Help World's Poor: Hand Them Cash

By Seth Gitter & Daniel Rothschild

After Mitt Romney was captured on tape last week discussing how 47 percent of American households pay no income taxes, commentators and economists on both the left and right were quick to point that this was to a large degree driven by so-called "refundable tax credits" like the Earned Income Tax Credit (EITC) and Child Tax Credit.

These credits have enjoyed a great deal of support among conservatives because they are simple, transparent, and obviate the need for expensive and cumbersome bureaucracies. And on both the left and right, there's a widespread consensus that refundable credits work: liberals like them because they fight poverty, and conservatives see them as empowering families. Indeed, Ronald Reagan called the 1986 Tax Reform Act, which include a huge EITC expansion, "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress."

Unfortunately, economists and international donors have been less willing to apply domestic conventional wisdom past America's shores. Western international aid programs remain mired in big plans and bigger bureaucracy.

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This is a missed opportunity. Conditional cash transfers - direct payments of cash to households conditional on pro-growth behaviors like enrolling girls in school and using preventative health services - are a remarkably effective way to fight poverty abroad, and donors concerned about international development should look for ways to increase their use.

The idea behind cash transfers is straightforward. Like refundable tax credits, they are premised on the idea that poor people aren't ignorant, they're just poor. So providing them with small amounts of cash contingent upon certain actions provides resources without directing them in their use.

Mexico and Brazil have been at the forefront of providing conditional cash transfers to their citizens - about one in four households in these countries receive governmental or NGO aid this way. Indeed, these programs have proven so popular and ingrained that they typically survive power transfers between political parties with little more than a name change.

The Mexican and Brazilian cash transfer gained popularity with citizens - and international donors - because they actually work. Dozens of studies, many using randomized control trials, show these program increase school enrollment and improve nutrition. In most cases, they started as small trial programs and, having proven successful, were rolled out nationwide.

But despite the well-documented success of these programs, few countries in Latin America and sub-Saharan Africa have rolled out conditional cash transfer programs on a national scale. The poorest countries in Latin America have failed to expand their programs beyond test programs reaching just a few percent of the total population despite a larger percentage of impoverished households than Mexico or Brazil. Furthermore, successful programs like Nicaragua's Social Safety Net have been terminated due to lack of funding.

For the poorest countries in Latin America to provide conditional cash transfers on the scale of Mexico or Brazil, they would have to devote between five and 10 percent of GDP to these efforts. In other words, there is no feasible way that poorer countries can scale up conditional cash transfer programs without donor funds. Fortunately, there is seemingly no limit to the number of failed and counterproductive development programs funded by international donors that could be axed in favor of conditional cash transfers.

One of the longstanding failures of traditional aid has been that it can serve to entrench and magnify political corruption. But pilot programs have shown that cash transfers can create significant benefits, even in countries with endemic corruption. Perhaps more importantly, conditional cash transfers are far less likely to line the pockets of dictators, since individuals tend to notice if their money goes missing. Moreover, technological innovations such as debit cards and cell phone payment systems greatly decrease the potential for corruption.

If nothing else, donors should remember it's not just the amount of aid that matters, but the type and effectiveness. Conditional cash transfers aren't a cure-all, and they're certainly not a substitute for an open market economy, rule of law, property rights, and entrepreneurship.

But they are an effective means of getting aid to the poor and encouraging pro-social, pro-family, pro-growth behaviors. And those are ideas that both liberals and conservatives can get behind.

Seth Gitter is an assistant professor of economics at Towson University in Maryland, researching conditional cash transfers. Daniel M. Rothschild is Director of External Affairs at the American Enterprise Institute.

(AP Photo)

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