Written by Claire Manley
Giving to charity is a reliable way to experience a genuine dopamine hit.[1] Clicking that button to Donate! or choosing a brand that will spend a percentage of your money on charity kindles satisfaction. Someone halfway across the globe will be better off because of my actions. It makes us feel good. It feels even better when we can visualize what we’ve given, like seeds if we donate to FarmAfrica, chickens if we give to Heifer International or a pair of shoes if we buy Toms (whose slogan “one for one” commits to giving a pair of shoes to a child in need for each pair you buy). If we’re after this feeling more than the actual giving, we can be careless about where our money goes. We’re less likely to be interested in the marginal benefit of our donation to the world’s critical poor, much less in any quantitative measures of efficacy.
There’s little incentive for the majority of charities to test the efficiency of their interventions using scientific methods. However, from an economics perspective, charities that focus on giving one specific good are inherently inefficient if the recipient has access to that market. Dollar-for-dollar, studies indicate that this is not the most effective way of helping people–unless there is no local market for the item (e.g. some medical supplies).[2] Charities pay a premium to obtain goods in non-local markets and also to transport them. Further, if the marginal cost of the good outweighs its marginal benefit—that is, if the amount of money spent to buy and deliver a chicken across the world outweighs the positive aspects experienced by the recipient—the process is inefficient. An exchange might look something like this:
Charity: “Here’s a chicken that cost me $10 to source and deliver.”
Person in need: “Thanks, but I could buy this chicken locally for $3. Also, I don’t have a cage or a way to feed this chicken. What I really need is a tin roof.”
Certainly, giving chickens to people in poor communities can be helpful, but blanket solutions do not solve complex needs. The process above does not efficiently spend donations or account for what individual recipients need most. Put another way, it does not utilize resources to maximize the recipient’s wellbeing, which should be the goal of a charity interested in efficiency. However, this seems an impossible task. How can one charity account for diverse individual needs? Even if we wanted to maximize the single-good charity model, how do we know that the person receiving a pair of Toms needed new shoes the most?
The simple answer to these questions is that practically, they can’t. It would be complicated, time-intensive and very expensive to diversify charities to the extent that each individual need could be met. The good news is that they don’t have to. The benchmark for giving to the world’s critical poor should be direct cash transfers. Cash can be traded efficiently for anything, it can be diversified, and it can buy goods that are tailored to individual needs. Giving cash directly stimulates local economies often in multiple industries, as individuals are likely to buy from multiple sectors.[3] If an individual’s primary need is actually a pair of shoes, like in the Toms charity model, they can purchase locally—and most people in developing nations are not isolated from markets for shoes. (This is not efficient in the opposite direction, that is, trading shoes for cash; single-good charity models often create a surplus of one kind of item.) Recipients are also likely to invest in their own industry, as this study on Ugandan coffee farmers showed.[4] Further, long-term impacts of cash transfers have also been rigorously studied, with children’s health outcomes significantly improving[5] and one study that showed men’s annual income increasing by over 64% five years after receiving money directly.[6] Cash transfers have also been shown to reduce domestic violence and inter-household tension, and increase psychological well-being. [7]
The largest and most well-known charity that utilizes the unconditional cash transfer model is GiveDirectly (“unconditional” rather than “conditional” refers to the lack of a recipient requirement of what to spend the money on). GiveDirectly was founded in 2008 by Michael Faye, Paul Niehaus, Jeremy Shapiro, and Rohit Wanchoo, Harvard and MIT graduates who wanted an evidence-based way to give money to the world’s poor. GiveDirectly is focused mainly in Kenya, Uganda, and Rwanda, though it also has operations in Liberia, Malawi, DRC and Morocco. Based on national poverty data and a number of other targeted selection processes, GiveDirectly seeks out the poorest villages (sometimes the poorest households within villages) for cash transfers. They prevent corruption and errors through a comprehensive audit system, which includes identity-matching and in-person confirmations from GiveDirectly staff. Their most common practice includes a one-time endowment paid in multiple increments through country-specific electronic payment processes. With no outsourced work, GiveDirectly is involved with each step. The average transfer is $1,000, and the changes to individual, social, and economic well-being detailed above are significant. A recent study in 2019 tracked the long-term effects of a $10 million cash transfer project in Siaya County, Kenya, found that the positive economic effects were even shown to affect nearby towns that didn’t receive cash transfers. The fiscal multiplier in this area is estimated to be around 2.6, which means that there is an estimated $2.60 growth in the economy for every $1 that GiveDirectly invested, with only a 0.1% inflation rate in average prices. [8]
Despite these impressive numbers and the sheer amount of scientific evidence for cash transfers presented by GiveDirectly and shown by independent research, it is not the leading charity by donations. This can partially be explained by GiveDirectly’s relative newness, and a lack of willingness by givers to thoroughly vet the charities they give to. Another problem is that givers tend to be more satisfied by a contribution to good-specific charities because they have a clear idea of how the good might impact poor families. When we’re not entirely sure how our money will be spent, a suspicion of the recipient and how they will choose to spend often arises. These paternalistic ideas are rooted in a fundamental mistrust of poor people and a stereotyped prediction about the relationship between economic status and ability to manage money. However, studies suggest that trusting poor people to be their own economic agents is often the most effective option when it comes to the short-term and often the long-term.[10] Short-term individual needs are complex and their variance between individuals is high. Locals are effective at identifying these needs and buying at a competitive market rate. Further, there has been no significant impact shown of cash transfers on “temptation goods” (e.g. alcohol), and the majority of studies find no relationship between transfers and the number of hours worked. [11]
To be thorough, there are some single-good charities that could be argued are more efficient than direct cash transfers. The 2019 Nobel Prize in Economics went to economists who published randomized controlled trials on specific poverty interventions to test their effectiveness. Most charities in this category offer goods in the sector of preventative health, like funding for malaria nets or giving deworming services for free. These charities are arguably more effective than direct cash transfers because preventative health tends to be a sector that the critical poor don’t often consider and have relatively minimal access to. However, these tend not to be fully generalizable charities; for example, malaria nets are important only in areas where malaria is prevalent.
Cash transfers are applicable as an efficient way to increase both short-term and long-term well-being across all of the world’s extremely poor communities. GiveDirectly should be the standard for efficient charities because of the economic principles that warrant its effectiveness and the comparatively vast amounts of data that prove it. GiveDirectly takes the decision-making and humanity of the world’s poor seriously, and provides a paternalism-free framework for giving. The rigorous testing GiveDirectly practices should be the standard for aid organizations across the world. Many charities tout the effect that their programs have on poverty in websites and newsletters, but it should not be sufficient to solely demonstrate the positive impact of an organization (which can be claimed even if the benefits only slightly outweigh the costs). If an organization can’t prove, using randomized control trials and pilot programs, that it is more effective than GiveDirectly, it should not be considered a legitimate way to alleviate poverty. While cash transfers are not the answer to global poverty, they should be the gold standard for charities.
References
[1]Moll, Jorje. “Human Fronto–mesolimbic Networks Guide Decisions about Charitable Donation.” 17 Oct. 2006.
[2]Karnofsky, Holden. “The Case for Cash.” The GiveWell Blog. GiveWell, 26 July 2016. Web. <https://blog.givewell.org/2012/12/26/the-case-for-cash-2/>
[3]Egger, Dennis, Johannes Haushofer, Edward Miguel, Paul Niehaus, and Michael Walker. “General Equilibrium Effects of Cash Transfers: Experimental Evidence from Kenya.” Working Paper, November 2019.
[4] Cooke, Michael and Mukhopadhyay, Piali. “Cash crop: evaluating large cash transfers to coffee farming communities in Uganda.” GiveDirectly, May 2019 https://www.givedirectly.org/wp-content/uploads/2019/06/Cash_Crop_Ugandan_CoffeeRCT.pdf
[5] Aguero, Jorge and Michael Carter and Ingrid Woolard. “The Impact of Unconditional Cash Transfers on Nutrition: the South African Child Support Grant.” mimeograph, August 2010.
[6] de Mel, Suresh, McKenzie, David, and Woodruff, Christopher. “Returns to Capital in Microenterprises: Evidence from a Field Experiment.” The Quarterly Journal of Economics, Volume 123, Issue 4, November 2008. https://academic.oup.com/qje/article-abstract/123/4/1329/1933166?redirectedFrom=fulltext
[7]Haushofer, Johannes, and Jeremy Shapiro. “The Short-Term Impact of Unconditional Cash Transfers to the Poor: Experimental Evidence from Kenya.” The Quarterly Journal of Economics, accepted manuscript, July 19, 2016.
[8] Huston, Joe, and Michael Cooke. “New Research Results: How Do Cash Transfers Impact the People Who Don’t Receive Them?” GiveDirectly, 03 Jan. 2020. Web. https://www.givedirectly.org/how-do-cash-transfers-impact-neighbors/
[9] graph taken from: https://www.givedirectly.org/financials/
[10] “Unconditional Cash Transfers to Increase General Welfare and Local Public Finance in Kenya.” The Abdul Latif Jameel Poverty Action Lab (J-PAL). Updated Sept 2020. Web. https://www.povertyactionlab.org/evaluation/unconditional-cash-transfers-increase-general-welfare-and-local-public-finance-kenya
[11] Cunha, Jesse, “Testing Paternalism: Cash v.s. In-Kind Transfers in Rural Mexico,” Technical Report, Stanford University March 2010.