A group of economists is suggesting a radical, if obvious, way to reduce poverty in developing countries: Just give poor people money.
The idea behind GiveDirectly is fairly simple: Instead of using charitable donations to set up elaborate programs (and to cover hefty administrative costs for those programs), all in the name of helping the poor, why not just give the money directly to poor people, in as efficient a way as possible?
An NPR story explains that to accomplish this goal, donations collected through the non-profit GiveDirectly’s website are dispersed to impoverished households in Kenya by way of M-Pesa—a technology that allows for cash transfers via cell phones. (Yes, many of Kenya’s poorest have cell phones, but not land lines or traditional bank accounts.) Recipients receive text messages when they’ve received a transfer, and they can typically turn their electronic balance into cash in their local village store.
Per GiveDirectly, the process of depositing and withdrawing money with this system is remarkably quick and efficient. It can be completed within a minute. Though roughly 10% of the money collected is needed to cover the costs of transfers—involving foreign exchange fees and M-Pesa’s cut—donors can be assured an exceptionally large proportion of their donations (90%) goes directly to needy households. The households identified for cash transfers are usually those lacking basics such as solid walls, roofs, and floors.
How these households use the donations is entirely up to them, with no oversight or judgment from GiveDirectly whatsoever. GiveDirectly does, however, interview household members to find out how the money is used:
According to these interviews, common uses include starting or expanding a business, buying food or other consumption items, and paying education and medical expenses. The types of businesses recipients operate include rearing chickens, vending (clothes, shoes, vegetables, charcoal, etc.), and agricultural enterprises.
But wouldn’t it be possible for recipients to spend the money on cigarettes, booze, or other products most donors probably wouldn’t want to pay for? Yes, that’s possible. But GiveDirectly points to a body of research indicating that consumption of “temptation goods” like alcohol and cigarettes doesn’t increase significantly when there’s an increase in overall household spending. On the contrary, according to GiveDirectly:
Households typically save or invest 50%-80% of transfers they receive. (In contrast, American personal savings rates ranged between 1% and 5% during the 2000s.)