How to permanently escape poverty

What is the best way to help someone who is living in poverty? 

A hefty handout? 

A job? 

Or something entirely different? 

These questions are at the heart of what development economists want to know. 

And not only development economists: politicians often purport to want to implement policies that benefit the poor. 

But which policies are likely to have the biggest effect?

One prominent school of thought has emerged in the last decade with a simple answer: give people more cash. 

Individuals know what is best for themselves, these scholars argue, and paying them a lump sum will naturally allow them to improve their lives according to their own preference set. 

Some may invest it in educating their children (a pension plan for many in the developing world), others might start a business, pay off crippling debt, purchase a house, or improve the nutritional value of their food (improving health). 

Perhaps some will spend frivolously, but the net gains, on average, will be large.

Much of the evidence for this line of argument has come from studies that use randomised control trials (RCTs) in developing countries. 

An RCT would, for example, take all the people in a village, assign half of them randomly (with the flip of a coin) to a treatment group and the other to a control group. 

The treatment group receives the ‘treatment’, like a $300 lump-sum payment. 

The impact of the policy is measured by comparing the incomes, wealth or health of individuals after a month (or year) to those in the control group.

If individuals in the treatment group are better off than the control group, the researcher can causally claim, because of the random assignment, that the lump-sum payment had an effect.

Several studies do exactly this and find large effects in the short run. 

In Northern Uganda, a programme giving women $150 grants and basic training yielded large income gains after 18 months. 

Cash grants to entrepreneurs in Sri Lanka, Ghana and India led to increases in earnings a year later. 

Cash grants to poor farmers in Mali raised incomes one to two years later. 

Cash transfers in Kenyan villages led to increases in assets but no impact on incomes. 

There are many other examples.

These optimistic results of the effect of cash transfers has also catapulted debates about reparation payments (in the context of US slavery or African colonialism) back into the political arena. 

Surely, proponents argue, if cash transfers can have such positive gains, a once-off reparation payment would go a long way to address the injustices of the past.But, as a new study suggests, perhaps we should be more cautious of the permanent impact of cash transfers. 

In a recent National Bureau of Economic Research working paper, development economists Chris Blattman, Stefan Dercon and Simon Franklin published the results of a five-year study of young, mostly female, low-skilled job-seekers in Ethiopia. 

In 2010, they identified almost 1 000 people interested in a job at five different firms (in different sectors and different regions of Ethiopia). 

They then introduced two interventions: Some women received a cash grant intended to stimulate self-employment, another group got a factory job, and a third group received neither (the control group). 

They interviewed participants in all three groups at the time of recruitment, a year later and again five years later.

After one year, the authors found exactly what they had hoped to see: a large improvement in the incomes and well-being of those that received a grant (compared to the control group) and higher wages for those receiving a job (again, compared to the control group). 

These one-off interventions, the authors believed, would push beneficiaries to a level of income and well-being permanently beyond their peers in the control group. 

But when they measured income and well-being after five years, neither of these interventions had an impact anymore.

“For the most part, we do not find support for the hypotheses that start-up grants lead to sustained income changes, or that industrial job offers affect long-run well-being,” they conclude. 

“Over five years, we see that these young and mostly unemployed women found relatively full-time employment in a variety of wage work and microenterprises, even without the opportunity for a grant or an initial job offer. Medium-run equilibrium labour market outcomes seem unaffected by the interventions. After five years we see almost complete convergence in earnings, employment, and health.”

These results suggest that we should rule out sustained or transformative impacts of cash grants. 

Poverty alleviation is not as simple as cash hand-outs or even, it seems, jobs. 

Such hand-outs may result in short-run improvement in productivity, income and well-being, but compared to a group of peers with similar characteristics, these beneficiaries are likely to converge back to the mean within a few years.

The results are depressing, but they do help us understand that poverty is a multifaceted and complex phenomenon. 

There is no easy solution (else we would already have found it). 

Calls for reparations, payments of historical debt or even a basic income grant may have very valid ethical grounds, but perhaps we should be careful not to overestimate its potential to lift the poorest of the poor permanently out of poverty. 

For that to happen, something else is needed. What that might be is why development economists do research.

Johan Fourie is associate professor in economics at Stellenbosch University.

This article originally appeared in the 23 May edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.