Indu makes the world’s best aloo parathas—thin, crisp and dripping in oil. Many economists shrug off their cholesterol worries at our doorstep to sample my housekeeper’s fantastic breakfast treats. So when Indu asks for a morning off when another macro being is planning to drop in for a micro bite, I want to know why. She’s been summoned by her son’s teacher to sign on some forms. What forms, I ask, even as the mental image of the planned breakfast pops and dies. It seems that government schools in Delhi give Rs500 twice a year for assorted school-related expenses to parents of disadvantaged children. Now, the government was getting each child to open an account, with the parent as a joint holder and would henceforth directly credit the account. But the child would only get the money when he finished school. Thinking that Indu would be upset at this reduction in money in hand, I was surprised at what she said: “We don’t get the full amount. The teacher sometimes gives Rs200, sometimes Rs300—she gives the full amount to kids of a minority community and those of lower castes.”
Cash transfers are suddenly the flavour of the year in India, especially after the success of the National Rural Employment Guarantee Act (NREGA) in some states and the link between such programmes and the Congress win this year. But globally, cash transfers evoke strong reactions along two main lines of argument. One, the poor will drink away this money—or that they are incapable of taking rational economic decisions when faced with cash. Two, subsidies distort economic signals and sap away the quality of enterprise and initiative. Both, if true, are reasons enough to allow the continuation of the paternalistic system of micro-managed handouts that aim to prevent misuse. The difficulty in accessing these handouts drives out a swathe of the target clients, many of whom give up on the system and are then forced to pull themselves out of poverty through ingenuity or dint of sheer hard work.
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The first question we must ask is, do the poor have active economic lives and are they any different from those higher up the income ladder? A study carried out by the Institute for Development Policy and Management, University of Manchester, UK, shows that in India even the very poor have strongly active financial lives, making about one financial deal every two-and-a-half weeks. Most of this activity is in the informal sector, with a few comfortable with banks and post offices. On average, each household in the study made financial transactions equal to about 130% of their annual income. Append this research to the microfinance experience worldwide that shows the poor to be responsible borrowers and users of money. But this still does not prove that doles work. Plus there is enough evidence to show that subsidies distort economic signals and actually make the poor worse off. A look at the loan melas of the past show an appropriation of state goodies by the incumbents, leaving the poor outside the wealth effect caused by these doles. Expand this argument and you bump into the iconoclastic British economist Peter Bauer who wrote: “There is not a single instance when external donations were required for the economic development of a country.”
On the ground, do doles work? There is evidence that they do, under special circumstances. Two of the world’s biggest conditional cash transfers—the Mexican Progresa-Oportunidades or Opportunities of Progress and the Brazilian Bolsa Família or the Family Stipend programme that is a part of the state welfare programme Fome Zero (read Starvation’s Over in English)—are cases in point. With testing tools woven into the programme, the Mexican project will transfer cash conditional to nutrition, health and education behaviour targets. A World Bank study found the programme to be effective in increasing school enrolment, better diet and medical attention. A paper by Behrman and Hoddinott (2000) reports an impact of Oportunidades equivalent to an increase of 16% in the mean growth rate per year for children who received treatment between 12 and 36 months of age. The Bolsa Familia programme aims similarly to transfer cash to people who meet school attendance, immunization and health-check targets. A United Nations Development Programme study finds that the Brazilian Gini index fell by 4.7% from 1995-2004 with the Bolsa Familia responsible for one-fifth of this fall.
Sometimes, simple common sense embedded into large programmes works. Hand out money in loan melas and you get economic distortions. Build a programme around a goal set, implant targets and testing into it and you get results. Cash transfers are needed for those at the bottom of the pile—you can’t display initiative and entrepreneurship when you’ve not eaten for three days or are chronically sick due to neglect of basic health and nutrition needs. And to wait for “trickle down” is a cynical incumbent smart strategy.
So Indu got her morning off, an account was opened and long-term cash, linked to the son passing the final exam, begins to trickle in. Mr Macro Economics will surely come home another day.
Monika Halan works in the area of financial literacy and financial intermediation policy. She is consulting editor with Mint and adviser, Pension Fund Regulatory and Development Authority.
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