omondi-68453ad8f598b8de7a754315a0074f83d4cf5f01-s40-c85Why do people live in poverty?

Sometimes the problem is structural, and the cause can be attributed to a corrupt government or economic injustice. Sometimes the problem is individual, and the cause can be attributed to poor work ethic or a dependency on drugs. Sometimes, perhaps even most of the time, the problem is a combination of structural and individual reasons.

Just as there is no one cause of poverty there can be no one solution to poverty. Forgetting this obvious point can lead us to embrace a doomed one-size-fits-all approach or to dismiss workable initiatives because they can’t be applied in all cases. Consider, for example, the idea that since the poor lack resources, the best way to help them get out out of poverty is to give them money directly.

The New York Times recently highlighted a charity, GiveDirectly, that does just what it’s name implies: gives money directly to the needy. The organization gave $1,000 in two lump payments to the various poor villagers living in rural Kenya. The results:

Lots of people, in fact, used the money in productive ways. An inordinate number, it seemed, used it to replace their thatched roofs, which are not only lousy but also weirdly expensive, as they need to be patched every few months with a special kind of grass. A metal roof costs several hundred dollars, but lasts for 10 years, making it a much better investment. Omondi was among those who bought metal roofs. He also purchased a used Bajaj Boxer, an Indian-made motorcycle that he uses to ferry people around, for a small fee; he is also currently paying off a second motorcycle, which he rents out. Now Omondi makes about $6 to $9 a day in his taxi operation, several times his previous income, and he works almost every day. Several of his neighbors also used the money to start businesses­. One man bought a mill and charges villagers to grind their corn. Others became microretailers, buying goods like soap and oil at wholesale and reselling them at a markup.

But while Omondi and his neighbors have metal roofs, their houses still have dirt floors and no running water or electricity. And their prospects for making it to the middle class are pretty bleak. “You give people cash to start a business or expand their business, and in a lot of cases, they shoot forward,” Blattman says. “Then they start screeching to a halt when they hit the next constraint.” If Omondi wanted to further expand, he’d probably find it hard to get a small-business loan from a bank. The problems holding Omondi and his neighbors back — underdeveloped financial systems, bad infrastructure — are the generic but defining problems of the developing world, and they won’t be fixed by a one-time windfall.

The story highlights one of the primary problems with the “give directly” approach. Many people in poverty need both cash to take care of basic needs (such as a roof that doesn’t leak) and capital to finance an entrepreneurial venture. But as almost any small business owner will tell you, capital is rarely needed only at the beginning of an operation. Injections of capital are often needed to expand the business or to prevent short term cash flow problems from bankrupting a business.

What happens when a small business owner like Omondi needs more funding? Should a charity like GiveDirectly simply give him more cash? Continually providing more cash, with no strings attached, can help trap a person in poverty. As Bob Lupton writes in his book, Toxic Charity:

• Give once and you elicit appreciation;
• Give twice and you create anticipation;
• Give three times and you create expectation;
• Give four times and it becomes entitlement;
• Give five times and you establish dependency

Giving money directly can certainly help provide relief and cover short term needs. It may even be useful for providing start-up capital. But when money is continually given directly, it tends to lead to a sense of entitlement and welfare dependency.

This is not to say that cash transfer to the poor cannot play a role in overcoming poverty. But we should be aware that such a simple solution is not going to be the sole means of solving such a complex problem.

For more on poverty reduction initiatives visit PovertyCure.org.

  • Darcie Gore

    Thanks, Joe. I appreciated your post. It was well rounded. If the symptoms of poverty are not as clear-cut as they seem, then neither are the solutions! That’s so true. I happen to appreciate the benefits of microfinance, where business training and savings groups are involved. Without a place to save and accumulate capital, people can become hooked on unproductive credit and have no real way to buy what they need on a consistent basis. Real change involves more than just giving cash or giving a loan…