Unconditional cash transfer to all households is unsound economic advice

Dear Editor,

Splurge. Consumption binge.  Reckless. More corruption. Welfare state. Laziness. Dependency syndrome. Economic destruction. Blanket cash payout is unsound economics. These are the initial thoughts that came to my mind as I read the article `Clive Thomas urges cash payout to households from oil revenue.’  That is the case with radical ideas, but there may be some merit to Thomas’s raw argument once it is nuanced.  In a letter to Stabroek News written more than two years ago (“A Sovereign Wealth Fund could be used to invest in Guyanese,” 10 January 2016), I made a more targeted suggestion.  I suggested that each newly born child receives an endowment, “arbitrarily assume US$15,000,” which should be used to fund tertiary education and  serious medical conditions.  Some other conditions were attached, and the interested reader may wish to peruse my essay.

According to Preliminary Report on the 2012 Population and Housing Census, there were 210,124 households in Guyana, up from 182,609 in 2002.  Assume with Thomas that the cash transfer is US$5,000 per year per household.  Total transfer will amount to US$1.1 billion annually, which is 3.5 times the estimated US$300 million in petroleum revenue during the initial years of the oil bonanza.  Even if the Government rakes in around US$5 billion per year by the end the next decade, as some have estimated, more than one-fifth of it will be gifted unconditionally to households.   The sheer magnitude of such transfers raises troubling questions, some of which are listed in the first lines of this letter.  Per capita cash transfer will be larger than per capita GDP in 2017, which was US$4,725.  By 2021, income per person could be about US$10,000!  The level of per capita income in 2017 means that the average person had about US$13 dollars to spend daily, while US$10,000 in 2021 will give each person more than twice this amount – about US$27.4.  Significantly, most of the cash transfer will end up in Region 4, which has 93,260 households and is already the richest and most developed region in the country.  This region alone will absorb US$466.3 million or 44.4 percent of the estimated cash transfers by the end of the next decade.  Region 5 and 6 will each get around 15 percent of the transfers. Only about 8.25 percent of the cash transfers will go to the 17,341 households in the interior regions (1, 7, 8 and 9).  Region 10 will receive 5 percent and Region 2 about 6 percent.  Yet a cash transfer of an equal amount to all households will leave absolute inequality unchanged.

Thomas is reported to have said: “I don’t think giving cash transfers to persons are a waste of resources. If you look at the evidence, cash transfers are the single most effective means of combatting poverty.” Until recently, a large cash transfer directly to the poor was met with great skepticism. Researchers have now produced a body of evidence that shows cash transfers can improve substantially the lives of the extreme poor. The evidence, and the ensuing publicity around cash transfers, has changed the way we think about giving cash to the poor, creating a valuable benchmark against which to evaluate other programmes. But the point needs to be underscored: cash transfer is effective only for people living in extreme poverty of about US$2 per day.  I am not sure if any country in the world gives a cash transfer to each household.  Even if I am incorrect, I have not seen any analysis of the effectiveness of such transfers.

According to the Household Income and Expenditure Survey (HIES) of 2006, the extreme poverty line in that year was G$8,395 per month and 18.6 percent of the Guyanese population – Headcount Index – lived in extreme poverty. The extreme poverty line was G$2,929 per month in 1992 and 28.7 percent of the Guyanese population lived in extreme poverty. The moderate poverty line was G$3,960 and G$11,395 in 1992 and 2006, and the extreme poverty rate was 43.2 percent and 36.1 percent, respectively.  Note, firstly, that Guyana’s GDP in 2017 was ten times as large as it was in 1992!  It rose from $368.3 million to $3.7 billion. Yet extreme poverty during these twenty-five years fell by only 10 percentage point, while moderate poverty was even more sticky for it declined by only 7.1 percentage points.   These figures suggest extreme income (expenditure) inequality, particularly between interior regions and coastland regions.  Second, both the extreme and moderate poverty lines in 2006 was less than $2 per day.  Using the International Poverty Line, instead of the national one as the yardstick, 54.7 percent of Guyana’s population lived in extreme poverty in 2006!  That sticky figure is unlikely to have changed much today.  It seems, then, that more than half of Guyana’s population will benefit from the cash transfer. 

Cash transfer must address several important issues. First, is that of the magnitude and administration of the transfer. Generally, cash transfers do not exceed per capita income.  Setting the size of the transfer is possibly the most important programming decision that needs to be made when designing a cash transfer scheme. Setting the benefit too low runs the risk of setting up a huge delivery mechanism for a benefit that has little or no impact; setting the transfer too high can undermine the programme by freezing other potential recipients out of the programme and inducing perverse incentives. So what is the right size for the transfer? There is no standard to setting the transfer size, but most cash transfer programmes attempt to “anchor” the size to some stated programme objective.  For example, Zambia’s Child Grant Programme aimed to provide at least one meal per person per day in the household and linked the size accordingly.  Other methods include eliminating the poverty gap, eliminating food poverty gap or providing a percent of the food poverty line.

Second cash transfers immediately boost a household’s income but also lead to leakages: what fraction of a given income injection into the economy leaks out to other countries via imports?  For this we need to get an idea of the marginal propensity to import (MPM), which is the change in imports/change in income.  Guyana is an extremely open economy, with import of goods and services exceeding GDP.  Imports have historically exceeded exports, which is why there is a perennial current account gap. Usually the change in import is calculated in relation to disposable income (amount available for spending and saving after taxes) but the latter does not exist.

Third, a cash transfer is good for poverty reduction and human development, which is heavily influenced by income, but it may lead to increasing dependence upon transfers and the rise of a welfare state and all its associated socio-economic problems. Just as important is the effect of transfers on the willingness to work (rise of laziness), and the productive structure and the capacity of the economy.  The rise of oil wealth and thus an “oil economy” could lead to the decline of agriculture, increased food import and luxury items, which will narrow the country’s economic pillars. I am unsure if the kind of cash transfer Thomas contemplates will improve overall welfare more than by investing the resource into the economy and its people – upgrade and expand the inadequate and delipidated infrastructure, such as roads, bridges and electricity; investment in nutrition, health, education and high-speed internet connectivity throughout the country. 

Given the evidence, I suggest the Government conduct an experiment to prove evidence about cash transfers. This may be done by randomly selecting a representative sample of poverty-stricken households from all regions.  Households would be divided into three groups: one with conditions attached to the transfers (conditional transfers), a second without conditions attached (unconditional transfers), and a third as a control group, which will not get any transfer.  Most cash transfer programmes around the world are conditional transfers.  The available evidence suggest that cash transfers predicated upon certain behaviour or actions can positively affect the outcomes relating to the conditions on. After a year or two these programmes can be evaluated, and policy decisions taken accordingly. 

The evidence that targeted, conditional cash transfers work is convincing. But an unconditional cash transfer to all households is unsound economic advice that will bring more economic ill rather than economic health.

Yours faithfully,

Ramesh Gampat

 

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