependency proved to be far less than feared.
The research has also shown that despite poor infrastructure is not as great a challenge as expected, as informal networks have ensured cash is flowing from the urban to rural areas, even if by hand, and local councils and schools far from the capital are now also receiving payment through bank accounts and not in cash. The same goes for institutional capacity which is widely believed to be improving.

Corruption in Sierra Leone continues to pose a serious challenge and the country ranked only 142 out of 163 in Transparency International's 2006 rankings. Cash transfers are no more prone to corruption than other sources of government spending, yet specific parts of the process of implementation must be carefully monitored.
Affordability is argued to be low. Total government expenditure on social protection was budgeted at around US$1.5 million in 2006 and US$2.8 million in 2007 and social protection expenditure is estimated at around 1.5% to 2.5% of non-salary, non-interest recurrent government expenditure, 0.3–0.6% of total government expenditure and a small fraction of a percentage of GDP.

See also

  • Basic income
    Basic income
    A basic income guarantee is a proposed system of social security, that regularly provides each citizen with a sum of money. In contrast to income redistribution between nations themselves, the phrase basic income defines payments to individuals rather than households, groups, or nations, in order...

  • Conditional Cash Transfer
    Conditional Cash Transfer
    Conditional cash transfer programs aim to reduce poverty by making welfare programs conditional upon the receivers' actions. The government only transfers the money to persons who meet certain criteria...

  • Overseas Development Institute
    Overseas Development Institute
    The Overseas Development Institute is one of the leading independent think tanks on international development and humanitarian issues. Based in London, its mission is "to inspire and inform policy and practice which lead to the reduction of poverty, the alleviation of suffering and the achievement...


External resources

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