As Graduation Approaches have spread, so too have the discussions of the best approaches. For example, to date, all CGAP-Ford Foundation Graduation pilots have chosen in-kind transfers. However, as the strategy is being scaled through public policy — mostly in Latin America — governments are more often than not choosing to focus on cash. At Fundación Capital, we have been part of the movement for in-cash rather than in-kind transfers, and strongly believe that cash transfers are preferable, which begs the simple question: Why?
People prefer cash
Let’s start with the most basic level. Our program participants prefer cash. Participants in diverse programs from Colombia to Mexico explained why.
“I agree with the cash because sometimes the products that are being brought to us are better than the ones we would buy, but other times we get fooled and this is a shame … with the cash if we get fooled, we are the ones who chose,” said one participant.
These cash transfers promote empowerment and responsibility, as well as demonstrate a powerful form of trust in participants. When a recipient receives a cash transfer, he or she also receives the responsibility of finding providers, negotiating prices, making purchasing decisions, and tracking their expenses. On a daily basis and in practical ways, this becomes a powerful means to increase empowerment and self-esteem as well as an important teaching tool for micro-entrepreneurs.
Cash as project buy-in
Graduation participants reported that in purchasing assets and inputs they needed, they felt more committed to their business. Conversely, they reported that in-kind assets felt more like a “gift,” which could fail to inspire the associated skills of business responsibility.
Project evaluations show that social control mechanisms and keeping track of expenses were sufficient to avoid misuse of public funds.
In rural Uganda, a randomized controlled trial (RCT) tested the impact of giving out $400 per person to youth, the equivalent to one year of their income. After following close to 2,500 young people two and four years after transferring the money, the study revealed that the majority had initiated new businesses, that their working hours had increased by 17 percent and their income by 50 percent, especially among women. Similar studies in other regions found similar results.
Issues with in-kind transfers
In-kind transfers do not guarantee proper use of the funds. Various studies in different countries demonstrated that recipients of cash transfers make good use of the funds, and transfers in-kind do not guarantee that the goods will be used appropriately since they could be sold to third-parties.
Impacts of GiveDirectly's transfers, an NGO that helps people in extreme poverty in Kenya by making unconditional cash transfers by cell phone, discovered a 34 percent increase in earnings, 52 percent increase in assets, 42 percent reduction in days children go without food, and zero effect on alcohol and tobacco spending.
They claim: “Cash transfers have arguably the strongest existing evidence base among anti-poverty tools, with dozens of high-quality evaluations of cash transfer programs spanning Africa, Asia, and Latin America.”
In our experience with the Colombian Graduation pilot, led by the government entity Social Prosperity, only about 3 percent of participants used the cash transfer for a purpose unrelated to their livelihood activities. Such a risk of misuse is limited in the Graduation Approach since every participant is asked to elaborate a basic business and investment plan monitored by a coach.
Boost local economies
Cash transfers are more cost-efficient for governments, which tend to favor financial inclusion. Cash transfers are generally more economical for governments than in-kind transfers. When made electronically, they also reduce the risk of corruption. On average across all Conditional Cash Transfer programs in Latin America, the cost of dispersion is $1.50 per transfer. In-kind assets distribution on a large scale could not compete with those prices.
Finally, cash transfers boost local economies, whereas in-kind transfers tend to favor large suppliers at the national level. A study of Mexico’s large food assistance program, Programa de Apoyo Alimentario, compared how cash and in-kind transfers affect local prices through a village-level randomized experiment.
Both types of transfers increased the demand for normal goods, but only in-kind transfers also increased supply. “With a cash transfer, the price increase for normal goods hurts consumers and favors producers. With in-kind transfers, the increase in local supply lowers prices and helps consumers at the expense of producers,” a study in 2011 reported.
Acceptance of cash transfers opens up new questions for further discovery and further research. But for now, we believe cash transfers are the way to go when implementing a Graduation model at scale. And scale is what we should aim for knowing that 836 million people worldwide are still living in extreme poverty.