How to make cash transfers work

Should they be targeted? Should they go to individuals or households? Are conditionalities necessary? Without a full consideration of these issues, cash transfers will remain an expensive gamble

Having worked on cash transfers for over 25 years, and being an economist, I find recent criticisms of the idea shrill and ill-informed. Only a right-wing ideologue would call them a panacea or a cure-all. They would merely be a vast improvement on the existing mish-mash of subsidy-based social policies, which, as all economists should know, leads to inefficiency, inequity and corruption.

However, if cash transfers are to be successful, authorities at national and state levels must ensure certain conditions are met and that certain design considerations are evaluated, before they rush into what could be an enormously expensive venture.

Cash transfers come in many forms, and the authorities must assess the advantages and disadvantages of each of them before rushing ahead. There is no evidence this has been done. The presumption seems to be that they will replace the PDS, and possibly a few other subsidy schemes, and be targeted on the poor, however defined. I believe that will be a serious, expensive error. Others may disagree. But where is the proper professional debate on that key decision?

There is no need for any kind of targeting. Bear in mind the overwhelming evidence that the subsidy system is chronically inefficient. Yet it is based on targeting via BPL cards. Like others, in our surveys in Gujarat, Delhi and Madhya Pradesh, we have found that a huge proportion of those in need either do not have the cards or are denied them for some spurious reason. The incidence of possession is actually regressive, with the poorest being the least likely to have them. The same is the case with MNREGS. We have surveyed many dozens of villages in various areas. The majority of respondent households and individuals have not had any labour under the scheme, and given the link with the BPL cards, that is scarcely surprising.

In an article in The Indian Express ('Cash is no cure-all', November 27), Lant Pritchett and Shrayana Bhattacharya claimed that cash-for-work schemes like MNREGS work efficiently because they induce self-selection targeting, and are preferable to cash transfers. But not only is the first round of targeting nothing to do with voluntary action, since it depends on possession of a BPL or Antyodaya card, the idea that only those most in need would do the labour is risible. Imagine being disabled or sick through hunger. You are likely to be among the poorest. Will you or others like you be able to queue up for or do hard manual labour? The fittest are likely to be from higher-income families. They will be favoured. The poorest and frail would risk their health and risk more medical costs that would be greater than the value of any income gained through the labour.

So, the first discussion should be about whether cash transfers should be targeted at all. We have been conducting several universal cash transfer experiments, whereby thousands of Indian villagers have been receiving an unconditional monthly cash transfer. Before that, I was involved with SEWA in conducting a pilot in west Delhi. Although full results have yet to be published, we have found that the universality of cash transfers has important advantages, including community benefits. The point here is that policymakers should think through the issues before opting for old-fashioned targeting, which they know fails.

Let me move on from that subject, after noting that two options are available. Either the transfers can be provided universally for every legally resident Indian citizen with money being clawed back in taxes from the wealthier, through income tax or sales tax on luxury goods and services. Or one could operate a universal system whereby everybody must apply for the cash transfers. What the latter has induced in other countries is a tendency among middle-income and upper-income groups to forgo their right, thereby generating an implicit, ethically pleasing form of targeting.

A second presumption that should be reconsidered is that the money should be provided on a "family" basis. That may sound reasonable, until you try to operationalise it and think of the intra-family dynamics it will encourage. In our pilots in India, Latin America and Africa, we have found it is more efficient and equitable if cash transfers are provided to individuals, with the children's money being given to the mother or her surrogate.

Among the advantages we have observed in numerous households is that an individualised payment raises the status of women in the family and the status of the elderly and frail, each of whom has proper claim to the resources linked to the cash transfer. Moreover, defining what is the family or household is never easy or fixed. Doing such a policy on a family basis will create bureaucratic nightmares.

A third issue that some analysts want to introduce is conditionality. Beware of the "nudgers", those who think people must be induced to behave in ways they think is best for them. These paternalists will chip away at the freedom of low-income groups and move from one conditionality to more. We all have to learn to use cash in our lives. Conditionality is neither necessary nor desirable.

We have found that people act rationally by spending on their own priorities, such as on food for their children and medicines for them and themselves. They buy shoes for their children so that they can and do attend school more regularly. If the cash transfers are universal, neighbours put moral pressure on others to do the right thing. This is the normal human condition. Tell the nudgers to go home. Conditions attached to cash transfers are expensive to administer and arbitrary.

There are other conditions for success that should be considered. It will be important to roll out the scheme slowly and systematically, learning practical lessons in the process, without vast spending that would be involved if a rush forward were made. This is one reason for the success of Brazil's cash transfer scheme, the Bolsa Familia. It has been rolled out over the past decade, in the process showing the dangers of even modest conditionality.

A final point is one we have learned in our Indian pilot cash transfer schemes, which relates to the challenge of financial inclusion. Sceptics say it will not work because only 35 per cent of Indians have bank accounts. True. But we have found that experience of cash transfers soon leads people to open bank accounts or their equivalent.

We recommend that initially, cash transfers are provided in hand, at designated venues, such as the local school. The recipients should be told that within three months they should set up bank or cooperative accounts. Those who do so could be given a one-off incentive of, say, Rs 200. The remainder should receive the cash in hand for a further three months, within which they must have accounts. The local panchayat and voluntary or paid groups should help people set up accounts.

In sum, the success of cash transfers will depend as much on how it is done as on the cash itself.

The writer is professor of development studies at the School of Oriental and African Studies, University of London, and professor of economic security, University of Bath, UK. He is also co-president of BIEN, a global network promoting basic income cash transfers

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