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Researchers May Have Found the Best Way of Ending Extreme Poverty, and It's Embarrassingly Simple

by Matt Hershberger Apr 18, 2016

FOR DECADES, THE UNITED STATES HAS grappled with the homelessness problem: what’s the best way to deal with thousands of homeless people living rough in our cities? Should we crack down on drug use? Should we improve rehabilitation efforts? Should we try to fix the economy so the homeless can get jobs?

During this debate, the state of Utah quietly solved the problem. Between 2005 and 2015, they reduced their chronic homelessness rate by 91 percent. And the answer was almost stupidly, blindingly simple: just give homes to the homeless. The people who grumbled about the expense of housing the homeless have been silenced by the numbers: homeless people tend to cost the state a lot of money, whether it’s in jailing them or in paying their emergency room bills, and simply giving them homes is much, much cheaper.

Thus, a major, intractable problem was fixed in a way that any two-year-old could have devised. Which of course makes you wonder: are there any other major problems that we may have stupidly, blindingly simple answers to?

The answer is yes: researchers may have found an incredibly simple and intuitive way to fight extreme poverty.

The effective altruism movement

The past decade has seen the rise of a form of philanthropy that concerns itself not with ideology or emotion, but with end results. It’s called “effective altruism,” and it’s designed around the idea that, if we’re going to give our money to charities, we should give it in a way that it does the greatest amount of good to the greatest number of people.

It’s been heavily advocated by utilitarian philosopher Peter Singer, who insists that if we think all lives are created equal, then we have a moral obligation to help the people who are most in need, and who we are most capable of helping.

Effective altruists want their donations to be justified with hard data. As such, they demand that the charities they support be both effective and transparent about how effective they are. Two websites, GiveWell and Singer’s own The Life You Can Save do research into the world’s most effective charities, and then recommend a select few that meet their rigorous standards. Most of the charities are fighting developing world diseases and afflictions like malaria or parasitic worm infections — diseases that the developed world has already eliminated for the most part, but that still plague the developing world thanks to a lack of funds and public health infrastructure.

One charity on their list, however, is different. One charity isn’t fighting a disease, but is fighting extreme poverty as a whole. They’re called GiveDirectly, and their method is simple: they just give cash directly and unconditionally to extremely poor families. And it’s working really well.

How to change conventional wisdom

It should be noted that giving money directly to poor people is not an idea economists and aid workers have traditionally been on board with. It seems to go against common sense: “If you give a man a fish, he’ll eat for a day,” the old saying goes, “If you teach a man to fish, he’ll eat for a lifetime.” GiveDirectly is basically just giving out fish.

People who have traditionally seen capitalism as the route to ending poverty are deeply suspicious of this approach as well, as hand-outs are generally believed to breed dependence. Giving cash directly to the poor smacks of socialism. Singer himself said so in his 2009 book, The Life You Can Save:

“Neither [Columbia anti-poverty economist Jeffrey] Sachs nor anyone else is seriously proposing that we solve world poverty by handing poor people enough money to meet their basic needs. That would not be likely to produce a lasting solution to the many problems that the poor face.”

Singer has since changed his mind, because he has seen the evidence: GiveDirectly works. And the organization doesn’t identify with a socialist ideology. They just give out the money because it’s really, really effective. GiveDirectly co-founder Michael Faye explained that they were econ grad students who were looking to give away some of their money.

“We were fortunate to have front-row seats to two profound shifts in the development sector:

The first was the rise of rigorous testing (i.e. randomized tests). From this, we learned that many of our longstanding assumptions were wrong, and that cash transfers performed remarkably well across a wide variety of contexts, and over prolonged periods of time.

The second major shift we saw in the fieldwork that we were doing was the rapid growth of mobile payments and financial connectivity. This made it possible to send cash to the poor at a lower cost, with more speed and security than had been imaginable.”

But, they realized, there was no organization dedicated exclusively to direct cash transfers. So they started it themselves.

How it works

As of right now, GiveDirectly only operates in two countries, Kenya and Uganda. The reasons they chose these countries are that both of them have high levels of extreme poverty, but also have electronic payment systems already in place. Direct cash transfers take place over a cell phone or a SIM card, which GiveDirectly provides the families with if they don’t have it themselves.

It’s a relatively simple process: First, they identify the families in a given area that are most in need. They have a field staff investigate, but one of the easiest indicators, they’ve found, is to go to families with thatched roofs. They’ve found that if a family has money, one of the first things they’re likely to spend it on is an iron roof.

After that, they run an investigation to make sure that the recipients truly deserve the money, and didn’t bribe anyone or cheat their way onto the list. Then, they transfer around $1000 (nearly a year’s wages) to the family over the cell phone or SIM card. This cash is unconditional: recipients don’t need to spend it on anything in particular.

After that, they monitor the families to make sure they got the money and to see how they do.

Overall, the results are pretty incredible. The cash transfers are one-time only (though possibly paid in installments), so there’s no worry of them breeding the sort of dependence that many aid experts fear, and the program costs them staggeringly little in the way of overhead: of the money donated, 91% of it ends up in the hands of Kenyan recipients, and 85% of it ends up in the hands of Ugandan recipients. And although the idea of cash transfers is still relatively new, the early numbers are promising: one-time cash transfers do seem to have a long-term effect in improving the lives of the recipients.

What cash transfers are showing is that if you give an extremely poor person money, they are probably going to have a better idea of how best they can spend it than an aid worker does. And while the conventional wisdom says “they’ll just spend it on alcohol and tobacco,” GiveDirectly has found that there’s no significant increase in expenditure on these products. Instead, families tend to spend the money on things they need, or they invest in business opportunities they would otherwise have not been able to afford.

The result is that most of the families end up a good deal better off than they were before, whether it’s because they got a new roof that doesn’t leak, or because they saw an increase in their total income after making business investments.

A silver bullet?

For years, microloans were touted as the best solution to global poverty. Microloans are basically exactly what they sound like — small loans to extremely poor people. They turned out to be pretty effective in terms of helping the poor get small businesses started, or in helping them invest in themselves or their family, and for a few years, the world thought it had found its silver bullet for ending poverty. But the problem with them was that they put some of loan recipients into pretty serious debt, which is hardly a way to alleviate poverty.

On the heels of this realization, the development world has been looking for better alternatives, and the best alternative seems to be cash transfers. UN Secretary Ban Ki-Moon recently said that cash transfers should be the default method of helping people in emergencies whenever possible. A Princeton study found that cash transfers have a significant impact on the lives of recipients, while several other recent studies have found that direct cash transfers (as well as conditional cash transfers) don’t breed dependency, and don’t make the recipients lazy.

As of right now, Give Directly is the only non-profit that does cash transfers exclusively. There are other non-profits that do cash transfers on top of their other operations around the world, though, and cash transfers are gaining steam. There’s the Issara Foundation, which gives cash directly to freed slaves, and development titan Oxfam and the UN High Commission for Refugees have integrated cash transfers into their programs. But the aid world seems to have learned its lesson from the microfinance boom, and is still treating cash transfers cautiously.

“We don’t think that cash transfers are necessarily a silver bullet,” Max Chapnick, a spokesperson for GiveDirectly told me. “There are things cash transfers alone can’t do. They can’t build public goods. They can’t build roads. They can’t build a cellphone tower. They can’t cure a disease. But they can directly help families in need and serve as a benchmark for other programs.

The idea, in short, is to judge other aid programs by asking the question, “Is this better than just giving people cash?” At the same time, GiveDirectly is working with researchers to be transparent as possible, so they can better understand the long-term effects and limitations of cash transfers. And just last week, they announced something huge: they’re doing an experiment with “universal basic income,” in which they plan on providing a guaranteed income for 6,000 people living in extreme poverty in Kenya for 10 to 15 years, and then observing how that affects their lives in the long term. This will, of course, test the conventional wisdom about handouts breeding dependency. But so much of the conventional wisdom has been wrong up to this point, that it’s worth putting it to the test: as Michael Faye and his GiveDirectly co-founder Paul Niehaus wrote about the experiment, “At a minimum our money will shift the life trajectories of thousands of low-income households. At best, it will change how the world thinks about ending poverty.”

Cash transfers aren’t going to save the world. But they could help improve it dramatically. And the lesson that cash transfers are teaching us is extremely important: when you put ideology aside and focus on the results, the answers to some of the world’s toughest questions may turn out to be incredibly simple.

You can learn more about GiveDirectly here.

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