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Economic Development

Making Cash Pay Off

GiveDirectly relies on high tech and hard data to test whether large cash transfers can alleviate extreme poverty.

 

Even by the standards of East Africa, Julius Radol Gwada is poor. His yearly income hovers around $175. Until recently, his hut in the rural Kenyan village of Komonge was roofed with thatch. When it rained, water seeped through the roof. When it rained at night, Gwada would gather his wife and children in the driest corner of the hut, and they would pass several miserable hours under a sheet of wax paper. Late in 2012, two strangers came to Komonge. They went from hut to hut, collecting information on the people who lived there. To the poorest members of the community, including Gwada, they offered money: a princely sum of $1,000—more than he would otherwise make in five years.

What was the catch? There was none. The strangers worked for GiveDirectly, a US-based charity founded in 2011 on the principle that the best way to alleviate extreme poverty is to give people money and let them do what they want with it. With his unexpected windfall, Gwada installed an iron roof on his hut. It cost $300, but the investment will pay off quickly: The old, leaky thatched roof needed repair twice a year, and the repair cost $30 each time. In short, it leaked not only water but cash as well—a vicious circle that the gift from GiveDirectly has allowed Gwada to escape.

Quite a few people in Komonge installed roofs with their GiveDirectly money. Others bought cows, paid off debts, sent their children to school, or held weddings. From GiveDirectly, they received no instruction at all—that is, beyond information on how to collect their money. This might sound strange: After all, whatever happened to the proverb about “teaching a man to fish”? “The data we have so far,” says Paul Niehaus, a cofounder of GiveDirectly who is also a development economist at the University of California, San Diego, “show that our fishing lessons aren’t very good, and that poor people use money to buy fishing poles.”

Transfer Technology

GiveDirectly didn’t invent the give-money-away model. Over the past decade or so, conditional cash transfers—gifts of money with stipulations attached, such as the requirement that recipients spend some of the money on education or health care—have become a tool commonly used by governments in Africa, Asia, and Latin America. Many economists consider this approach to be less vulnerable to waste and corruption than traditional forms of aid and philanthropy. Unconditional cash transfers are a variant of that model.

A man in Siaya County, Kenya, sits on a motorcycle bought with cash from GIveDirectly. (Photo courtesy of GiveDirectly)

By 2008, when Niehaus was a doctoral student in economics at Harvard University, cash transfers had become an established poverty-fighting tool in the government sector. But that model hadn’t yet reached the philanthropic world. Niehaus and three fellow graduate students—Michael Faye, Rohit Wanchoo, and Jeremy Shapiro—decided that they wanted to use this approach to help poor people in Africa. Unable to find a charitable organization that offered such a service, they took the matter into their own hands. They formed a private giving circle, collected money from friends and colleagues, and then traveled to rural Kenya and searched for potential recipients.

Niehaus and his friends didn’t actually carry cash with them. Instead, they used M-Pesa, a financial service that lets people send and receive money via mobile phones. The service has more than 17 million registered users in Kenya alone, and it’s especially popular among poor people who have no access to traditional banking services. “There are leaps and bounds being made in the technology that poor people have access to,” says Niehaus. “M-Pesa is a really remarkable system. Sitting here on my floor, I can upload a spreadsheet with a list of phone numbers and hit a button, and the money shows up with people in Africa.”

Three years after that initial venture, Niehaus and his friends opened their giving circle to the world by launching a nonprofit organization—the first of its kind—that does just what its name says: give cash directly to people in need. Since then, GiveDirectly has distributed more than $6 million to 30,000 people in Kenya and Uganda. It has raised that money from individual donors, and it has received considerable support from tech-world philanthropists in particular. In 2012, Google bestowed a $2.4 million Global Impact Award on GiveDirectly, and in February of this year Good Ventures—a philanthropic group started by Facebook cofounder Dustin Moskovitz—gave the organization a $5 million matching grant after GiveDirectly raised that sum from individual donors and companies.

The tech-industry orientation seems appropriate, given how central technology is to GiveDirectly’s operations. Early on, people from GiveDirectly would ask village elders help them identify needy local families, but elders sometimes used that opportunity to direct cash to friends and relatives. To avoid that problem, GiveDirectly leaders have adopted an on-the-ground, in-the-sky approach: They crunch census data to identify target communities, equip field teams with handheld devices and send them door-to-door to collect information, and use satellite imagery to verify whether potential recipients live in thatch-roofed huts. (That data point, GiveDirectly has found, serves as a fairly good indicator of whether a family is very poor.)

Those extra layers of tech-enabled auditing ensure that money reaches the right people. According to GiveDirectly, roughly 90 percent of its revenue from donors goes straight to recipients.

Big Gifts, Big Impact?

GiveDirectly has distinguished itself from government-based cash-transfer programs in another way: It provides exceptionally large gifts. Most government transfers involve relatively small sums disbursed regularly over long periods of time. In Kenya, for example, the government operates the Cash Transfer Programme for Orphans and Vulnerable Children, which provides about $21 per month to more than 130,000 households. GiveDirectly’s transfers typically run to about $1,000, and the organization pays out that sum in a handful of installments over the course of a year.

Why not provide smaller sums, which have been proven to help? GiveDirectly leaders believe that large transfers have a previously untapped potential to transform people’s lives. Carolina Toth, the organization’s field director in Kenya, cites the example of a 46-year-old HIV-positive widow and mother of three who used her gift to build a house, send her children to school, and purchase a cow. “Houses traditionally have to be built by a husband, or another man who ‘inherits’ a widowed woman,” Toth explains. “No one wants to inherit an HIV-positive woman, so she was both socially and financially unable to build.” With a smaller gift, the woman would not have been able to make changes to her life of that magnitude.

Sudhanshu Handa, a development economist at the University of North Carolina, notes that small, regular cash transfers have real value as well. At this point, in fact, the impact of that model has been more thoroughly studied than the large-transfer model. Handa, who has helped East African governments to study their cash transfer programs, does see potential in the GiveDirectly approach. It “could allow recipients to do something big—to structurally change their situation,” he says. GiveDirectly, he adds, serves as a kind of incubator: It can test the large-gift model in ways that governments, with their focus on immediate poverty mitigation, are unable to do.

GiveDirectly has received praise for its rigorous approach to impact evaluation. Most notably, it was the subject of a randomized controlled trial conducted by two researchers at MIT’s Abdul Latif Jameel Poverty Action Lab. (One of the researchers is GiveDirectly cofounder Jeremy Shapiro.) The results of that trial aren’t conclusive. They’re necessarily short-term, and they encompass several different gift sizes and payment schedules, thereby decreasing their statistical significance. But they accord with the findings of earlier studies: One year after receiving their gifts, recipients typically had more assets and larger incomes. They generally felt less stress than before, and their homes were more peaceful places. An influx of money didn’t appear to cause local inflation. And recipients, by and large, didn’t squander their gifts. Contrary to what some might expect, Niehaus notes, most people don’t drink or gamble away windfall sums of this kind.

In a review of GiveDirectly’s work, the charity evaluation organization GiveWell observed that “there is still limited evidence on the humanitarian impact of the type of transfers” that GiveDirectly provides. Despite that caveat, the group ranked GiveDirectly as one of its top charities, in part because of its commitment to self-examination. “Most charities don’t have that kind of rigorous, publicly available critique of their own programs,” says Eliza Scheffler, a research associate at GiveWell.

GiveDirectly continues to collect data, and it’s also experimenting with its model to compare the effectiveness of different giving strategies. The data might eventually show that it makes more sense to give money to everyone in a community, not only to people who meet certain poverty criteria, or that it’s better to give $500 apiece to two households than $1,000 to one household. “Software companies are constantly testing, improving, and releasing new versions,” says Michael Faye, a cofounder who now sits on the GiveDirectly board. “We are doing the same, just in the field.”

Faye emphasizes that he and his colleagues don’t envision a time when large cash transfers will replace all forms of international development aid. If there are no hospitals or schools, for example, money alone won’t help children get vaccines or learn math. “Cash is not a silver bullet,” he says.

It certainly helps, though. GiveDirectly aims to hand out $14 million in 2014 and $26 million in 2015. Scaling up at that pace will require adding new staff and building the organization’s operational capacity. “But longer-term,” Niehaus says, “the big question is: How much do Americans want to give? I don’t think the availability of poor people is ever going to be a constraint.”

 
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