Let the Poor Be Free
The late economist Martin Ravallion said an ‘’economy exists to guide the production choices to serve peoples’ consumption needs’’. It is therefore not surprising that poverty exists and persists where these production choices cannot meet the consumption needs of some people. This happens when the economy does not provide enough means for people to earn sufficient income to meet their consumption needs. Or simply because the consumption cost is rising faster than people’s income. Sometimes it is for both reasons.
In the case of Nigeria, a country with a high rate of poverty and inflation, the recently discontinued government subsidy for petrol has spotlighted the running debate about how exactly to help poor people. Some have argued that the effect of this particular price shock will have less impact on the poor. According to the World Bank, 40% of the population has only 3% of the share of PMS consumption. Nevertheless, it is not far-fetched that poor people have some exposure to spikes in the prices of complementary services like transportation. But given that the cost of the subsidy outweighs the benefit, the real question is how to make price adjustment easier on the welfare of the most vulnerable and affected.
Before the Buhari government left, in what was the last exercise in the periodic mulling of subsidy removal, it agreed to take an $800m loan from the World Bank for a cash transfer program of N5,000 to the poorest Nigerians as a form of palliative — this will be distributed using the National Social Register. When the Tinubu government assumed power, the size of the program was increased to N8,000 per household. What is less surprising, however, is that the program has become mired in controversy that goes to the heart of a familiar debate about how best to help poor people. First of all, cash transfer programs (CTPs subsequently) are not popular politically because as a form of public spending on aid to poor people, it is the least susceptible to political control.
Secondly, I suspect part of the resistance to the program is due to a common problem that has plagued discussions about CTPs. In this case, and I will argue that in most other controversies about cash transfers, most people think CTP is an answer to a more general question of what is ‘’the best way to help poor people’’? Whereas I believe that CTPs are most effective as an answer to a much narrower question of what is ‘’the most effective way to help poor people in the short-term’’? It is important to note that ‘’short-term’’ can cover a range of things from an initial investment for starting a small business to direct financial aid in response to an economic shock (e.g. sudden price surges).
Understanding CTPs
In essence, cash transfers involve giving money directly to individuals or families living in poverty. These transfers can be divided into two main types: unconditional cash transfers (UCTs) where no specific conditions are attached to the aid receipt, and conditional cash transfers (CCTs) where recipients are required to meet specific requirements such as sending their children to school or attending health check-ups.
The concept of cash transfers has been around for decades, with countries like Mexico and Brazil pioneering large-scale programs in the 1990s. Over time, these programs have spread globally, often with significant results.
Benefits of CTPs
By providing direct financial aid, CTPs empower poor people to meet basic needs like food, shelter, and healthcare. Moreover, cash transfers can stimulate local economies. When people have more money to spend, they purchase goods and services that invigorate local businesses and create jobs. This can lead to more sustainable, community-led development. Economist Chris Blattmann, an early promoter of cash transfers summarized one of his research projects;
In Uganda, my colleagues and I worked with a nonprofit that offered $150 and five days of business planning to 900 of the poorest women in the world. After 18 months, the women had twice the incomes of a random control group.
I also worked with the Ugandan government to study what happened when it gave groups of 20 poor people $8,000 in return for a business proposal. My colleagues and I followed hundreds of groups that did and did not get grants. Those who did mostly invested in trades like carpentry. Four years later, their earnings were about 40 percent higher than those of a random control group.
The second paragraph of the above quote will be familiar to many Nigerians. It is reminiscent of a similar business plan competition scheme by the Nigerian government in 2011 — which ran well into the last time the government removed the petrol subsidy in 2012. David McKenzie of the World Bank ran an evaluation of this program;
The YouWiN! competition was launched in late 2011 by the President of Nigeria, and in its first year attracted almost 24,000 applications aiming to start a new business or expand an existing one. The top 6,000 applications were selected for a 4-day business plan training course, and then winners were chosen to receive awards averaging US$50,000 each, paid out in four tranche payments conditional on achieving basic milestones. The top-scoring plans overall and within region were chosen as winners automatically, and then 729 additional winners were randomly selected from a group of 1,841 semi-finalists, providing experimental variation from US$34 million in grants that enables causal estimation of the program’s impact.
Three annual follow-up surveys enable tracking the trajectory of impacts, with the last survey occurring 27 months after winners received their first grant payment and 12 to 18 months after the last payment. I find that winning this competition has large positive impacts on both applicants looking to start new firms as well as those aiming to expand existing firms. Three years after applying, new firm applicant winners were 37 percentage points more likely than the control group to be operating a business and 23 percentage points more likely to have a firm with 10 or more workers (relative to a control mean of 11 percent), while existing firm winners were 20 percentage points more likely to have survived, and 21 percentage points more likely to have a firm with 10 or more workers (relative to a control mean of 17 percent). The winners are also innovating more, and are earning higher sales and profits.
I do not intend to muddy the waters on CTPs by lumping cash grants for things like business proposals with direct cash assistance to very poor people who might not be in the position to make a business proposal in the first place. Instead, what this shows is that CTPs can have different goals and can be used in many creative ways. And without a doubt, the evidence for its overall positive effect on the recipient’s lives is overwhelming.
The Problem with Cash
Why is there controversy about cash transfers, especially when we do not have to go too far to find evidence that they are effective? One reason is that politicians do not like it. Giving people cash is not as visible as electric bikes, sewing machines, and bags of Semolina — and hence it is a bit difficult for politicians to get credit for CTPs. Even though I will hardly question anyone skeptical about anything presided over by Buhari, the credibility (or lack thereof) of the so-called National Social Register (read this Waziri Adio piece on NSR) is not enough to scrap cash transfers altogether. If we go by what happened during the Covid-19 lockdown, which was when the word ‘’palliative’’ fully penetrated the socioeconomic zeitgeist, then it is pretty clear that the Nigerian political class does not care about the most effective way to help poor people. They only like to be seen ‘doing something’.
Another reason CTPs might be unpopular is that for a ‘shock’ like the sudden increase in the price of fuel that affects everyone (although not equally), there is always the question of how to figure out who is deserving of publicly funded relief. We can argue that the poorest are most affected and that most of them are the rural population. But there is very high urban poverty — and many ‘’middle class’’ households are one or two shocks away from penury. Many of them, especially in the working class, may feel it is unfair for some to get relief while inflation is ripping apart their wallets. The World Bank’s lead economist in Nigeria, Alex Sienaert, was recently quoted to have said:
“The other thing we often hear is that N5,000 or N8,000 is a trivial amount of money. I think people will be shocked to know that for a huge number of Nigerian households, it is a very significant amount of money. I believe the statistics are that about 50 per cent of Nigerian households are on less than N60,000 a month. So, if you are giving them N5,000 or N8,000 extra for six months to help tie them over, you are increasing their earnings and available incomes on the order of 10 per cent. For many households, it would be meaningful.
While this may be the cold hard fact, I can bet many of the said households and even those on slightly higher monthly income (say N100,000) cannot see an improvement when they compute their cost of living — and this might explain part of the resistance to cash transfers. For these households, cash transfer will simply not suffice. Addressing the sources of the rising cost of living like relaxing restrictive trade policies on food may prove more effective in this case. Firms will also need help with the difficulty of sourcing inputs, energy costs, and regressive taxation — to prevent job losses and wage cuts.
But the most serious challenge to the acceptance of CTPs is that it is sometimes seen as the solution to poverty. This is in part due to the premature and unnecessary generalisations made by some economists who researched the subject — which resulted in CTPs being sold as a shortcut intervention to poverty that bypasses the political and institutional sclerosis of many countries. We know that the effect of CTPs on poverty is insignificant when compared to migrating to high-productivity locations or national economic growth — and even the benefits of CTPs are contingent on several other factors.
However, the shortcomings of cash transfers can lead to many stereotypical conclusions. Some of the incentive problems casually associated with CTPs are unfounded. For example, poor people do not use financial aid for alcohol and drugs — and cash transfers do not make people lazy and unwilling to work. The dignity of work, personal achievements, and the ability to earn their way out of their situation are important to a majority of poor people. On the other hand, cash transfers can be effective for narrower goals like providing temporary relief from shocks, and even initial opportunities for poor people to get themselves into better positions in life.
Conclusion
In case you are still not sure where I stand. I support the use of cash transfer as a form of palliative in this particular situation (relief from the effects of subsidy removal) — for three simple reasons. Firstly, we know the money will be spent anyway, so why not spend it on an effective scheme? Additionally, there are many organisations (like Give Directly) with a good track record that can administer cash transfers without prohibitive overhead costs to the government and the almost inevitable corruption.
Secondly, in the absence of a social contract, providing direct and effective relief to poor Nigerians is a good way of establishing one — especially when the predictable attitude to the plight of poor people ranges from disinterestedness to disdain. After all, if Senators are getting financial relief through email prayers, why shouldn’t regular citizens?
Finally, direct cash transfers will free beneficiaries from politicians who use their situations as tokens of achievement, and from paternalists who like to pretend they know more than people who control their own lives.
