Outsized focus on cash transfers is missing the point

A paramedic distributes free medicine provided by the government to patients inside a ward at Rajiv Gandhi Government General Hospital (RGGGH) in Chennai July 12, 2012. Chennai is the capital of Tamil Nadu, one of two Indian states offering free medicine for all. The state provides a glimpse of the hurdles India faces as it embarks on a programme to extend free drug coverage nationwide. Picture taken July 12, 2012. To match Analysis INDIA-DRUGS/             REUTERS/Babu (INDIA - Tags: HEALTH SOCIETY DRUGS) - GM1E87N0HMY01

A recent blog with my colleagues James Habyarimana and Irfan Nooruddin generated much interest (see here and here, and the Twittering here). Most of the comments missed the point. The question we raised is not whether policymakers should or should not pursue direct cash transfers. Rather, we were asking if the policy debate is sufficiently cognizant of trade-offs with other areas of public services, such as health. Many among those who advocate for cash transfers are frustrated with corrupt and inefficient governments and want to explore an easier way out. There is no easy way out. Poor people, like all of us, need strong states to provide law and order, security, and some basic services like public health.

Injecting unprecedented amounts of cash into weak state environments, because technology makes it easy to do so and randomized control trials (RCTs) have shown positive results, may have unintended and adverse consequences. The ceteris paribus assumption inherent in RCTs and most economics analysis that qualifies as “rigorous” is a really important weakness that should make experts and policy advocates much more humble.

The point of asking a series of different survey questions to measure people’s views of public policies is not to test what policies they would select under direct democracy (which is what all the comments we received on our blog are about—you didn’t tell them the size of the budget; you needed to give them more information; etc.). There is a reason most of the modern world is governed through representative political institutions, democratic or otherwise. Complex policy decisions involving difficult trade-offs require experts dedicated to marshaling technical evidence and evaluating it in dispassionate ways. But it is the leaders selected through political institutions who deliberate over policy options, weighing advice from different experts. Political institutions determine what policies have sufficient support to be pursued.

Political institutions are failing in these roles across the world, in both rich and poor countries. This is the problem I define and examine in my work. If I had to summarize the problem in one sentence, I would say that politics is being played like a zero-sum game, with contestation revolving around extracting private benefits from the state, at the expense of the broad public goods that governments are supposed to pursue. Policies that provide targeted private benefits, like cash transfers in poor countries, may have inadvertent consequences by fueling that game at the expense of broader public services like in public health. For example, in places where political competition revolves around buying votes, it is precisely public health that suffers.

The point of the survey module that we’ve administered so far in Benin, Tanzania, and India, is to try out simple, feasible-to-administer questions in multipurpose surveys to measure a really hard issue: whether people’s demands from government spending are geared towards targeted private benefits or broader public services with more dispersed benefits. We can then examine the correlates of these measures to shed light on why political institutions are failing. Is it because poor people do not demand services like health and education, relative to spending on benefits like cash and jobs? There could be many reasons why they might prefer government spending on cash and jobs, including that these benefits are easy to verify, and have immediate value, while public schools and health clinics are failing around them. This could be creating a vicious circle, with weak political incentives to improve the quality of schools and clinics spurring politicians to win office through vote-buying or populist handouts, to the neglect of broader public services. What we found in the most recent survey in India is the opposite—poor people overwhelmingly rank public health at the top, and cash last. This surprised us, and we thought it worth sharing through a blog, since the policy debate is raging now.

At the very least, poor people’s responses to these survey questions suggest that if there is a political problem of underinvestment in things like health and education, it cannot be simply explained by that vague term “populism”—demand from the uninformed, uneducated populace for inefficient forms of public spending that deliver immediate benefits at the expense of long-term investments. What if the problem is on the “supply-side”—politicians choose strategies to win political support by creating divisions among voters, and/or by making promises that they can quickly deliver without undertaking the difficult task of building state capacity?

There is an impressive amount of evaluation of the spillover effects of cash transfer programs. Ongoing analysis from one much-awaited study suggests that cash transfers can have fiscal-multiplier-like effects on local economic activity. Other work has been examining social effects. It’s time to include politics. Not just general equilibrium effects on economic variables such as food prices, but whether the quality of local politics changes. And by the quality of local politics I do not mean incumbent vote shares (that’s been done). I mean whether political competition and the leaders selected through it have the incentives and motivation to serve the public good. Yes, this is extremely difficult to measure and test. But this is precisely what poor people are trying to do when they actively engage in politics (see chapter 2 of this report). And this is how the underlying structural determinants of an economy, and thus of poverty, are shaped. Injecting cash may be akin to giving Tylenol to help the symptoms of a fever—it can help but needs to be administered cautiously and in controlled amounts. It cannot address the underlying disease. Cash is not a poverty killer. Economic and human development are. Sustained economic activity that lifts people out of poverty, and keeps them out, needs capable states that protect property and human rights, and leaders in government who pursue policies to serve the public good.

Poor people take politics very seriously. It’s time for economists who want to transfer cash to them to do the same. Don’t treat politics as easy. And don’t ignore it because it is too hard.