Every month, thousands of poor people in Kenya and Uganda receive a text message in their cell phones telling them they have been given around $45 dollars, and they have done nothing to earn them. They then go to a paying agent and get the money.

It’s not a lottery, nor a scam. It’s GiveDirectly, a charity that simply gives money away. It takes millions of dollars in donations, spends around 10% on administrative expenses, and gives the rest to poor people. As wasteful as it might sound, every year they are ranked as one the most cost-effective charities in the world, and their work and that of hundreds of similar programs has proven to be one the most effective and efficient strategies to fight poverty.

While most of the developing world adopted these types of programs long ago – programs that were first implemented in Latin America – today’s Venezuela is lagging way behind in their implementation, and in their discussion in the political debate.

Instead, we’re still stuck arguing about the government’s dumbest social policy: increasing the minimum wage. Anytime the government raises it, opposition politicians react in different ways. Some get it right: it’ll simply cause more inflation.

That’s what happens when wages increase faster than productivity. And it’s bad for companies, especially small and medium ones, which have to downsize or close, depressing supply even more. Furthermore, it only “benefits” those in the formal sector.

we’re still stuck arguing about the government’s dumbest social policy: increasing the minimum wage.

Most people understand this, even some of the politicians that complain that the increase should have been ten times larger. Some reactions are rooted on very understandable worries: “I get it. More inflation. So what? Look around you, heartless economist, people are starving! We have to do something!”.

It’s true. The government, this or the next one, needs to do something about the millions of people who can’t find or afford enough food. But that something is not raising the minimum wage ad infinitum.

There’s an alternative. If you want to help the poor, give them money. A little cash, every month, like they do in GiveDirectly. It’s what economists unimaginatively call “cash transfer programs”.

What’s most frustrating about the lack of opposition politicians talking about cash transfers (CT), is that there’s a wide consensus among Venezuelan economists and advisors, on every side of the debate.

A CT program is included in every serious adjustment proposal for Venezuela. It’s in UNASUR’s plan, in the recent proposal by the National Academy of Economic Sciences, and a team of Venezuelan researchers at Harvard working on a reform plan published a paper about the size and cost of a social protection program. It even has the seal of approval of the unlikeliest of pairs: Aristóbulo, and Maria Corina’s economic advisor.

In a CT program, the government gives money to people who fit some criteria, which can be based on income, health, gender, age, or other vulnerabilities. They come in two varieties: unconditional and conditional. In unconditional cash transfers (UCT), beneficiaries receive money and that’s it; money for nothing. Conditional cash transfers (CCT) beneficiaries have to comply with conditions: it can be sending their kids to school, completing job training courses, or taking their children regularly to medical checkups.

The government needs to do something about the millions of people who can’t find or afford enough food. But that something is not raising the minimum wage ad infinitum.

The idea of giving money to people might not seat well with the Anti-Populism Police, but helping the poor get out of poverty is not populism. And consider this: the World Bank and the IMF, two of the institutions most allergic to populism, love cash transfers. The World Bank loves them enough to lend billions to finance them, and CTs are one the IMF’s research staff main policy recommendations for developing countries.

They love them because the evidence –of hundreds of programs and evaluations going back decades– show they work. Their benefits are too long to list here, but their main positive results are very relevant to Venezuela. There is strong evidence that they reduce poverty, hunger and inequality, by allowing households to maintain minimum levels of spending on food and medicines. Beneficiaries typically increase their use of health and educations services. Households can avoid having to sell their assets, or take on debt.

They work in two ways: protecting living standards, and promoting wealth creation so people can transition to better livelihoods. They thus can help both those in transitory poverty (with lower incomes due to a crisis, for example), and the chronically, or structural, poor.

After watching chavismo tinker with the whole economy for 17 years with the finesse of a medieval surgeon, there’s another reason we – and the World Bank and IMF – like cash transfers: they don’t mess with the market and price mechanism.

When chavismo sees a price that’s too high for the poor to afford, they want to bring it down by decree. The price controls then distort everything on the distribution and supply side, and then they want to control that as well. It’s a slippery slope that leads to everyone fighting for a CLAP bag.

Cash transfers are the smart alternative: if there’s people that can’t afford food, give them money so they can go to the market and pay market prices. Increase their income, and work within the market mechanism, not against it.

Raising the minimum wage is a reaction that comes from the same impulse: give people money. But wages are a price like all others – the price of labor – and messing with it constantly is liable to cause distortions. And it forces the private sector to pay for your dumb social policy, with the cost passed on to consumers in the form of inflation.

Instead of trying to bridge the gap between populism and common sense when talking about the minimum wage, opposition politicians should start talking about and pushing for cash transfers

Another thing to like about CTs is that there are a form of direct subsidies. In Venezuela we’ve grown accustomed to large, indirect subsidies that are not focused on the poor: subsidies for gasoline, gas, electricity and imports (CADIVI). Their main beneficiaries are those who consume more. Energy subsidies are great for the guy with two SUVs and six air conditioners running 24/7 in his home, but do little for the poorest. CTs, and direct subsidies in general, are the more efficient alternative, go straight to those in need, and they don’t tinker with prices.

Prices can be a great conduit of information: they tell people what’s profitable and worthwhile, what’s a good use of their time. The indirect subsidies and price controls change the information, nudging people towards unwanted behaviour. The CADIVI subsidy told everyone it was better to import than produce locally. The price controls told companies to reduce their output, or to shut down. They also told consumers and gangs it was worthwhile to buy food at controlled prices and sell it in the black market, or take it to Colombia.

As for the bad news: yes, CT programs can be expensive. Two of the largest and most successful CCT programs are Oportunidades in Mexico, and Bolsa Familia in Brazil, and both cost about 0.6% of GDP. Other programs take up to 2% of GDP. But the depth of the Venezuelan crisis is likely to make the initial cost higher than that.

The Venezuelan researchers in Harvard estimate that there are currently 9.4 million people in Venezuela that are structurally (long term) poor, and another 9.9 million are poor by income (recently poor). The first group might need transfers for a long time, while the second group could “graduate” in short order once their income rises along with a refloated economy. The government is already running a UCT, but it’s too small to have a real impact (declared target: 500,000 people).

A transfer of $1.25 per day (until 2015, the international poverty line) for both the structurally and temporarily poor would cost $8.9bn in the first year, assuming (unrealistically) no one graduates that year. That’s around 4-5% of GDP for year one, and it will decrease going forward. Covering only the structurally poor would cost $4.3bn per year. Those are big numbers, but we could get a large part by cutting energy subsidies, which cost at least around 8% of GDP. And who knows how much we waste on the CADIVI subsidy and related corruption. Here’s where their efficiency is shown: the cost will undoubtedly be a lot less than that of indirect subsidies, and it’ll be focused directly on the poor.

We could start with an UCT, and as the number of poor by income drops, it can morph into a CCT with conditions that invest on human capital. CCTs are more expensive, and more complex to manage and monitor. And if you are going to require millions of people to make regular use of the health, education, and job training services, you better have those services ready to cover that demand, and have the administrative capabilities to manage and monitor. Needless to say, that’s not the case today in Venezuela.

The usual knee-jerk critique to these programs is that people will squander the money in booze and cigarettes. But evaluations of several programs in Latin America, Africa and Asia found zero evidence of even a small increase in spending on “temptation goods”. People don’t like to be hungry, even those who love to party. As for creating dependency, the transfer should be set at, or just above, the poverty line, and below the minimum wage, so that working is always a worthwhile proposition. The goal is to avoid people starving, not to cover all of their wants and needs.

Instead of trying to bridge the gap between populism and common sense when talking about the minimum wage, opposition politicians should start talking about and pushing for CTs, the alternative they either already know about, or at least their advisors do. It’s time to start talking about they would do to save and improve lives. Maybe they fear being called chavistas or populists, or they don’t want to be seen as approving of past and current chavista programs because the CT programs do sound, at least on paper, like the misiones. They are actually what the misiones could have been, but never were.

32 COMMENTS

    • It seems you didn’t read till the end. Let me help you copying and pasting this
      “The usual knee-jerk critique to these programs is that people will squander the money in booze and cigarettes. But evaluations of several programs in Latin America, Africa and Asia found zero evidence of even a small increase in spending on “temptation goods”. “

      • Giving people money or things without working for them has worked wonders in Venezuela. Right? If they spend the money on booze or something else does not matter. Still populism, still destroying our hard work ethic. It seems you can read but not relate to venezuelan reality.

    • To be “bloggish” about it: money to buy WHAT FOOD?!

      To be serious: I will listen to proposals and try to evaluate the economic logic. But the paper linked to from CC “The Urban Poor in Latin America” has not (as far as I have read) mentioned direct cash transfers (and the paper summarizes what they cover, without mentioning cash transfers). That paper points to improving the poor sectors’ access to services such as transportation to and from work and school, and to private businesses such as checking and savings accounts. https://en.wikipedia.org/wiki/Muhammad_Yunus

      Reading that paper and putting it into context, I got the impression that far from one of a few views of the poor as a near-hopeless collection of culturally or otherwise “structurally disadvantaged” people, the poor are resourceful, but face hurdles which the next income level up do not face.

      However: the situation in Venezuela is crisis-level, and even if theoretically unsound, a proposal to stop a crisis is worth considering as a temporary bridge or transition. This is the area I have (tiny voice as I may be) have been asking for proposals to for months. How to transition over from the socialist to the free market.

      I would much rather see proposals on how to restore food-sufficiency to Venezuela. The resources are there, to bring the supply up. There are programs which have been successful in better educating farmers on how to grow crops and raise livestock – in Africa, where conditions are markedly different. The impression I get from Venezuela is that the problem with supply is not one of lack of knowledge, but lack of free markets. If you have people who are smart enough to see opportunity even if they have no resources and have to break ridiculous laws, then imagine what production increase you would get if you simply removed those ridiculous laws. I mention again the Venezuelan cattle farmer who said it would take about a year to recover production. ONE YEAR. Crops grow in one year.

  1. I’m skeptical of the results of the study you linked. Admittedly I didn’t bother to read through the report after skimming over their methodology, but in developed countries we have these programs and their analogs. What we also have are databases that provide us with reams of data and we know for a fact that the money is used in strip clubs, casinos, liquor stores, dog tracks, etc.

    To rely on a study that uses inferior, secondary data to try and infer the usage of such handouts while ignoring superior data available from more developed countries seems like a bad idea. I will allow that it is entirely possible that the way these handouts are used by the recipients in Latin American, Asia and Africa is different than in the USA, but it seems like a bad assumption. You flatly state that people will not purchase alcohol or drugs when they are hungry but that doesn’t ring true to me.

    In many states (talking about in the USA), the money is automatically put into accounts and the recipient simply uses a special Automated Teller Machine (ATM) card to withdraw the funds. The database can tell you which ATM was used. Various states have had to move forward with banning the use of these cards at certain ATM locations after it became public that the cards were being used inside of strip clubs, liquor stores, etc.

    I am not saying your idea is not valid. Every solution is going to have both pros and cons. I am just pointing out that I think you have underestimated some of the drawbacks to this solution. That is not to say it is a bad solution overall. It definitely seems superior to the price control “solution”, which has severe drawbacks.

    • One “funny” location that I forgot to mention the ATM cards as being used at are inside marijuana dispensaries. Some of the newspapers requested and obtained this data from states like California and Arizona, so it’s not hard to find the information online.

      • I just googled an old article about these minor scandals and as usual the abuse and fraud was even worse than I had remembered. Some other places these cards were used to withdraw money:

        – out of state casinos (example, in Las Vegas casinos by non-Nevada residents)
        – out of state vacation hot spots (example, Hawaii)
        – on cruise ships

        In the USA, many of our “poor” wear more expensive clothes than I do so I understand that in Venezuela people are not going to be spending this money on cruise ships in the Caribbean (except for the cases where it is pure fraud, which will certainly exist).

    • What did you find wrong about their methodology? And their data? They review evidence from 41 studies. It’s basically the same methodology used by Cochrane Reviews. And it’s a World Bank paper; they are not sloppy with their data or methodology.

      As for people spending their transfers on temptation goods, let’s be clear about something: of course *some* people will spend money of their transfers on these. You can answer “yes” to that question right away. I’m completely sure that’s the case in the USA, and in developing countries as well. But it doesn’t matter, as long as it’s only a few people. The really relevant questions are: whether it’s significant percentage of the beneficiaries, and how much of their transfer money they spend on temptation goods? The study didn’t say that no one spends their transfer on these goods. These studies usually involve large samples, and the they are looking for evidence that a significant percentage of beneficiaries systematically use their money on temptation goods. The answers is no. Anecdotal evidence of a few people doing it is not really evidence. You can’t say a program involving thousands of people doesn’t work because a dozen of them are boozing all day. It’s about large numbers, not anecdotes.

      Maybe we should have been more clear about this in the article, an written instead: “found zero evidence of even a small or statistically significant increase in spending on “temptation goods” by a large number of beneficiaries”

      Having said that: the studies you mentioned in the USA: What proportion of beneficiaries are doing this? These kind of “benefits fraud” always makes for good press, but it’s rarely a significant proportion of beneficiaries. The Daily Mail in the UK has mastered this art: https://www.google.co.ve/search?q=benefits+cheat+site%3Awww.dailymail.co.uk&oq=benefits+cheat+site%3Awww.dailymail.co.uk&aqs=chrome..69i57.6762j0j4&sourceid=chrome&ie=UTF-8

      As for the differences between developed and developing countries: Yes, we should take that into account. The World Bank study I linked to focuses on developing countries.

  2. “The usual knee-jerk critique to these programs is that people will squander the money in booze and cigarettes.”

    You just said so, in fact, that’s the other reason that farmers have been denied the right to own their lands, because the classic excuse was that the farmer would sell the land and drink the money.

    And that pathetic excuse was what chavismo used as an axiom to completely obliterate the private sector of small and tiny enterpreurs, in addition to turn them into slaves of the all-powerful state-party-regime.

      • It’ll help them to at least buy some food while they look for a job.

        The “free” money (Nothing’s free, by the way, someone’s paying for that) should be below the minimum wage line, so the poorest at least have a chance to avoid starving to death.

        Then you remove and eradicate ALL the price controls and attacks on the private businesses for political reasons, which are the direct cause of the scarcity which added with impunity result in the black market that sells corn flour on 3000 Bs, deodorant in 2800 Bs, powdered milk on 10000 Bs and pasta in 5000 Bs.

        That way people can stop wasting time in those fucking useless lines to buy the almost-free food and do something productive with their lives, like working and producing, that’s empowerment, when you liberate the people from that gangrene-laden shackle that’s the all-powerful paternalistic state-party that controls everything.

        “But some of them will want to live for free” Then THOSE will be the ones that will end starving, and you know what, they’ll eventually have to go looking for a job or die.

        What if some of those folks want to spend all their money on booze and hookers?” Well, fuck them then, it’s their problem, not ours, in what they spend their money.

        “But where the money will come from?” Taxes, because the state MUST punish and forbid the illegal “buhonero” economy, EVERYBODY that works MUST have their RIF and papers in rule, and the state’s obligation MUST be making the process to get those documents as easy as possible, even getting those stuff in a maximum of a week at most, so the workers can pay their taxes to the state, which would be low taxes for everybody, instead of what happens now, which is monstrously high taxes for a few.

        • They were (are) called BECAS. Giving money for free creates parasites. We have plenty of those. Chavez purchased millions of votes that way. Make them work for it.

          • They’re not exactly becas, a beca example as you described it would be an university studentship, where the student’s expenses are covered as long as she keeps getting the highest grades, my work partner got his career done in a private university that way. You can apply that to ANYTHING if you want.

            But you have to understand that for production to begin flowing anew, you HAVE to let the private businesses to work and get a benefit from it, you must destroy the control prices and stop forcing people to work to lose their investment.

            The prices will rise, yes, but that’s where the direct transfer helps the most poor to at least buy the basic stuff, and that way the other people working can still operate business that have a benefit and gain.

            Chavismo always avoided paying cash to its supporters directly, their aids were always something else than money, because people can choose to spend money as they want and in what they want, meaning they get a certain degree of freedom, something chavismo hated with every fiber of their being, that’s the reason they never allowed the beneficiaries of misión vivienda to have the ownership of their houses (despite every claim from the random chavista that a “friend of their friend’s stylist” got it), they have staunchly stood on the side of never, ever giving any property to the poor because they treat the poor as stupid imbeciles that would “sell the house for booze”, and again, I tell you to read my previous post, where I said that somebody that stupid deserves to have his genes erased from the pool for good.

            Chavismo opted instead by forcing everybody to work in slavery conditions to give their production away for free, because that served their purpose of keeping the people poor and powerless, the alternative described in the article is diametrally oppossed to what chavismo has done.

            PS: The cash paid to colectivos for killing protesters doesn’t count.

  3. In bolsa familia in Brazil and Argentina they give it to people for sending their kids to school or regular medical check ups , maybe one could give it to the parents of better than average students (if they support them) or for joining a recognized sports club and for being better than average at athletics, or for joining the sistema and learning to play an instrument …….maybe to young impoverished women to taking long term contraceptives or to people who use it to build their own homes and need it to buy materials…. !! Money should always be used reward a socially desirable conduct ……!Jus throwing it our of the window may have good resultls in some starvation level communities in Africa but not just anywhere……

    I would also prefer giving loans to businessmen who invest in creating good stable jobs for the lower skilled or for training their workers to gain greater skills …….

    We are no longer a rich country so that any money given away has to come from increased taxation of the most productive and unles there is a good result to how the money is spent , people will be angry at being taxed more simply to fund the life of the unproductive…….!!

  4. Additionally to all the problems mentioned above, in Venezuela, where corruption is endemic/epidemic at all levels, the $billions employed in these schemes will mostly be ripped off, one way or another (Yes, I know, direct ATM/bank transfers, but, to whom (some of the 40% or more of REP cedulados who aren’t/don’t know they’re really registered?, etc.) , decided by whom (why your typical noble/honest Big Kahuna public functionary, of course), and implemented by whom (why, your typical noble/honest lower-level public functionary, of course)?

  5. One good thing about direct subsidies (as opposed to indirect ones) is that the recipient is being treated like an adult, given responsibility for how they use the money. Indirect subsidies imply a directive from above as to what they’re “supposed” to consume.

  6. Things never change . In ancient Rome corrupt emperors delighted the roman mob thru gladiatorial spectacles and free bread , from whence the well known phrase Panem en Circenses…….!! If there is no money and a huge part of the population remains unproductive and poor giving money away is going to make it better …….!! Hey did you know that just fixing the iron ore transporter in Guayana will cost some 20 billion USD and that there are dozens of key infrastructure investments needed just to get things in working operation again …..where is the money going to come from ….??

  7. Its not only the misuse of funds in idiotic or pernicious things that bothers me but the fact that there are so many investments that have to be made which are essential in nature and which can serve to give the country a more secure foot hold from which to restore its economy and lost living standards, and for which there is not enough money that just to spend money on the ‘deserving’ poor to assuage their personal suffering seems silly and inept…… because it will do nothing to help them live a decent life in the future , if money is scarce you have to prioritize its use on what is most lasting and long term effective……

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