Friday, 1 November 2013
KAMPALA, Uganda – Do simple money transfers help raise people out of poverty? Or do they just provide a one-time boost in consumption? A new study shines light on this question. The study looked at a government program in Uganda aimed at reducing youth unemployment. The program, called the Youth Opportunities Program (YOP), solicited applications from groups of young adults for a large sum of money, roughly equitable to a year’s pay per person. Follow-ups two and four years later gauged the effects of this one-time grant.
The applicants’ proposal had to outline ways to spend the money on skills, tools, or materials to enable them to practice a craft. However, there was no direct penalty for spending the money otherwise. The programs specifically aimed to transfer young workers away from subsistence-based agriculture work to more profitable ventures, such as entrepreneurship or manufacturing. This type of shift is vital for the economic future of Uganda.
YOP was found to be extremely effective, increasing winners’ earnings by an average of 41%. Winners were more drawn to investments in skills training, and were 65% more likely to practice a skilled trade four years after being given the grant. These benefits were especially profound for female winners, whose average earnings were 84% higher than female non-winners. This most likely results from more severe capital constraints placed on women. Overall, the average return on cash transfers per year turned out to be an astoundingly high 40%.
In an interview with the New York Times, one author of the study, Christopher Blattman, discussed pros and cons of the cash-transfer approach. He explained that in most cases, the transfer serves as an “accelerant” that propels winners a few years ahead of their peers economically. However, the case seems to be different for female winners. While male non-winners eventually caught up to the male winners economically, female non-winners never caught up to female winners. This suggests that for women facing enormous capital constraints, a one-time grant such as this could be much more than an accelerant. It could very well be “an escape from a trap.”
These grants are also touted as a great short-term solution while rates on small-business loans decrease. Currently, lending rates in many countries are so high that they cancel out any profits small businesses could hope to earn. This results from complicated, long-term problems, and one-time money grants are seen as an excellent short-term measure until the price of credit deflates. Blattman praised governments and institutions such as the World Bank for their work to generate lower lending rates, as well as for their commitment to temporary solutions for the interim.
Blattman pointed out that these types of loans are especially effective when given to young, poor, unemployed people. He implied that this is because they are under the most stress and have the greatest ability to capitalize on their untapped abilities. Comparing them to “really tightly coiled springs”, he revealed the ability of these youth to improve their skills and make wise investments. He explained, “They’ve got a lot of potential and they’re really constrained.”