The Cash or Kind Wars, part 1 (out of a zillion)

“Give a man a fish, and he’ll eat for a day. Give a man a fish net, and he’ll fish for a lifetime. Give him 20 bucks, and he may buy something way better than a fish net, or he may just drink it. It’s hard to say…”

That, in a nutshell, is the state of the Cash-or-Kind debate today.

The miseries of just handing out consumption goods are  well understood. Nobody wants your old sneakers. Cash is preferable in every conceivable way.

But that’s not the interesting question.

The interesting question pits cash against capital goods: investments that people could – but might not – spend their cash on. And here it’s a good deal murkier, because the normal reasons behind the “presumption in favour of cash” go wobbly in an investment context.

In the context of a critique, Matt Collin puts forward the presumption in favour of cash pretty succinctly:

Even without the growing body of empirical evidence indicating that just giving cash is an incredibly cost-effective way to increase welfare, there is an extremely compelling theoretical case to be made for cash transfers. Poor households have preferences… and no one will ever have better information on these preferences than these households. Transferring households cash allows them to best allocate these new resources to meet these preferences – otherwise, we run the risk of wasting resources onstuff that households just don’t want

When we’re talking about consumption goods, this is entirely uncontroversial, and it’s important to fully digest the reasons behind the presumption in favour of cash in that context.

But take a step back and ask yourself why donors give in the first place.

Aid donors want to help people overcome poverty as a condition. They want to do more than just enable a one-time consumption spike, nice though that may be. They want to help people switch trajectories onto shift onto a higher consumption plane.

Is in cash aid better than in kind aid at helping people do that?

That’s an empirical question, and one that I don’t think we have a good answer to yet. (If you think that’s wrong, that’s what comments are for!)

But there are reasons to believe thatn at least in some settings, a grant of capital goods does better than cash at shifting people onto a higher consumption plane. This Ghanean RCT makes for some startling reading in that regard. And we know that in Uganda, just giving out hybrid seed to farmers one year doubles their willingness to buy it the next.

It makes good intuitive sense: when you have cash in your pocket, investment goods have to compete with any number of consumption goods, some of which may be desperately tempting right around now. Giving aid in the form of a capital good rather than cash is exactly the kind of behavioural nudge we know helps people exercise self-control. In fact, in that Fafchamps paper, it’s precisely the people with self-control issues who benefit most from capital-good rather than cash aid.

There’s a lot still to learn about this, and replicating Fafchamps’s study design in other settings really should be a priority.

The key, as always, is to keep a determined focus on incomes. Make that your metric, and the rest of the pieces fall into place.

7 thoughts on “The Cash or Kind Wars, part 1 (out of a zillion)”

  1. Quico, great post as always! Congrats on the new Blog.

    I, in part, agree with what you say on the post. But I think we tend to always think in terms of doing one thing or another. Understandably you propose a case in which is better to give a capital good rather than cash, but the real question is how when to give what!

    Cheers.

  2. While a full-information farmer might well see the benefits of hybrid corn, or longer-lasting, rot-resistant nets, more traditional folk won’t. I don’t see anything wrong with creating a default position which involves trying something new.

    A donation in kind does contain the potential for a quick turnaround sale, though. So, to prevent the sale of a $20.00 net for $5.00, it might be necessary to “loan” the nets out at first, with the proviso that if not used, they have to be returned within a year.

    1. Sure, this is why I think replicating Fafchamps’s research results is so important. We don’t have to guess whether your concern applies to a lot of people or a few, we can test for it.

  3. Well as i used to be in a weird master ( I still don’t know if it was poliscience/iR/ management) I send your way to see if anyone in my former school in the development part want to share with you. Yes I would keep reading…anyways… Good Luck!

  4. Great blog! But I am not a fan of the “lack of self control” language used here and some of the academic literature on the subject. Aren’t cash grant recipients making a rational choice to meet immediate consumption needs rather than long-term investment needs? Who deems this a loss of “self control”? Smacks of paternalism, no?

    1. Oh it’s definitely paternalist, no question about that…it’s just that paternalism is in these days, didn’t you get the memo?!

      Actually, I shouldn’t be flip. It’s an important debate. There is a ton of evidence that people in general don’t discount future rewards in anything like a time-consistent way. Lab experiments keep finding evidence that present-bias is rampant not just among people who are actually hungry – and so have a pretty damn compelling reason to be present-biased – but by the typical population of well-fed, well-educated, healthy Western undergrads who generally turn up as volunteers in academic lab experiments.

      But it’s one of these things that, when you think about it, is too obvious to warrant much analysis: have you ever met anyone who hasn’t, at some point, regretted an impulse buy? Anyone who hasn’t, at one point or another, spent a windfall in ways s/he later recognized to have been unwise? I mean, c’mon…only an academic would think you need a study to make that point.

      So I actually think Fafchamps does the development world a service by refusing to be polite in the face of common sense here. There’s way too much eggshell walking in the dev. literature as it is…

  5. Great article , an eye opener , dont just give them cash that is too often simply used for compsumption ,give them something practical that they can use to improve their lives , specially their productive work life , this is not just money ( unless its seed money to buy practical things) but information together with the tools which can help them in the tasks they carry out in their daily work lives . The information and assistance part is also very important . knowhow is the greatest asset . One of the great contributions of now defunct Agrocanarias was the practical assistance they gave to farmers to help them improve their crop yields using the things they bought from the company. !! .

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