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John Hoffmire: Benefits of cash payments outweigh limitations in alleviating poverty

Published: Monday, March 24 2014 7:30 a.m. MDT

A Filipino child looks as they wait to enter the Philippine Postal Office in Manila, Philippines where poor families receive cash grants from the government in this Tuesday March 12, 2013 file photo. Pantawid Pamilya, the country’s conditional cash transfer (CCT) program, provides cash grants to very poor Filipinos to encourage them to keep their children of age 0-14 in school and have regular health checks.

Aaron Favila, Associated Press

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In the fight against poverty, few issues are more contentious than the allocation of the billions of dollars set aside to help those in need. Whether the money comes from private donations or state tax revenues, arguments over how to use the monies arise both in domestic and international politics. This debate usually focuses on balancing two competing interests: providing significant, meaningful help while promoting independence rather than dependence.

One solution that has made some headway in addressing both these needs in recent years is the use of conditional cash transfers, CCTs for short. These grants are designed to break the cycle of intergenerational poverty through enabling the increase of human capital. CCTs provide incentives that encourage personal development through education, better health care and other personal improvements, which in turn, leads to better jobs and more stable employment.

CCT programs are not complicated. A monthly stipend is paid to those living in poverty as long as certain conditions are met. One common approach used in Brazil, Mexico and the Philippines is to assist poor families on the condition that their children have at least 85 percent attendance at school. The government receives reports from the schools that provide attendance information and has the authority to discontinue the payments as soon as the requirements stop being satisfied. Other programs send out payments as an immediate incentive, rewarding decisions such as doctor visits or vaccinations with cash or food stipends.

CCT programs tend to be relatively cheap, especially when compared to other existing benefit programs. The payments to the poor, while material to the families receiving them, are quite small on a national scale. In Brazil for example, the 2003 Bolsa Famillia CCT program accounts for just 0.5 percent of GDP and has helped decrease families living below the poverty line by 8 percent each year since its creation. This drop has also corresponded with a drop in the Gini index, a common measure of income inequality.

Another benefit of CCT programs is that they provide a reliable source of income for the period of enrollment. For a family struggling to survive, the monthly payments offer a sense of security and consistency usually absent from their lives. While this approach has brought up concerns about dependency, studies from the U.N. and the World Bank in Mexico and Brazil have found no significant evidence of dependency created from the programs in place. The small payment amounts which, while helpful and impactful, do not provide enough to live on.

Even though they have proved successful in many countries, CCTs are not a magic bullet to completely solve poverty. Recent expansions in Sao Paolo and a privately funded attempt in New York City have had minimal impact. The high cost of living in both places, coupled with the added complexities of life in the city, led to more complicated payment programs that confused participants and resulted in lower success levels. This has led experts to question the universal applicability of the programs, especially when placed in cities.

An alternative that has worked fairly well in the U.S. is called the Earned Income Tax Credit. It has been the largest cash-oriented anti-poverty program in recent years. At its heart, the EITC is a work incentive: only those who receive income and file a tax returne are eligible for the benefit.

The possible limitations of CCT programs are no reason to discount the already well-documented successes. Conditional cash transfers have made significant progress in developing nations not only by helping alleviate short-term poverty, but also by enabling children to break free of long-term cyclical poverty. These gains make it worth considering applying similar programs across developed nations.

John Hoffmire is Director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a non-profit promoting economic development. Ben Young, Hoffmire’s colleague at Progress Through Business, did the research for this article.

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