Photo by Mitul Grover.

Extreme Poverty as a Choice

The world is wonderful. The world is terrible. Let’s choose again.

The world is richer, healthier, and more educated than it has ever been. In the last 150 years, we broke out of the Malthusian trap; eradicated smallpox; invented sliced bread, the automobile, the Internet, and the smartphone; and put a man on the Moon. And yet the awe-inspiring scientific, technological, and social progress has not benefited everyone equally.

The State of the World

The world is wonderful

The world is now richer than it has ever been. For millions of years, humanity was stuck in the Malthusian trap:

  • Improved standards of living would lead to population growth.
  • Population growth would lead to decreased standards of living.
Figure 1
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The world is terrible

It seems that the world is doing pretty well, right?

The Economist reports on the lifestyle of Teodoro Nguema Obiang Mangue (known as Teodorín), Vice President of Equatorial Guinea and son of the President.
Figure 5

Sidenote: int.-$

I’ve now mentioned int.-$ (i.e., the 2011 international dollars) in passing a few times. When we discussed the world’s GDP in 1870, I converted int.-$1,263 to today’s dollars and moved on. Int.-$1.90 is different. I will keep referring to it, so before we go any further, let’s make sure we all know what it means. And to do that, let’s consider burgers.

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  • Around 1 billion people cannot read and write. While most European, Asian, and North and American countries have literacy rates close to 100%, Africa and South Asia are lagging severely behind. Chad’s literacy rate is a measly 22%; in twelve other African countries and Afghanistan, less than half of the population can read and write. These are also the countries with the lowest formal education enrolment rates.
  • Millions of children around the world work, primarily as unpaid family labourers. Some find time to attend school as well, while others will never receive an education. In 2013, for example, 5% of Bangladeshi children aged 7 to 14 had a job, working on average 36 hours/week, more than adults in the Netherlands (30.4 in 2019). In Cameroon, 62% of children were employed, averaging 21.1 hours per week.
  • Poor households often have limited access to sanitation and clean water, leading to more disease. 2.2 billion people around the world don’t have access to safe drinking water, 2 billion lack even the most basic sanitation facilities. The poor are also much more likely to die from indoor air pollution. For example, around 9% of all deaths in Madagascar could be prevented by switching to clean fuels for cooking.
Figure 8

The world is even more terrible

Let’s go back to the averages for a moment. In 2016, global GDP per capita was int.-$14,574. This roughly corresponds to the median standard of living in Costa Rica, an upper-middle-income economy. And yet in practice, 737 million people live on less than int.-$1.90/day. This means that the wealth that the world creates every year is distributed unequally. How unequally? Here’s one way of looking at it.

Figure 9

Sidenote: Figure 9

Let’s pause here. Figure 9 is profound. So let me take a moment to explain how it came about. PovcalNet, a database maintained by the World Bank, provides income and consumption data for 164 economies; this includes not just average and median household spending, but also income distribution by population decile. For example, in South Africa, one of the world’s most unequal countries, the bottom 10% of the population earn less than 0.9% of the country’s income, while the top 10% take in almost 51%. Using this data, I calculated average incomes for every country-decile combination. For example, the 1st decile in South Africa has a mean annual income of int.-$347. Finally, I ordered all country-decile combinations by their average incomes. First on the list are the 1st decile earners in Haiti, averaging int.-$70/year (that’s ten times less than the extreme poverty threshold). The 10th decile earners from Luxembourg complete the list with int.-$80,283/year (corresponding to $91,246, or €79,567 today).

  • The underlying data provided by the World Bank is far from perfect. Drawn from national household surveys, it is not strictly comparable and might not work well “for other purposes, including tracing out the entire distribution of income”. Nevertheless, it is the best data source available.
  • Finally, while deciles are vastly more useful than country-wide averages, they are nevertheless only rough approximations. Haiti is relatively small, and thus each decile there contains around 1 million people. Even then, hundreds of thousands in the 1st decile must be living on less than the average int.-$70/year. China’s decile, on the other hand, corresponds to 138 million people. In such a case, very little of the intra-country income variation can be captured.
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The Great Dissonance

When asked about the world’s greatest challenges, people unfailingly bring up poverty. Some are worried about the economy at home, others brood over basic human needs abroad; even millennials, concerned with climate change and the destruction of nature, agree that poverty and inequality are as important. And yet extreme poverty not only exists — with coronavirus ravaging poor economies, 265 million more people could be pushed to the brink of starvation by the end of 2020. Why, then, are we failing to help those most in need?

Talk is cheap

One obvious answer is that talk is cheap. In 2005, President George W. Bush urged rich countries to increase their spending on development aid to 0.7% of gross national income (GNI), a level agreed upon at the Monterrey Conference in 2002. That was not the first — nor the last — time President Bush “stood on the world stage and promised to sharply increase development assistance to poor nations”. The US has indeed propped up its foreign aid over the past 15 years. To 0.18%.

The cultures that (don’t) give

Some cultures might be more conducive to giving than others. In Islam, for example, alms-giving (known as zakat) is one of the five pillars, or religious obligations, that must be observed by everyone. Muslims are required to donate 2.5% of their wealth to those in need; in some countries, the tax is collected by the state. It is estimated that the global volume of zakat amounts to tens, and possibly even hundreds of billions of dollars every year. Perhaps not surprisingly, Indonesia topped the World Giving Index in 2019.

Making momentous mistakes

Now here’s another challenge: even when we do give, we don’t always do a good job at it. When billions of dollars and millions of livelihoods are involved, mistakes can be costly. William Easterly, a renowned development economist, has written a 400-page book on the failings of the Western aid, and he’s not alone. He is also right: many aid projects have indeed ended in abysmal failure. Extensive investments have been made into programs with unknown or non-existent effects; implementations have been botched; and, on an occasion, more harm than good has been done.

Giving from the bottom of the heart

Such questionable impact evaluations are not limited to large development institutions. In fact, individual donors are probably even more predisposed to giving with their hearts rather than minds. For example, would you rather donate to a charity that distributes books to African kids, or to one that treats parasitic worm infections? Books are much more fun; it’s something we can all understand and relate to. And so in 2019 Books For Africa’s income was $39 million. SCI Foundation, on the other hand, only received $19.5 million. The trouble is, SCI Foundation’s impact is proven, its approach highly cost-effective. When it comes to improving lives, deworming is pretty much impossible to beat. Books might make donors happy, but they appear to make no difference to the recipient’s educational outcomes.

But when it works…

So, is all our aid spending inadequate and misguided? Far from it. While we have made mistakes — and probably too many of them — there have also been wonderful achievements. With financial and scientific backing from the US, India underwent the Green Revolution in the 1960s, adopting high yielding variety seeds, irrigation, fertilisers, and other modern agricultural technologies, leading to increased food security, higher-quality diets, and a reduction in poverty. In 1980, the World Health Organization (WHO) declared the world smallpox-free, two decades after Viktor Zhdanov, a Ukrainian virologist, initiated an organised global effort. The WHO is now eyeing malaria, the disease that kills more than 400,000 people every year, disproportionally affecting some of the poorest countries on Earth.

Taking a Second Look at Aid

Aid is often broken down by donor type and sector. For example, in 2018 the US government disbursed $46 billion of foreign aid, double the $22.9 billion donated by individuals, foundations, and corporations. More than 30% of the $46 billion was spent on security efforts, much of that while engaging in military conflicts in the Middle East.

Solving global problems

Some challenges are inherently global, often transcending not just country borders, but continental boundaries as well. Nevertheless, many of them disproportionally affect developing countries. Take, for example, HIV/AIDS.

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Building national infrastructure

Some challenges are decidedly national. Consider electricity, a seemingly basic necessity that 860 million people in the world still lack. Electricity plays a crucial role in economic development, and yet electrifying a country is a monumental undertaking (it took Afghanistan, one of the fastest economies ever to electrify, 10 years to increase coverage from ~25% to almost 100%). Problems such as these can only be addressed by national governments. The market won’t step in to provide electricity to remote populations at a loss, and no single region is likely to have the funds necessary to build a local grid.

  1. Have little risk associated with them (so there’s little chance of losing a lot of money),
  2. Will provide value soonest (so the country can start reaping the benefits right away), and
  3. Have fewest dependencies, especially early in the country’s development cycle.

Nailing local implementation

While the national government is busy building the basic infrastructure, the crucial job of figuring out the details is often left to regional governments. For example, the central government might allocate funding for building schools and hiring teachers. But how can we make sure these teachers actually show up to work?

  1. Instructing teachers to have a student take a picture of the teacher and other students twice a day is a cheap and effective way to significantly reduce teacher absenteeism.

Living the best individual life

At the end of the day, however, global, national, and local investments only matter if they benefit individuals, adequately and fairly. Yet even in the best-run, richest countries, things go south once in a while. A pandemic hits. Someone gets sick. Loses a job. In the developing world, such personal disasters are both more terrifying and more wide-spread. The power grid, while a wonderful invention, won’t help, at least not in the short turn. One of the most valuable services that a government can provide is thus social security. Paid by everyone, available to everyone (though some countries would argue that’s much too generous).

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  1. We should drastically increase the amount of foreign aid dedicated to cash transfers.
  2. We should build a global welfare system based on cash transfers.

Cash Transfers: An Overview

At the outset, cash transfers are simple: a benefactor sends money to an eligible individual. That’s it. That’s a cash transfer. In practice, pretty much everything about a cash transfer can be customised, and the following four dimensions in particular are worth a deeper look.

  • What the challenges associated with these options are, and
  • How each of the options might affect program outcomes.

Supporting 1.2 million poor Malawians

Malawi, a landlocked country in Southern Africa, is one of the continent’s poorest nations: 70% of its 18 million inhabitants live below the international poverty line. In 2006, its government piloted Social Cash Transfer Programme (SCTP), a donor-supported unconditional cash transfer program. Today the program covers the entire country, assisting nearly 300,000 ultra-poor and labour-constrained households and an estimated 1.2 million individuals. Transfer amounts vary with the size of the household and the number of children in school; a single-member household currently receives MWK 2,600 ($3.50) per month. While the transfers corresponded to only 18% of the baseline consumption of beneficiary households in 2013, the Malawi government has also used the program to distribute additional money during times of hardship, such as the recent flooding and drought in Nsanje, Neno and Phalombe districts.

The silver bullet

Cash transfer programs are probably one of the most-researched development interventions. They are also extremely diverse. While Malawi distributes monthly allowances to its poorest households with no strings attached, Indonesia targets poor households with children or pregnant women and insists on numerous conditions that cover healthcare and education. In fact, most social security systems throughout the world are based on cash transfers. To keep the discussion focused, it is thus important to remember the goal of this investigation: to explore whether cash transfers can eradicate extreme poverty around the world before sustainable long-term solutions are in introduced.

No strings attached

Conditional cash transfers are employed when donors have goals beyond poverty alleviation. Bastagli et al. (2015) conclude that conditions may lead to higher impact in areas targeted by the conditions. For example, increased usage of healthcare services has only been observed when transfers were conditional on such visits. Often, however, no or only small differences between conditional and unconditional transfers are found. For example, while some studies have shown that conditional transfers are associated with slightly better educational outcomes, differences are not always significant.

The never-ending story

The choice between one-off and recurring transfers is context-specific as well. Indeed, there are cases where one-off transfers are not only acceptable but also preferred. For example, in the aftermath of a disaster, recipients can benefit from a single transfer to help them address their immediate needs, be it food, shelter, or medical services. More generally, Bastagli et al. (2015) suggest that frequent transfers favour consumption smoothing and spending on smaller assets, while lump-sum payments might be associated with larger investments. Now poverty is not a temporary humanitarian crisis. Nor is it a state of being one cow away from wealth. Instead, it is a long-term condition caused by a variety of factors, vast majority of them not controlled by those in need. Without a doubt, recurring payments are thus preferred.

A glass half full

As could be expected, larger transfers are associated with larger expenditures, greater poverty reduction, and increased savings and investments. On the other hand, larger transfers appear to have no effect on educational outcomes, and might also be associated with some reduction in employment.

The right tool for the right job

Now I believe in universal basic income as a tool to eradicate poverty, reduce inequality, improve well-being, encourage creativity, manage job automation, and more. And yet in the context of global poverty, the universality of cash transfers has a few glaring problems.

Alright, but won’t they spend it all on cigarettes?

Ah, I’m glad you asked. Cash transfers might indeed seem too good to be true. Less poverty, better nutrition, improved school attendance, and more. There must be a downside to all this, right?

Cash Transfers: The Objections

There are no silver bullets nor free lunches. Even though some interventions are indeed more cost-effective than others, all come with a price tag. But before I get into objections, let me remind you that all these conclusions, while based on a review of robust, experimental evaluations of existing programs, might still fail to apply in specific situations.

Evidence limitations

For example, much of the evidence comes from Latin America, while extreme poverty eradication will necessarily focus on sub-Saharan Africa. Similarly, conditional cash transfers have been studied more widely than unconditional ones. Most importantly, however, all evaluations so far have focused on near-term effects. For example, it is clear that people who receive transfers eat more nutritious food. It is not clear, however, whether they also end up healthier. They might not because health, like education, is affected by a range of factors. Or they might, but no study has yet been run long enough to capture these long-term effects.

Will cash transfers lead to…?

Dependency? Unemployment? Waste? All these questions have been asked before. And indeed, it is important that we ask them. This is the only way we can be sure that all these programs truly work. But there is a dark side to this.

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… waste?

A common argument against cash transfers is that recipients will spend them on bads (e.g., tobacco) or luxury items. In the words of a senior government official in Nicaragua (Handa et al., 2018):

… increased unemployment?

There is a widespread perception that cash transfers lead to dependency and thus reduced employment. From a fascinating survey of elite attitudes towards poverty and cash transfers in Malawi (Kalebe-Nyamongo and Marquette, 2014):

Figure 14

… increased fertility?

Some policymakers believe that targeting families with young children will lead to increased fertility. Because, you know, cash transfers make rearing children profitable.

… increased inflation?

An unintended side effect of cash transfers could be inflation in small, isolated communities. Indeed, if cash transfers in an area are not followed by increases in supply, prices will rise, both reducing the value of transfers to recipients, and crowding out non-recipients.

  1. Cash transfers amount to a very small proportion of the overall economy, and
  2. Markets, even in rural areas, are reasonably well connected, so increased demand can be easily met.

Fine, but aren’t there better options?

Not only cash transfers appear to be effective in reducing poverty, they do so without any obvious side effects. Money is not spent on temptation goods, unemployment does not shoot up, fertility does not skyrocket, and inflation does not ravage local economies. But before we can say that cash transfers are the best tool we have for eradicating extreme poverty, we need to look at the alternatives.

Cash Transfers: The Alternatives

The painkiller and the cast

Imagine you’ve just broken your wrist. Your family rushes you to the nearest hospital while you’re doing your best not to swear and scream. The doctor greets you with painkillers and a splint to prevent movement. An X-ray evaluates the damage. Luckily for you, the broken bone is in position, so you get a cast, more painkillers, and a hearty goodbye. You can go home.

Short-term remedies to extreme poverty

Sulaiman et al. (2016) have reviewed 48 poverty reduction interventions, focusing on lump-sum unconditional cash transfers, livelihood development, and graduation programs. Lump-sum unconditional cash transfer programs provide one-off grants. Livelihood development programs help poor people build skills. Graduation programs combine the two approaches, offering the poor various services (e.g., saving, mentoring), while also providing a productive asset or a grant.

The logical argument

If you think about it, it should not be at all surprising that unconditional cash transfers are the best tool for reducing poverty. We have defined poverty as living on less than int.-$1.90/day. Cash transfers thus attack the problem directly — 100% of every dollar that reaches the recipient can be used to fill the immediate consumption gap. Not so in other interventions. Instead of money for food, a livelihood development program would offer you training. (Try focusing on a lecture when your stomach is growling.) Instead of money for cataract surgery, a graduation program will give you a goat. And instead of money for fertiliser, a conditional cash transfer program will finance regular doctor visits instead.

From the short term to the long term

Of course, structural eradication of extreme poverty is still very much a goal. And that goal cannot be achieved by cash transfers alone (Ladhani and Sitter, 2018):

Figure 15

Balancing the short term and the long term

On the other hand, the answer to balancing the short term and the long term is surprisingly simple: spend as much on cash transfers as is required to lift everyone from extreme poverty immediately. I know this might sound crazy, but hear me out.

Cash Transfers: The Costs

A quick primer on cash transfer program costs

Broadly, total cash transfer program costs can be broken down into administrative (set-up, roll-out, operational, monitoring and evaluation) and transfer costs.

Figure 16

The cost of safety nets around the world

Since transfers make up the bulk of cash transfer program costs, the flippant answer is: however much you decide to spend on addressing poverty. Let’s see if we can dissect that response.

Figure 17

The cost of eradicating extreme poverty in Tanzania

Tanzania, famous for the Serengeti National Park, is home to 56.3 million people, 49% of them extremely poor. The country’s poverty gap at int.-$1.90/day is 15.7%, close to Sub-Saharan Africa’s 16.6%. Its GDP per capita is $1,105. In 2016, Tanzania’s government spent 2.35% of GDP (or 12% of total government expenditure) on social protection.

The bottom line

So, can extreme poverty in Tanzania be eradicated through cash transfers?

Eradicating Poverty: The Funding

Remember, I estimated that it would cost $194 billion/year to eradicate extreme poverty everywhere in the world. And yet eradicating poverty in Tanzania alone seems pretty damn hard. So how do we approach this global challenge?

Global leadership, with the World Bank at the helm

The mission of the World Bank is “to end extreme poverty and promote shared prosperity in a sustainable way”. Its experience, size, and access to funds mean that it is uniquely positioned to lead the global response to acute poverty.

  1. Investing in “skilled, healthy, productive workforce” (presumably by focusing on education and healthcare), and
  2. Preparing for looming threats: population displacement, climate change, and pandemics.

National commitments, fulfilled

The World Bank can lead the fight against poverty, but so can individual countries.

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Charities obsessed with problems, not solutions

Thousands of charitable organisations out there are doing amazing work. Thousands more aren’t nearly as effective. Just as governments should have a good look at their aid budgets and consider redirecting some of the spending to cash transfers, so could large foundations. For example, Rockefeller Philanthropy Advisors, one of the wealthiest charitable foundations in the world, directs millions of dollars to arts and culture. Is that really “thoughtful, effective philanthropy”? Peter Singer, a moral philosopher and an avid defender of utilitarianism, responds bluntly: “I don’t think so”.

Your money and your voice

It would be easy to conclude that individual actions don’t matter. It would also be wrong. Every one of us can do an immense amount of good.

Eradicating Poverty: The Vision

Extreme poverty could be eradicated tomorrow.*

daily cash transfer = int.-$1.90 — current daily consumption

The guiding principles

It’s about fundamental human rights. There is no intrinsic value in eradicating poverty. The value comes from lessening human suffering, bringing happiness, giving back the right to dignity.

The vision

A decentralised global safety net system, available to everyone who needs it, supported by everyone who can.

  1. The safety nets are a set of national cash transfer programs that benefit the recipients. A national safety net is funded by the local government and the funding system.
  2. The funding system is a network of transnational organisations, donor countries, charitable foundations, and individuals who provide partial financing for national safety nets.

The recipients

The ultimate goal of the system is to identify everyone who lives on less than int.-$1.90/day and to provide them with cash transfers to make up the difference.

The safety net

The safety net will necessarily be country-specific. However, it should comply with a set of basic requirements, such as cash transfers being unconditional and recurring. With so many people requiring assistance, safety nets also need to be efficient. One way to ensure this is certification. First, a cash transfer program would be evaluated in terms of its impact on recipients and its cost-effectiveness. Second, ongoing monitoring would ensure that the program is implemented and runs as planned, and that the benefits are thus reaching the intended recipients.

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The funding system

The feasibility of global poverty eradication ultimately depends on funding. The goal of the funding system is thus to cover the difference between what a national government can provide itself, and what is needed to eradicate poverty in the country.

Charity fundraising

Individual donations should be collected by new or existing charities. While basic guidelines (e.g., transparency expectations) could be provided, it would be up to the charities themselves to decide how exactly to raise funds — including whether to target global or national funds. For example, the Ghanaian diaspora could set up a charity to collect donations from Ghanaian expatriates around the world, with the specific purpose of fundraising for the national fund of Ghana.

National donor registers

An idea I’m rather more excited about is the national donor register. But first, let’s talk about organ transplants.

  1. Voluntarily increase the tax, or
  2. Opt out of the tax.

The global safety net

So here it is, a way to eradicate extreme poverty that involves all stakeholders, yet does not depend on any one of them to function. One donor and one recipient are enough to get this started. With hundreds of donors and dozens of recipients, extreme poverty might well become a relic of the past.

Let’s Choose Again

The world is wonderful. We live longer. We feel better. We know more. We experience more. We dream, then we do.

daily cash transfer = int.-$1.90 — current daily consumption

Bookworm (but I sometimes go on real adventures) · Obsessive thinker · Inconsistent writer · “You live and learn. At any rate, you live.” — Douglas Adams

Bookworm (but I sometimes go on real adventures) · Obsessive thinker · Inconsistent writer · “You live and learn. At any rate, you live.” — Douglas Adams