Informal Economies

Cash Grants

Both cash transfers and microfinance have a place in international development and can be useful tools when used in the right context.

International development efforts do not exist in a vacuum. Local linkages, informal financial institutions, and the dynamics of an economy are part of every community long before aid workers arrive. This makes the method of aid delivery of utmost importance. Delivering goods directly may harm local business and, over time, inadvertently destroy linkages between producers, trader and purchasers. Funds that come with stringent spending requirements require costly overhead that reduce the amount of money available for the poor. Moreover, bureaucrats seldom have the local knowledge to determine how funds should best be spent. These factors, and many more, have led the international development community to cash transfers.

 Cash transfer programs generally give money to the poor without any – or with few – strings attached. They require little overhead and are pumped back into the economies they enter. These funds trickle down to help people who are selling goods locally as much as the people who were first granted the money. Randomized controlled trails have found that cash transfer programs have annual rates of return of 20 percent or more. Food is a major source of spending, as is investment. A 2012 study of the Oportunidadas cash transfer program in Mexico found that 74 percent of the funds went towards consumption, while a full 26 percent was spent on investment. These findings are consistent with studies conducted in other developing countries.

The high margins of return and relatively low overhead costs of cash transfer programs have led some global leaders to advocate for cash transfer programs instead of microfinance. Though an interesting proposition, one needn’t choose one development tool over another. Both cash transfers and microfinance have a place in international development and can be useful tools when used in the right context.

The number one advantage of microfinance over cash transfers is that the profits earned from loan repayment schemes can be used to fund more loans. Once an initial investment of capital has been made, a microfinance institution can become self-sufficient and even profitable. Though some development advocates bulk at the first sign of profits, a properly managed, self-sustained development organization can alleviate the need for donations. When donations are scarce, the poor in countries that have invested in these organizations will still be able to access capital.

This isn’t to say that there is no place for cash transfers. When the cash is available, cash transfers are a proven, time-honored method of fighting poverty, helping the poor build wealth, and even jump starting an economy. Equally exciting, cash transfer programs are now being built with an eye toward financial inclusion. Cash transfer recipients are more likely to have a formal financial account, often a mobile account affiliated with their transfer. Though financial inclusion hasn’t been bundled within these programs long enough to see concrete results, advocates hope that financial inclusion will amplify the pay-offs of cash transfer programs. As the costs of digital transfers fall in relation to on-the-ground delivery systems, we are likely to see more dual programs moving forward.

About the author

Erin Wildermuth

Erin Wildermuth

Erin is a freelance writer with a degree in International Political Economy from the London School of Economics and a background in microfinance.

Please subscribe for more data-rich insights on India’s informal economy

Your information will NEVER be shared or sold to a 3rd party.

Please subscribe for more data-rich insights on India’s informal economy

Your information will NEVER be shared or sold to a 3rd party.