Cash transfers as a poverty alleviating mechanism can work with carefully crafted conditions

Dear Editor,

I have listened to Professor Clive Thomas’ proposal that every household in Guyana should receive cash transfers – the figure of US5000.00 was floated – from the oil revenues. I have also followed the discussions which have ensued. I believed Prof. Thomas, whom I have tremendous respect for as a brilliant economist and thinker should be given the space and public forum to develop his thinking on this matter, since it has gained such currency in the society

President Granger has since weighed-in on the proposal and has said that there is no precedent for the cash transfer proposal, which is unfortunate (I’m not sure if the president meant precedent in Guyana or anywhere). The President should’ve deliberated with his experts before pronouncing on the issue and giving the impression that it is without merit. There is a whole body of literature, and academic advocacy for cash transfers as a poverty alleviation mechanism. There are also different types of conditional cash transfers which are implemented in various societies to alleviate poverty. In the US there are, Temporary Assistance for Needy Families, Medicaid, Food Stamps, Supplemental Security Income, Earned Income Tax Credit, and Housing Assistance, etc. In 2016, Saudi Arabia implemented a cash transfer programme to address economic anxieties as well as to shore up its economy and political system.

Cash transfers as a poverty alleviating mechanism have some merits as well as some potential pitfalls which should not be ignored, or side stepped. I have some real problems with the amount of US$5000.00 floated at the forum by Dr. Thomas. Cash transfers have real economic implications if not done properly and in the correct amounts.  One has to take into consideration the social-economic make-up of the society. Guyana is a society which has endured a high rate of unemployment for decades, and as such, there are large swaths of the society which lack a culture of formal employment. Because of this socio-economic condition there is indeed the risk of creating a dependency economy.

As the society begins to develop there will be growth in the labour market, and thus, increase in employment availability. What therefore is the incentive for those with guaranteed cash transfers, which are above labour market rates, to enter the labour market? There will be none.

what will obtain therefore, is an expanding economy, increased investments in all sectors without concurrent expansion in the labour force. The potential economic implication here is serious labour shortages and suppression of productivity in important sectors. Additionally, sudden increases in purchasing power with concomitant increases in prices will cause inflationary pressures in an emerging economy.

There is also the additional risk of corruption in establishing the means of distributions of these transfers, which could result in large portions of the funds not reaching the intended targets.   Another intervening factor is the political bias or suspicion of bias in distribution, depending on which political party is in power. Will the cash transfers be distributed in favour of one ethnic group over other ethnic groups, because of established political support?

What I am saying here is that we cannot discuss these ideas without considering the real economic and political implications for an emerging economy. Having said that, I do believe that cash transfers as a poverty alleviating mechanism can work with carefully crafted conditions within an established poverty line. Such transfers should not be above labour market wage rates so as to disincentivize employment. Employment should always be the avenue by which poverty is alleviated.

So, for example, there should be guidelines which establish what the poverty line is in the society for a household of 1,2,3, 4, etc. Let’s say the guidelines show that the poverty threshold for a one-person household is GY$60,000 annually (this can easily be worked out by the experts). If that household is without formal employment then that household will receive cash transfers of 150% of the poverty line, to the tune of GY$90,000, plus access to free education, healthcare, etc. In a household of 2, the poverty threshold would increase to let’s say GY$ 100,000. One person is working so the household makes GY$50,000. The cash transfer to that household would be 150% ($100,000- $50,000) or GY$100,000. If both occupants are unemployed then the  cash transfer would be GY$150,000. Note that this is just an example to establish an idea. 

Of course, I believe that as the economy expands with infrastructure development, and as investments increase, more employment will become available both in government and private sectors. So, there will be an increase in labour rates due to increased demand for labour. As more people enter the labour market due to high wages, they will fall out of the poverty-line threshold qualification for cash transfers.

Yours faithfully,

Dennis Wiggins

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