Are Conditional Cash Transfers Really the Answer?

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A while back I wrote about conditional cash transfers, which are the next biggest thing in development, in a post called “Where’s My Money, Fool,” titled so as an homage to the curler-wearing drug dealer Big Worm in the movie “Friday.” The most successful example of a good CCT program is Bolsa Familia, a government program in Brazil which has helped to increase incomes for poor families by 7 times as much as incomes for the rich (albeit, off a lower baseline).  Brazil has seen its poverty level drop faster than Snooki inside a plastic Zorb-like ball in the Jersey Shore on New Years Eve.  Specifically, the number of people living in poverty has dropped from 22% to 7% over the last decade.

The theory behind conditional cash transfers is simple.  The government pays poor families for meeting certain requirements.  Attendance in school and maintaining standards of healthcare are rewarded with monthly payments.  As long as the family achieves the targets of the program, they are eligible for a payout.  The outcome is two-fold.  First, the family gets immediate relief in the form of cash payments from the government, which can be put toward food and education.  Second, the underlying conditions that cause the unbreakable cycle of poverty to unbroken – lack of education due to the demands of meeting financial needs for the household – are addressed, as financial incentives eliminate the need to pull kids from school to help their parents earn income for the family.  An explanation from the New York Times:

The program fights poverty in two ways.  One is straightforward:  it gives money to the poor.  This works.  And no, the money tends not to be stolen or diverted to the better-off.   Brazil and Mexico have been very successful at including only the poor.  In both countries it has reduced poverty, especially extreme poverty, and has begun to close the inequality gap.

The idea’s other purpose — to give children more education and better health — is longer term and harder to measure.  But measured it is — Oportunidades is probably the most-studied social program on the planet.  The program has an evaluation unit and publishes all data. There have also been hundreds of studies by independent academics. The research indicates that conditional cash transfer programs in Mexico and Brazil do keep people healthier, and keep kids in school.

The results speak for themselves.  In Mexico, the percent of children in middle school has risen 42%.  In Brazil, female enrollment in high school is up significantly, particularly in the rural areas.  Malnutrition is down in both countries.  Here is a description of Bolsa Familia, the program in Brazil:

Brazil’s conditional cash transfer programs were begun before the government of President Luiz Inacio Lula da Silva, but he consolidated various programs and expanded it. It now covers about 50 million Brazilians, about a quarter of the country.   It pays a monthly stipend of about $13 to poor families for each child 15 or younger who is attending school, up to three children.  Families can get additional payments of $19 a month for each child of 16 or 17 still in school, up to two children.  Families that live in extreme poverty get a basic benefit of about $40, with no conditions.

There is no doubt that these programs work.  They have proven benefits, and the theory makes sense.  But I wonder whether these figures mask the real engine of poverty alleviation, which is economic development on a national scale.  Brazil is famous for being one of the four big emerging market countries, affectionately dubbed by Goldman Sachs as “BRIC” (Brazil, Russia, India, China).  According to the BRIC thesis, these four economies could become the most dominant economies in the world by 2050.  Brazil has a massive amount of natural resource wealth, including oil, timber, iron ore, and other valuable raw materials.  It has one of the most efficient agriculture industries in the world, and is a major exporter of soy, maize, rice, and sugar.  It supplies these materials to other manufacturing economies, like China and India, which have experience tremendous growth over the last decade.  It is the 5th largest country in the world by land mass and population, and has the potential to become a manufacturing powerhouse.  It is already the dominant economy in South America.  By 2050, Goldman Sachs predicts Brazil will have the fourth largest economy in the world ($11 trillion), behind China ($70 trillion), USA ($38 trillion), and India ($38 trillion).  It has a relatively stable democracy and, by all accounts, a good leader in Lula da Silva.  Last month, 60 Minutes had a segment about Brazil titled “The Next Economic Superpower.”  All of this begs the question: are programs like Bolsa Familia really responsible for Brazil’s incredible poverty alleviation efforts?

Above all else, conditional cash transfer programs require money.  Many countries with similar programs rely on loans from the World Bank and the IMF to fund such programs.  The Philippines, for example, just received a loan from the Asian Development Bank on the order of several hundred million for such a program.  Brazil has the money, and it has it in spades.  It can afford to “spread the wealth around,” in the immortal words of Joe the Plumber.  Second, education means nothing without jobs.  I concede that it is a chicken-egg situation (educated people start the companies that provide the jobs, but without the jobs, educated people either go elsewhere or end up back where they started).  And it is true that the real beneficiaries are the poorest of the poor – the kids who are being pulled from school at a very young age and would likely be illiterate were it not for these programs.  But it does help to have a strong and vibrant economy in place to mop up all the high school and college graduates that conditional cash transfer programs create.

My intention is not to discredit the good works of conditional cash transfer programs like Bolsa Familia.  The evidence of the efficacy of these programs is well-documented, even in poorer countries with weaker economies, like Tanzania and Mexico.  And not all the BRIC countries are doing so hot right now.  At least a third of the world’s poor resides in India – the third-biggest economy in 2050.  Shit, the United States is on par with Russia in terms of income inequality, and the divide is only growing.  So it is clear that there isn’t a one-to-one causality between the economic growth of a country and its poverty rate, nor between conditional cash transfers and the same.  But giving the credit to programs that have been tried in 40 lower-income and still lower-income countries risks masking the real engine of poverty alleviation: macroeconomic growth.

H/T: Kimmie Behrman

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"Josh Weinstein is a visionary. I read his blog every day." - Bono
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One Response to Are Conditional Cash Transfers Really the Answer?

  1. Pingback: The Silver Bullet of Conditional Cash Transfers | Develop Economies

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