Unconditional Cash Transfers. The better approach to alleviate extreme poverty?

Essay, 2019
6 Pages, Grade: 1,0
Neema Li (Author)


Unconditional Cash Transfers – the better approach to alleviate extreme poverty?

A comparative analysis of the effects of conditional and unconditional cash transfers using the example of the Grameen Bank and GiveDirectly

Although the number of people living in extreme poverty has declined significantly in recent years, today it still accounts for over 10% of the world’s population living on less than $1.90 a day. Internationally agreed goal is to reduce this number to zero by 2030 (World Bank 2018). Jeffrey Sachs believes that these people are stuck in a poverty trap from which they are not able to liberate themselves without help (Banerjee & Duflo 2011: 12). A common approach to bring people out of poverty and kick-start a virtuous cycle are direct cash transfers (Haushofer & Shapiro 2013a: 1). Conditional cash transfers (CCTs), such as microcredits, as they are granted by the Grameen Bank for almost three decades, have generated considerable hope and enthusiasm for fast poverty reduction. However, in recent years there are increasing numbers of studies reporting no poverty alleviating effects and even talk about negative impact (e.g. Seng 2018). The organization GiveDirectly (GD), founded in 2011, pursues a different approach with the allocation of unconditional cash transfers (UCTs) (Walker 2015: 2).

This essay will compare and discuss selected aspects of the impact of UCTs and CCTs on poverty reduction, using the example of GiveDirectly and the Grameen Bank. I will argue that the work of GD overcomes many of the criticisms which are leveled against microcredits. At first, I will compare the effects of both approaches on the psychological well-being of the recipients. Secondly, I will discuss the different effects on (female) empowerment before I take a closer look at certain poverty indicators such as consumption, assets, income and foodsecurity. I will summarize the main finding in the conclusion and give a suggestion for further research.

The following comparisons are less than perfect since the cited studies were conducted in different countries. Furthermore, the empirical evidence for microcredits is highly controversial, considering the limited scope of this essay, I will focus on most recent studies that take that existence of controversial findings into account.

Psychological Well-Being

Sen (1999: 94) notes, the experience of poverty goes beyond a lack of income, such as psychological harm, loss of work-motivation, skilland self-confidence. Poverty affects mental well-being, which significantly affects the ability to make optimal economic decisions, and thereby exacerbates and perpetuates poverty (Haushofer 2011).

While UCTs improve the mental well-being of the participants in the long run, microcredits have no, if not a negative, effect on mental well-being. Haushofer & Shapiro (2016; 2018) find a significant effect on mental well-being, both nine months and three years after they received the cash transfer. In particular, they observed an increase in happiness, life-satisfaction and a reduction in stress and depression. This effect does not decrease significantly over time. Karlan et al. (2011: 1282) found no significant effect of increased well-being as an outcome for microcredits. There is no significant effect on life-satisfaction and no significant increase in the stress level in the overall sample, although they do find an increase in stress for male borrowers. Combining several variables into a summary index of subjective well-being, they even find a very small decrease in subjective well-being. The fact that men in particular react sensitively to the (negative) effects of microcredits is in line with the study by Ashta et al. (2015), which reveals a connection between suicides and microfinance among men in India. Rahman (1999: 68) also reports on the negative effects of microcredits in Bangladesh: The burden of debt has an effect on increased stress, anxiety and tension among household members. Moreover the burden of debt would lead to new forms of social and institutional dominance, especially with regard to female borrowers.


Empowerment, especially of women, is another factor strongly intertwined with poverty alleviation. Khosla (2009: 7) notes: “experience has shown that women not only bear the brunt of poverty, but their empowerment is a prediction to its reduction”.

While UCTs have a positive effect on the empowerment of women, there are no such (positive) outcome effects for microcredits. Haushofer & Shapiro (2016; 2018) find an increase in female empowerment which is characterized by a combined indicator, including the number of instances of violence as well as the justifiability of vio lence and a male-focused attitude. Also, they observe spillover effects on nonrecipient households in treatment villages. Accordingly, the number of instances of domestic violence decreased in the participant households, as well as their immediate neighbors. However, no statement can be made about the long-term spillover effects due to attrition in some participant groups.

Vaessen et al. (2014) conclude from their meta-analysis that it is very unlikely that microcredits would influence substantially the empowerment processes of women in a broader sense. These findings are in line with other reviews that report a limited impact of microcredits on female empowerment (e.g. Duvendack et al. 2011). Banerjee et al. (2015) also don’t find a discernible effect on women’s empowerment.

The empowerment of the poor in general is a stated goal of GiveDirectly. They pose that the poor people themselves are the experts on what they need most and put the full power of decision making in the hands of those people, by emphasizing that the recipients could spend the money freely. Thereby the people feel in charge of their destiny and regain control over their own lives again, after being constrained in daily decision because of the lack of finance (Weidel 2016: 176f). This also affects the well-being of the recipients, as this statement of Sheila a 27-year-old woman illustrates: “It gives me much joy to be sure of putting food on the table for the family and I take the pride of being fully responsible.” (GiveDirectly 2018). On the contrary, borrowers from microcredits must fulfill requirements, like the investment of the loans in income-generating projects. Also, the Grameen Bank emphasizes a strong supervisory measure to ensure the appropriate use of the loan (Rahman 1999: 75). That concerns about the misuse of the money are unfounded can be demonstrated if look more deeply into the consumption behavior of the recipients in the following section.

Poverty Indicators

Finally, the UCTs of GiveDirectly has larger impacts on the overall poverty indicators (consumption, assets, revenue, food security, health, education), compared to the CCTs of microfinancing. Haushofer & Shapiro (2013b) report substantially increased assets nine months after the money transfer which occurred mainly through home improvements and livestock holdings. Also, an increase in overall consumption is recorded. The recipients spend their money for a variety of goods and services like food, healthcare, education and social or family events. They observed particularly a strong increase in expenditures on food. While the overall consumption increased, they did not find a higher spending on temptation goods like alcohol and tobacco. The increased consumption on food leads also to a reduction of hunger and food insecurity (such as having to skip meals, going to bed hungry). Furthermore, they found an increase of revenue from animal husbandry and total revenue from self-employment. On health and education, they found only little to no impact. 3 years after the money transfer, the increase in revenues persists and may have even increased further whereby household are able to maintain their increased consumption levels through the increase in productive assets and the resulting higher income (Haushofer & Shapiro 2018: 30). Banerjee et al. (2015) find for microcredits in India no significant difference of monthly consumption, neither in the shortnor in the long run. The majority of small businesses cannot report an increase in profits.

However productive businesses show a significant increase in profits through taking out a loan. They could also not find an identifiable effect on health and education. Banerjee et al. (2015) also note, that the outcomes on these variables differ from study to study. But in general, they don’t find great changes in basic development outcomes for poor families. Seng (2018) draws even a darker picture. He finds evidence in Marocco that households that received microcredits get worse off in terms of household food consumption, since the recipients reduce their food consumption as a risk coping strategy.


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Unconditional Cash Transfers. The better approach to alleviate extreme poverty?
University of Copenhagen
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unconditional, cash, transfers
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Neema Li (Author), 2019, Unconditional Cash Transfers. The better approach to alleviate extreme poverty?, Munich, GRIN Verlag, https://www.grin.com/document/466607


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