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Epistemic status: as an Economics student who reads a fair amount of dev econ, this might be one of the only things in the world I'm actually ~qualified for. 85% confident that the main claim of this post ("GiveDirectly has presented no strong evidence for their claim that the costs of ending extreme poverty will rapidly & significantly decrease") is true.

Disclaimer: I ❤️ GiveDirectly and think they're doing fantastic work!

 

Recently, GiveDirectly collaborated with Rational Animations to make this YouTube video:

The aim of the video is in its title: showing that extreme poverty can be eradicated by directly giving money to the world's poorest, through organizations like GiveDirectly.

I think that the evidence presented in the video definitively shows that giving all the extremely poor people in the world money for a year can end extreme poverty for that year. This is true almost by definition, but I'm genuinely glad that a bunch of researchers decided to check anyway. There's always a chance of unforeseen second order effects, like maybe all the people getting the money would just spend it all on drinks and alcohol (almost certainly not) or it would cause huge inflation (nope, though really you could guess that one with Econ 101).

Our friends estimate the cost at about $258 billion dollars to end extreme poverty for a year, and point out that this is a small portion of yearly philanthropic spending or rich government's budgets. They're right about the rich countries' budgets (no longer sure about how large a part this is of philanthropic spending). It would be good to just give all the extremely poor people some money every year so they would no longer be extremely poor.[1]

Where the video loses me, though, is when they make a very strong claim with huge implications based on minimal evidence. This starts at 10:39 in the video, but I've transcribed it for you here:

We also know that cash transfers improve recipients' lives immensely. But what would be the impact on recipients' neighbors and the economy as a whole? A 2022 study led by Dennis Egger found that every $1,000 of cash given actually has a total economic effect of $2,500, thanks to "spillover" effects growing the local economy, as recipients spent more money at their neighbors' businesses, those businesses spent money, and so forth. Not only did recipients' incomes increase, their neighbors' incomes also increased by 18 months later. Even neighboring villages without any recipients saw increased incomes, which could have been from a 'spillover' effect as well. These effects mean our cash transfers will go further, and we may find that we've reached our goal of ending extreme poverty sooner - and for less money - than we would otherwise expect. The research suggests that the $200 to $300 billion figure we'd need to give for the first year will decrease every year thereafter [animation of a stack of dollar bills, halved each year] as the economies of entire regions and countries grow and lift their poorest residents out of extreme poverty. [emphasis mine]

Okay. There is an absolutely massive difference in cost between "$258 billion the first year, progressively less each year, maybe after X years no cost at all" and "$258 billion every year, eternally". One of these is a cost the rich world may be willing to bear, out of solidarity and self-interest and even just the wish to be on the right side of history. The other is just a pipe dream for teary-eyed optimists like us.

If a lot is riding on the answer to an empirical question, it would be wise to reason well about it before making strong claims one way or the other. But this is just a popularization video, perhaps it shouldn't be held to such high standards? Well, in another comment on this forum, GiveDirectly has linked to this video as their "explained in detail" source for the claim, which they also make in e.g. this post. There is, as far as I can tell, no other analysis hidden in a sidebar somewhere on their website (though if you do find one, please inform me ASAP!) This video is what we have to work with, so it's what I'll be critiquing in this post.

The study they're referencing to support their claim, Egger et al. (2022), is very well designed and has no serious flaws as far as I can tell, but it plainly isn't evidence for the claim they're making here. So what does the study say? Well, the video describes its contents correctly (just takes a much stronger conclusion from it than the authors do). For every dollar given, another 2.5 dollars are spent in the local economy. This takes the form of an increase in consumption by non-recipient households, almost equal to the consumption increase of recipients (!), at about 335 USD PPP to the recipients households' $339. They also show that this consumption increase is caused by higher earned income, rather than dissaving (spending money you'd saved up before), which is a good sign.

Why these spillover effects, though? The authors think what's happening is there's a lot of slack in the local economy. Small-scale manufacturers find themselves waiting for customers or eating and resting a lot of the time, due to a lack of demand. Often 'integer constraints are binding', which means e.g. there's too much demand for one person to handle, but too little to keep two people busy, so now one person spends a lot of time doing nothing. Generally, low scale due to few customers (due to low ability to pay, because everyone's poor) causes a lot of that sort of inefficiency (see Bassi et al. 2022).  Because more people had the resources to pay for stuff, the workers who were otherwise just twiddling their thumbs got to do more work. There was excess capacity, capital or labor sitting around doing nothing, and now it's doing something.

That's a genuine welfare and efficiency improvement. However, 

  1. It's a one-time effect. Demand goes up -> slack disappears. That's why "slack" is such a useful word to describe the phenomenon - increasing demand pulls the economy taut, like a rope. There's no slack left, afterwards.[2]  
  2. Once the donations stop rolling in, there'll be nobody pulling the rope, and the economy will go slack again. This is because according to our study, most (73%) of the money donated is being consumed, which is exactly the cause of aforementioned spillovers, but also means it doesn't stick around. The resources have been consumed. So slowly decreasing the amount of money donated just means slowly letting the spillover effects disappear as well.

So the argument given in the video falls flat - or at least, requires a lot more evidence than presented. There is, however, a more conventional argument for this kind of claim which is not made explicitly in the video, but bears looking at anyway.

I am, of course, talking about the poverty trap. A poverty trap is a situation where someone could increase their future income significantly if they had access to more money or capital right now, but they don't, so instead they stay stuck in poverty.[3] Some typical examples would be:

  • An entrepreneur wants to buy a machine that would make her business much more efficient and so pay back its costs quickly, but she lacks capital, so she can't buy the machine.
  • A smart kid in a poor country wants to go to high school, but his parents can't afford to send him, so instead he earns much less at a menial job.
  • A day laborer doesn't earn enough money to buy nutritious food. Due to malnutrition, he can't work as hard or often as he'd like, which keeps his income low, which is why he doesn't have enough money for good food.

If there are a lot of these kinds of cases, then we could expect a large injection of money to push these people into a new, higher-income equilibrium, which would then maintain itself without needing more outside money. This would be an excellent case for GiveDirectly's claim. But how common are poverty traps really?

Let's just say it's complicated. Development economists are strongly divided on this issue, with some (Sachs) believing that everything is poverty traps, others (Easterly, Moyo) saying that there are very few in practice, and a third camp (Duflo, Banerjee) doing the whole "both sides are partially right, we should just look at the evidence" thing, which is entirely correct and appropriate but still somehow annoying. Anyway, I won't force a whole literature review down your throats. Let's do some quick tests instead.

Microfinance programs, the development economics hype of the 2000s, are private-market (sometimes subsidized) programs to lend money to the world's poorest, based on the premise that they're stuck in poverty traps and so they could simply pay back the loans after using the money to gain a higher income. Results were mixed, with limited effects on the micro-level (the people actually borrowing the money) and macro-level effects, as always, very hard to identify. But micro-finance's failure to live up to the hype might be due to the other issues with loaning money in poor countries, like weak contract enforcement and lack of information about borrowers, which often led to interest rates around 60%/year, unheard of in Western countries. Perhaps simply giving money to the poor can get around this?

A simple way of checking is to see if the people given money are still doing better later on, once they're no longer receiving any money. Earlier in the video, a few such studies are mentioned. Blattman, Fiala, Martinez (2014) found large positive impacts on work (+17%) and earnings (+38%) four years later of a big one-time cash transfer (combined with help for planning to start a business) to young people interested in becoming artisans. The same authors' followup (Blattman, Fiala, Martinez 2020), however, found that these effects had ~entirely disappeared nine years after the transfer. Fiala et al. (2022) returns to declare triumph for cash transfers after all, saying that these same recipients who were indistinguishable from the control group after nine years were suddenly doing better-than-controls again after COVID-19 hit, perhaps due to larger durable asset stocks. Not implausible, but I would note that p = 0.08, which is already suspicious but especially so when you're doing studies on the same population every four or so years without statistically (e.g. Bonferroni) correcting for that. Also, note that this was not a pure randomized cash transfer program, and it's impossible to separate the effects of the help with business planning from the cash transfers themselves.

Conclusion

GiveDirectly made the claim that if we were to give money to all the world's poorest, this would not only lift them out of poverty in that year, but strengthen the local economy, lowering the cost of poverty reduction in future years by a lot every year, until poverty is eventually eliminated (as implied by the video's title). This is a claim with huge implications and in my opinion, the evidence GiveDirectly brings in the video is insufficient to support it. Their main argument, that of economic slack, does not support an effect of the size or type claimed, and the empirical support is weak. A side argument not explicitly mentioned but implied, that of poverty traps, is deeply controversial in the literature and the studies named in the video don't provide strong support for the existence of long-term poverty traps, or at least those of the type that could be solved with cash transfers. And none of those studies at all support the proposed long term effects on non-recipients, which are a fairly integral part of the argument.

So basically: I think GiveDirectly is doing amazing work and I didn't intend to be very harsh on them, but like any organization with a mission, they have incentives to overstate their (potential) impact, and in this case I think they did. Maybe the effect described in the video does exist! I certainly think it's worth finding out. But making strong claims about such things requires strong evidence, and I haven't seen it yet.

 

  1. ^

     They would still be in normal poverty, which is also bad, but less bad than extreme poverty.

  2. ^

    There will always be some, at the edges of the economy. Night store owners spend little time interacting with customers and lots on the phone (to the eternal aggravation of the few customers who do enter). Desk-job-havers and night security guards alike also spend a lot of time surfing the web, but that's less slack and more of a principal-agent problem: they could be doing productive work, they're just not incentivized to.

  3. ^

    Debatably, slack could be considered a "regional-level poverty trap".

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I have worked in the field in rural Africa on projects for almost 30 years, and from my experience you seem to be missing a pretty huge factor in your argument that there is insufficient evidence that the annual cost of extreme poverty reduction through cash transfers would decline over time. 

I don't quite understand how your argument can ignore household capital accumulation?

A portion of the $100 billion per year that the poor recipients would receive would be spent on durable goods and productive assets that raise the standard of living to some degree for several years for the beneficiary households.  Say each year 25% of money is spent on durable goods and assets that have a lasting effect of three years.  Then the first year, you need $100 billion, but the next year, you need only $75 billion, and then year after that you need only 0.75 x 75 =  $56 billion ...  One could of course build a much better conceptual model and estimation of this, but any durable goods and productive asset investments by beneficiaries should decrease the need for future cash transfers.

And there are many investments that people make in rural Africa that have very long, durable effects: sending kids to school, cement floors, durable metal roofs, buying a motorcycle to replace your bicycle, a mechanical irrigation pump so you can grow crops in the dry season and increase agricultural income. 

In order NOT to have a fairly rapid decrease in the amount of annual cash transfers (i.e. the hypothesis of your post), you would have to have only a very small amount of the cash transfers spent on productive or durable assets that last two to several years. 

I think the studies have satisfied a very high burden of proof with respect to showing that a substantial portion of the cash transfers are spent on durable and productive assets and that there exists a multi-year positive impact. 

I think that now the burden of proof is on you to show or demonstrate how spending on productive and durable assets would not lead to capital accumulation that would decrease the cost of maintaining a certain minimum standard of living in subsequent years.  I don't think you have shown that yet in your post. 

If a portion of income is spent on something that has a positive return, then that positive return needs to be subtracted from the income subsidy for the following year that is needed to maintain the minimum income level. But maybe I am I missing something in this logic?

In the course of my work over the past 30 years, I have talked to hundreds of rural African households about their finances and economics. When they get more money, they spend some on consumption, but they also invest. Very low-income households in rural Africa also have many very small investment opportunities that have payback times of months, not years. The investments they make can give them a return which increases income over the next year of which they take a portion of the surplus and invest again.  This becomes household equity that is used to sustain a long-term increase in household income. When you visit villages in Africa over many years, you see the dynamic of increased durable infrastructure and household financial equity over time: Dirt floors change to cement floors, mud walls become brick walls, thatch roofs become metal roofs, kids playing in the dirt become kids going to school, people who used to have to walk everywhere are able to ride motorcycle or minivan. 

Perhaps this comment is useful to you. Or maybe I am missing something and you can enlighten me as to why household asset accumulation would not necessarily decrease the cost of a global cash transfer program that is meant to eliminate extreme poverty at large scale.

Thanks for bringing your considerable expertise here! To be clear, my contention was that GiveDirectly hasn't shown this, not that the evidence doesn't exist. If they had made something like your comment, I would never have written this post in the first place.

That said, to engage with what you're saying:

-Many durable goods are a permanent or long-term increase in quality of life (like the metal roofs and cement floors you mentioned) without bringing an increase in productive capacity. Those goods are important in their own right, but don't support the claim made.

-Here I'm really going out of my knowledge zone, but based on what I currently know, I'm skeptical that kids going to school more in developing countries has a large total effect. The main reason I'm worried about this is that I've seen too many studies where it turns out that most of the teachers aren't showing up at these schools, or the kids can't actually write simple words by age 10, that kind of stuff. This opinion is lightly held because I'm not very familiar with the literature here.

-I do believe some poverty traps exist, and there is probably a long-term effect of cash transfers, mostly through investments like those you described. I just think the effect is likely small to medium.

The main reason I feel like I can make some of these statements with reasonable confidence (besides my econ background) is that, well, anyone can interpret a randomized controlled trial. And the few randomized controlled trials done show mixed to no effects, over the long term. More data coming in a few years though!

You claim that investments that improve the quality of services consumed (such as cement floors, brick walls and metal roofs) are not "productive investments" and do not produce a long-term improvement in income. 

This is our key point of disagreement. I disagree with your claim.  We can agree to disagree. 

I think we are disagreeing on how income/poverty is properly measured. 

In my work in low-income developing country conditions the most relevant measurement of income is "consumption income" the value of the goods and services that people consume. 

Where I work, it is common for 1/3 to 1/2 of household consumption to be self-produced: i.e. generated with no cash income, and no cash expenditure. 

In these conditions, an investment in improved housing does produce a long-term increase in consumption income because it increases the value of the housing services that the family is consuming over many years with no further cash expenditure. It is a one-time cash expenditure and a long-term consumption income increase. 

Increasing consumption income is what households in rural Africa see as real, tangible poverty reduction. 

I agree that GiveDirectly did not support its claims in ways that certain people can find convincing. Because many people in richer countries live in places where most consumption has an associated financial transaction, and many folks do not have familiarity with living in a subsistence economy that can enable an intuitive understanding of un-monetized production and consumption economics. 

But for those who do spend time working in the practice of improving rural African household economic conditions, GiveDirectly's claims seem well-supported because in rural Africa it is very common for people to make cash expenditures to increase consumption income over the long term. People like me consider such improvements in housing and infrastructure as productive investments even if they produce benefits that are not monetized. 

GiveDirectly has shown that the impact of cash transfers are multi-year, and if the benefit lasts more than one year, then the cash transfer in an subsequent year can be less than the cash transfer in the previous year to maintain a household above the extreme poverty threshold.  Thus, IMHO, GiveDirectly has shown what it needs to show to make the claim that cash transfers likely can decrease year-over-year to maintain incomes above the extreme poverty threshold in a larger scale program. 

Great point, I hadn't thought of it that way. Indeed, if you consider "increase in de facto consumption income over the next 4 years" to be a production increase (which I now agree is a reasonable point of view to take), then the long term effects on production are positive. I need to think more about how exactly that works out, but you've possibly convinced me of this.

My remaining point of contention, then, is that you say this argument isn't intuitive to those without experience in the field, which is true, but GiveDirectly didn't even try to make it! The only argument they affirmatively used to support their big claim was pointing vaguely at the Eggers (2022) spillovers study, which has general equilibrium models and economic slack as its focus, saying very little about durable consumption goods at all. So if GD wants to explain their reasoning to anyone, they should do it more like you did, and IMO a full analysis of multiple pages would be not just worthwhile but necessary.

I completely agree that GiveDirectly could explain this a hell of a lot better. I suspect that their team has a diversity of points of view and this prevents them from committing to a more concrete explanation like what I presented.  I explained the capital accumulation in terms of what I see when I visit actual households: someone starts with mud walls and a thatch roof, then they take their surplus and build a bigger house with concrete floors, brick walls and metal roof, move into that and then they can buy nicer furniture because dirt isn't falling down from the thatch roof all of the time.  They have obviously invested in higher productivity housing services which increases their consumption income.  But this evidence is anecdotal. 

I think GiveDirectly tried to anecdotally explain how cash transfers get invested with their shop example in the video. But again, I totally agree that their explanation has holes that make it hard for people who don't already agree with them to have the explanation that they need to understand why cash transfer requirements are likely to decrease substantially over time. 

Thank you for saving me the time of writing this myself!

Our friends estimate the cost at about $258 billion dollars to end extreme poverty for a year, and point out that this is a small portion of yearly philanthropic spending or [...]

Is that true?

Just ballparking this based on fractions of GDP given to charitable organisations (big overestimate imo), I get global giving at ~500bn/year. So I don't believe this is true

You're right, I shouldn't have taken them at their word there, it's probably not a small portion of philanthropic spending. US phil spending is about 500 billion per year, and the US has the highest spending as % of GDP. Can't find sources for total worldwide spending online, but if I had to guess, it's about 1.5 trillion, in which case the named figure is some 20-ish percent of the total.

Will edit post.

Sorry, I edited while you posted. I see US as 1.44% * 27tn = ~400bn, which is the vast majority of charitable giving when I add in the rest of the countries Wikipedia lists and interpolate based on location for other biggish economies

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which is entirely correct and appropriate but still somehow annoying.

Haha. Love this.

Great post overall. Appreciate you sharing.

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