What’s the best way to lift people out of poverty?

Summary

In 2018 a nonprofit gave every adult in Ahenyo, western Kenya $500 with no strings attached. Researchers expected little, yet two years later incomes, business revenues (+65%), savings, school performance and household well-being had improved while alcoholism, depression and domestic violence fell. This challenged decades of traditional aid—education, job training and microfinance often produced limited results—sparking broad research into direct cash transfers. Studies show strong short-term and community spillover effects, though long-term impacts are mixed. The evidence suggests poverty solutions should trust recipients’ knowledge: people know best how to invest cash to improve their lives, and the funds exist to scale such approaches.

Takeaways

• 😀 In 2018, a non-profit organization gave $500 to every adult in Ahenyo village, Kenya, as part of a cash transfer experiment aimed at combating poverty.
• 😀 The cash was given with no conditions, except for a commitment to speak with researchers after two years.
• 😀 The experiment took place in a region where families had lived in extreme poverty for generations, and $500 was equivalent to a year’s salary for most recipients.
• 😀 Despite the success of many philanthropic programs since the 1960s, studies found that traditional aid efforts like education and job training often had minimal impact on long-term poverty reduction.
• 😀 Studies of microfinance programs showed that, while loans were repaid, they did not significantly improve incomes for recipients.
• 😀 The surprising success of direct cash transfers challenged conventional wisdom, with positive results observed in Ahenyo after two years.
• 😀 In Ahenyo, business revenues increased by 65%, families saved more, and children performed better in school. There were also reductions in alcoholism, depression, domestic violence, and inequality.
• 😀 Cash transfers have since been studied extensively and have shown impacts that often outperform traditional aid programs.
• 😀 A study across multiple Kenyan villages found that the surrounding economy grew more than twice the amount given out in cash transfers just one year later.
• 😀 While direct cash giving shows promise, poverty remains a generational issue that requires long-term solutions, and further research is needed to understand the long-term effects of cash transfers.
• 😀 Cash transfers work because they trust the expertise of those living in poverty to decide what they need most—whether it's a new business, home repairs, or education for their children.
• 😀 Wealthy countries and philanthropists have the financial means to eliminate extreme poverty, but doing so requires trusting the judgment of the people in poverty rather than imposing external solutions.

Q & A

What was the main intervention introduced in Ahenyo village in 2018?

In 2018, a non-profit organization provided every adult in Ahenyo village with $500, with no strings attached, outside of a commitment to speak with researchers after two years. This was aimed at lifting the villagers out of poverty.

Why did researchers and philanthropists initially believe cash transfers could fail?

Many believed that direct cash giving would fail because recipients might quickly spend the money and end up back in the same situation, as they assumed that without additional support, the financial benefits would be short-lived.

What was the result of the cash transfer intervention in Ahenyo village after two years?

After two years, the results in Ahenyo were surprising: business revenues were up 65%, families saved more and ate better, children performed better in school, and there was a reduction in alcohol consumption, depression, domestic violence, and inequality between families.

What had been the outcome of traditional aid programs before the cash transfer experiment?

Traditional aid programs, such as those providing education, job training, agricultural development, and infrastructure projects, often had minimal impact. Studies found that these interventions failed to significantly improve education, raise incomes, or boost the overall economic condition of recipients.

What role did randomized control trials play in the study of aid programs?

Randomized control trials conducted in the late 90s and early 2000s helped reveal that traditional forms of aid, such as education or job training programs, often had minimal or inconsistent effects on improving the lives of recipients, prompting a re-evaluation of aid strategies.

What is microfinance, and why did it not achieve its goals despite consistent loan repayment?

Microfinance involves offering small loans to entrepreneurs in economically weak areas to help them start businesses. While microfinance recipients consistently repaid their loans, the programs did not meaningfully raise their incomes or lead to lasting financial improvement.

How does direct cash giving differ from traditional aid programs?

Direct cash giving differs from traditional aid by offering unconditional money to recipients, allowing them the freedom to decide how to use it based on their own needs and priorities, rather than imposing a predetermined aid program.

What were the findings of a subsequent study on cash transfers in Kenyan villages?

A subsequent study in Kenya found that the local economy grew by more than double the amount given out in cash transfers just one year after the intervention, highlighting the broader economic impact of direct cash giving.

What are the long-term challenges with evaluating the effectiveness of cash transfers?

The long-term effects of cash transfers are still not fully understood. For instance, a study in Uganda found that while cash transfers improved family earnings over the first four years, the benefits diminished after five years, only to return during the COVID-19 pandemic, suggesting that the impact may be temporary or cyclical.

Why is the theory behind direct cash giving considered important for understanding poverty?

The theory behind direct cash giving challenges traditional views by emphasizing that people experiencing poverty understand their own needs best. It allows recipients to prioritize their specific challenges, such as home repairs or education, which could lead to better long-term outcomes.

What is the potential for solving extreme poverty, according to the script?

The script suggests that extreme poverty could be eliminated if wealthy countries and philanthropists trust the expertise of people living in poverty and allow them to make decisions based on their own needs. With the resources already available, this is a feasible goal.