Cash grants catch on in international development world

It’s been a weird year in many ways — not least for investors in clean energy stocks.

Over 500 gigawatts of green power was added this year, a new record, with more than $1bn a day invested in solar generation alone. Last week in Dubai, world governments agreed to triple renewable energy capacity in just seven years. Yet shares in green companies have been performing miserably.

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We’re off next week for a festive break. In this final edition of 2023, we get into the giving spirit by looking at new research on a straightforward but potent economic intervention: simply sending money to people in poor communities.

We’ll be back in your inbox on January 3, with a look at some of the key themes to watch in 2024. In the meantime, we wish you a restful end to the year — and thank you, as ever, for reading.

What happens if you just hand over the cash?

Soon after Rory Stewart took charge of the UK’s Department for International Development in 2017, he had to grapple with an unsettling argument that was increasingly popular in the aid world.

Instead of designing complex, expensive interventions to help the world’s poorest people, he was told by advocates of cash grants, it was often more effective simply to give them money.

“I remember saying to myself, ‘Well what happens to all of us?’” the former Conservative politician told me. “If the best thing we can do for people is just to give them cash, why are we all employed? Why have we all got master’s degrees?”

Stewart has now become one of the most prominent advocates for this model of aid, through his work for GiveDirectly, the world’s largest charity focused entirely on cash grants.

GiveDirectly was created in 2009 by four economists who had developed the idea while pursuing graduate degrees at Harvard and the Massachusetts Institute of Technology. Since then, the charity has handed over more than $500mn to low-income people in nine African countries, as well as disaster victims in the US.

The approach has been catching on in the international development sector. In 2022, direct assistance through cash grants or vouchers accounted for 21 per cent of international humanitarian assistance, up from 14 per cent in 2017, according to the CALP Network, a non-profit coalition.

A growing body of evidence suggests that this can be a uniquely effective means of boosting living standards in the poorest communities. A recently published study of GiveDirectly’s operations in Kenya reinforces that finding — but also provides some troubling food for thought about how cash grants are being structured in the wider aid sector.

The study, whose authors include Nobel-winning economist Abhijit Banerjee and his fellow MIT professor Tavneet Suri — together with two of GiveDirectly’s founders — focused on low-income households in 200 small villages in Kenya, for two years.

The adults in the first group of villages were each given $22.50 per month, with a commitment that the payments would continue for 12 years. Those in the second group were also given $22.50 per month, but for only two years. Each adult in the third group was given a lump sum of $500. The fourth was a control group, and received no cash grants.

Like previous studies, this one found that cash grants had a significant positive effect on living standards. The biggest benefits were seen among people who used the cash to start a small business, enabling them to move forward from subsistence farming or day labour. That trend was much more common among those who received a lump-sum payment, or where payments were promised for 12 years (in the latter group, many households clubbed together to pool their payments, enabling each to take a lump sum in turn).

But while GiveDirectly mostly distributes cash in lump sums, it is more common in the wider aid sector to drip-feed payments over two years or so. That may reflect concerns that poor households will squander a big lump sum — despite increasingly abundant evidence to the contrary.

“To a large extent the poor do make very good choices,” said Samuel Mwamburi Mwale, a former senior official in the Kenyan government now serving as GiveDirectly’s president. “They’re just rational. We don’t believe that we can think and make choices for the poor; we’re going to trust them to make their own choices.”

This has been a challenging year for GiveDirectly. In September, Stewart moved from the chief executive position to an advisory role after only a year in charge, citing a pile-up of personal and professional responsibilities.

In June, GiveDirectly revealed that it had lost about $1mn to a fraud perpetrated by its employees in the Democratic Republic of Congo, where it had loosened some of its normal protocols to reach households in a remote eastern region. (Some might seize on this episode to question GiveDirectly’s entire model — but it’s worth reading the charity’s detailed statement on the matter, and this report in the New Humanitarian, before leaping to that conclusion.)

Yet as the documented evidence accumulates for the efficacy of cash transfers, Stewart argues, it will become increasingly impossible for donors and aid agencies to ignore.

Some have voiced concern about “setting up an eternal welfare state” to support the world’s poorest, he said. “So it’s very important [to note] that a one-time cash transfer can have an extraordinary impact. You don’t have to do it every month forever.”

This article has been amended to correct the amounts given to households in the study mentioned.

Smart read

I’ve just finished reading Stephen Markley’s The Deluge, a gripping, deeply disturbing novel that portrays a global climate catastrophe playing out over the next couple of decades. As well as giving a visceral warning of the terrible risks that we are taking with our biosphere, it underscores the role that business and finance can play in enabling the action we need — or in blocking it.