Most people’s perceptions of poverty are shaped by what they see on the streets [in America]. Lots of these [street] people have mental health and substance abuse issues,” he said, “so giving them money may not be the best way to help them.” But people in Africa are poor “because they were born in Africa. —Paul Niehaus
Paul Niehaus was pursuing a Ph.D. in developmental economics when he and his wife decided to give a portion of their income to a charitable cause.
Based on his knowledge of economics, Niehaus was skeptical about the effectiveness of many kinds of international aid.
“We wanted to do something that would really move the needle forward,” he said. They wanted to give money directly to people living in extreme poverty; the only problem was that they couldn't find an organization that facilitated this kind of exchange.
Undeterred, Niehaus started his own giving circle with some friends. Their mission: to give as much of the money as possible directly to people living in poverty. For several years they did this privately.
In 2011 they decided to go public. They started a website, givedirectly.com, where anyone can donate money directly to families in the developing world without any conditions, like spending the money to attend school or get vaccinated.
The public response has been impressive. Because of its rigorous research methods and commitment to outcomes, GiveDirectly has made several powerful allies in the world of development. It is currently ranked the second most efficient charity organization by Give Well, a nonprofit rankings group with a reputation for statistical rigor. Google also evaluated the group and came away so impressed that it gave the organization a $2.4 million grant to expand the project to other countries.
Niehaus and his friends are optimistic these unconditional cash transfers, or UTC’s, might end extreme poverty. But questions remain. UTC's are relatively new and, thus, untested on a large scale. No one really knows how recipients use their transfers, nor the net effect for families who receive the money.
How it works
GiveDirectly accepts online donations from the public through its website. Funds are transferred from donors to GiveDirectly's U.S. bank account. From there GiveDirectly transfers the money to its M-Pesa account, a popular mobile banking operation in Kenya, the only country where the program is currently operational. When GiveDirectly money arrives in its M-Pesa account, the organization transfers the money into the accounts of people it has pre-selected to participate in the UTC program. The recipients receive a text message notifying them that the transfer has been made. To collect their cash, recipients just show the message to M-Pesa vendors, who typically operate in local convenience stores.
GiveDirectly recipients get $1,000 over a one- or two-year period. It's a mind-boggling amount of money for these people, who otherwise would be living on about 65 cents a day. That figure, 65 cents, is calculated as “purchasing power parity,” according to Johannes Haushofer, a research associate at MIT’s Poverty Action Lab. Explaining what purchasing power parity means, Haushofer said, “It’s like you trying to live your life here in America on 65 cents a day, going to the grocery store, transportation, paying your rent."
Audits of the charity show that 92 cents on every dollar donated goes directly to poor households. The remaining 8 percent covers bank transfer fees, M-Pesa tariffs and the cost of paying people on the ground in Kenya to identify participants. Niehuas and his co-founders have covered the $30,000 they have spent on administrative costs, including building a website and buying computers for their employees, out of their own pockets.
In selecting potential participants, GiveDirectly targets households that have mud walls and thatched roofs. It is, according to their research, a fairly good indicator of acute poverty. Using the home as a selection criterion has a practical element, too, in that it provides GiveDirectly representatives with a straightforward way of explaining to the community why some people qualify and others do not. GiveDirectly believes using this transparent selection method minimizes tension or concern about the fairness of the selection process. It seems to be working. Only 7 percent of recipients say they have experienced an increase in tension from their neighbors because of the transfers.
GiveDirectly’s decision to start the program in Kenya was based on three factors. First, a large portion of the country’s population lives below the poverty line. Second, the nation’s mobile payment system, M-Pesa, is the most advanced in the developing world. Third, although the country is poor, cell phone penetration is high: About 75 percent of the population has a cell phone, according to a report from the Communications Commission of Kenya.
While formal evaluations of GiveDirectly’s program won’t be available until later this month, preliminary results are encouraging. Through surveys and interviews, GiveDirectly has found that the most common uses for cash transfer payments are installing a tin roof, buying food, paying for education, starting or expanding a business, and saving. GiveDirectly has also noticed that men and women use money in different ways. Women are more likely to spend money on food and household items, while men are are more likely to invest in businesses.
A common criticism of cash transfers is that the money will be used to purchase “temptation goods” like alcohol and tobacco, said Niehaus. GiveDirectly’s preliminary findings show that spending on these items typically decreases or stays constant.
GiveDirectly’s results are consistent with the academic literature on the impact of unconditional cash transfers. Studies of UTC's in South Africa found large increases in children's height- and weight-to-age ratios as well as reductions in HIV infection rates. In Malawi, UTC's helped reduce pregnancies and teen marriage rates by 48 percent. Another study found that participants’ annual income five years after a single UTC generally increased from 64 percent to 96 percent. What UTC's don’t do is make people lazy, studies say. In fact, one study found that recipients tended to work longer hours as more earning opportunities became available to them with a little bit of investment.
Why transfers need to be unconditional
GiveDirectly’s philosophy is that the poor need to be empowered to make their own decisions. “Unconditional cash transfers advance our core value of respect,” Niehaus said.
Giving money without conditions also maximizes its usefulness. Recipients get to choose what to do with their money instead of being given things they may not need or value. A final consideration is that unconditional cash transfers have lower administrative costs.
“If you put conditions on the transfers, someone has to monitor the people to make sure they are complying, and that costs money," Niehaus said.
While unconditional cash transfers are innovative, they remain extremely controversial. Niehaus suggests part of the reason for this has to do with American misconceptions about the cause of poverty in the developing world.
“Most people’s perceptions of poverty are shaped by what they see on the streets [in America]. Lots of these [street] people have mental health and substance abuse issues,” he said, “so giving them money may not be the best way to help them.” But people in Africa are poor “because they were born in Africa,” he said. “They have a good idea of the things they want and need and just have a really hard time getting them.”
Niehaus and other GiveDirectly co-founders would like to see unconditional cash transfers used as the benchmark by on which donors measure all development aid. “We’d like to see nonprofits that focus on poverty alleviation prove that they can do more with a dollar than the poor can do for themselves,” Niehaus said.