Cash Transfers or in Kind Transfers

Introduction

It is a common economic argument that cash transfers are better than in kind transfers when deciding how to assist the poor. This statement is based on certain assumptions and can be rendered invalid if the assumptions do not exist. The paper shall look at the traditional economists’ argument and its criticisms.

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The argument

Economists usually assert that cash transfers are better than in kind ones because they offer the recipient a wider array of options and this is generally a good thing. In order to understand this assertion, one can use the following example: A certain government has opted to give a particular low income earner (person P) in kind transfers worth $1000 of food. The economic implications of such a position can be best understood through a graph of other non food items (y axis) that P would have bought with the $ 1000 if he had been given cash transfers versus the amount of food (x axis) that the person can get through a one dimensional in-kind transfer. (Samson & Niekerk, 2006)

Graph of non food items versus food
Graph of non food items versus food. Source: Samson, M. & Niekerk, I. (2006). Implementing and designing social transfer programs. Cape Town, SA: EPRI

The latter graph is generally known as a budget line paragraph and if person P had not been given any assistance, then he would have to operate under line AB. In other words, A is the maximum amount of non food items that he can purchase with his own earnings. This can occur if he decided not to buy any food item at all. On the other hand, the maximum amount of food that he could buy if he received no government assistance and decided not to buy any other non food item is B. The budget line for having food only is OB and for non food items is OA. However, if this person got an in kind transfer of food only, then he would be able purchase more food than when he was on his own as shown under line OE. This implies that under the new arrangement, his budget line shifts to ACE because he still continues to buy non food items using his own money and as earlier indicated, his limit was A but because he has now been given more food then the budget line has expanded to E thus becoming ACE. On the other hand, if he had been given a cash transfer, then the range of non food items that he could buy would have increased and so would the range of food items that he could buy. The budget line would therefore shift from A to position D in the y axis (he can now spend more on non food items) and position E from B in the x axis. The budget line for cash transfer would therefore become DCE. Therefore, person P would be able to have a wider array of options since he can buy more non food items. The line CD represents that extra choice that this poor person is able to get through cash transfers than in kind transfers. This implies that according to economists, cash transfers are much better than in kind ones. (Samson & Niekerk, 2006)

In terms of an entire nation, the effect of cash transfers and in kind transfers can be compared through National Census Bureau Statistics released in 1978

Categories of poor households Cash transfer poverty reduction rates In kind transfer poverty reduction rate
All people 0.56 0.58
White 0.47 0.61
Black 0.75 0.50
Spanish 0.78 0.56

It should be noted that if the antipoverty measures worked very effectively then the ratio of poverty reduction would be 0.0. But if it worked very poorly then it would have been 1.0. As it can be seen, in kind transfers cause less reduction in poverty as the ratio is 0.58. On the other hand, cash transfers cause more reduction as its ratio is 0.56 and this is closer to the ideal poverty reduction ratio which would be 0.0. (Samson & Niekerk, 2006)

The following are the premises that this traditional economist model is based on: the first is that the recipient can easily make the choice without having to incur costs of making the decision. In other words, it does not consider the fact that this person may have to gather knowledge, analyze it and think about the decision he has made. Various professions in life exist because the concerned parties may not know how to make decisions; this is why financial advisors exist in the first place. Aside from that, when people make decisions they often agonize over them and this eventually diminishes their productivity. Therefore, a cash transfer may not necessarily be the right alternative if the concerned recipient does not have the right resources to make a good decision on his expenditure and the cost of acquiring that knowledge is too expensive. For such a person, an in kind transfer would be more plausible. (Adato, 2007)

The second assumption in the economic model is that certain social aspects remain constant. Human beings tend to treat material goods and cash in different ways depending on the scenario. For instance, gifts tend to acceptable if they are in kind than in cash and such aspects have not been taken into consideration when making the cash transfer argument. For instance, if a boyfriend had to give something to his girlfriend on Valentine’s Day, then he would earn himself a slap if he gave her cash instead of a gift.

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Lastly, this traditional principle has mostly focused on the demand side of the exchange i.e. on the recipient’s perspectives. Very little attention has been given to the supply side or to the donor yet this may not always be true. Sometimes some donors tend to assume that it is more effective to make a decision for a poor person than to allow him to proceed because they do not trust the mind of the poor person. Economists have not considered donor’s preferences in this regard. (Samson & Niekerk, 2006)

Human beings are also ruled and affected by power and status struggles. A donor is likely to help, if he is sure that the recipient will remain in the same status than he found him in. On the other hand, donors are likely to be reluctant to help if they realize that the assistance they offer could alter the recipient’s status. Cash normally gives people a wide range of choices and if properly used, it could change a poor person’s place in society especially when that person purchases items that display a higher status such as a car. Therefore one way of ensuring that such people remain in their place is by offering in kind transfers such as public education, health care and food stamps.

Criticisms

Cash transfers can create a lot of problems in any nation using them due to inflation. Supply and demand economics state that cash injection from an external source often cause prices of a commodity to go up and this implies that recipients may not get as much of a certain commodity for the same amount of cash as they would without the assistance. These inflationary risks are often detected quickly in any economic system. (Adato, 2007)

Sometimes recipients may misuse the cash they receive. A number of people have asserted that when human beings do not work for their own money, then they loose the incentive to invest in it wisely. Usually, the ability to make good decisions about money is earned when one has undergone such dilemmas using one’s own money. Cash transfers would therefore deny recipients a chance to earn such experience and thus prompt them to misuse it by buying alcohol or drugs. (Takha & Khogali, 2001)

Usually, targeting is much easier through in kind transfers than cash transfers. In other words, people who do not qualify as ‘the poor’ may want to benefit when cash is dispensed. On the other hand, it will be quite difficult to find a wealthy person lining up in a food stamp location just to get a free meal as this undermines their image. In kind transfers therefore eliminate or at least reduce the free rider problem. In line with the latter argument is the fact that cash is quite easy to divert. In nations filled with corruption or political unrest, seizure of the cash can be quite easily done than in in-kind transfers.

Sometimes a person may be in a position where they cannot access certain material items thus giving them cash would be pointless. For instance, in countries plagued by famine or drought, cash does little to solve the problem as citizens may have little to purchase with it. In this regard, food or health related items may be more imperative than the former. (Samson & Niekerk, 2006)

Conclusion

Economists have cited plausible scientific arguments that cash transfers work, however, this arguments ignore very fundamental aspects of human behavior as these elements have a tremendous effect on the kinds of decisions made by such groups. A country must therefore access all the conditions that its poor persons are undergoing and then decide on the best method of assistance for that population as neither in kind or cash transfers offer the one size fits all solution to poverty.

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References

Adato, I. (2007). Conditional cash transfer programs. Conference paper Q-squared, Hanoi.

Samson, M. & Niekerk, I. (2006). Implementing and designing social transfer programs. Cape Town, SA: EPRI.

Takha, P. & Khogali, H. (2001). “Empowering women through cash relief.” Journal of Gender and development 9(3), 34.

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