The most oft-cited reason in favour of in-kind subsidies against cash transfers is that the latter will make people waste the money on alcohol or other “temptation goods”. It turns out that all the evidence we have today debunks this as a myth. 

Rohit Pradhan shares a new research paper from the world bank, ‘Cash Transfers and Temptation Goods: A Review of Global Evidence‘ by David K Evans and Anna Popova. In this short paper, the authors review all empirical research on the topic to date. Since the success of Bolsa Familia and other experiments, conditional cash transfers have become an increasingly successful reform measure in welfare policy, moving away from an old idea of the state providing in-kind private goods to those considered deserving.

Cash transfers have also been slowly but unsteadily making their inroads into Indian welfare policies – with a Direct Benefits Transfer programme that was launched in January 2013. Linked to the Aadhar unique-ID system, the DBT if well implemented could bring about a welfare policy that is both more targeted and has lower delivery costs. That said, the parliament during the same UPA regime also passed a massive National Food Security Act that legislated the provision of food grains to two-thirds of India’s households. This schizophrenia awaits resolution with a new cabinet soon to be sworn in, and this paper could not have come at a better time to quash the last remaining refrain against cash transfers.

Perhaps the most persistent criticism of cash transfers is the misuse of transferred money by the beneficiaries who may spend it instead on alcohol or tobacco. These “temptation goods” could range from the frivolous to the obnoxious. The notion is that cash transfers would allow a callous husband to waste more money on booze that is meant instead for the wellbeing of a household. As the authors explain, past reports have been replete with anecdotes about the same. Without doubt, alcoholism (especially in adult men) and an iniquitous household structure have huge social costs on poor families. This cannot be dismissed or made light of. But it is also not something you can fix through lazy welfare policies, the problems are far beyond their scope.

What the authors show is that alcohol and tobacco consumption are agnostic to cash transfers – things are no better and no worse with other kinds of policies. Whether the state provides a kilogram of grain or the amount of money to buy one, it makes no difference to the household. People will continue to spend as they have, and what all transfers do is augment the income of the household. It is this aggregate effect of all cash and kind transfers that matters most. If the consumption pattern does change, it’s because of an ‘income effect‘ rather than anything else.

In-kind welfare policies for those in need are patronising, brimming with the arrogant assumption that the State knows best as to what a person or a household needs and what they should spend their money on. Now there is sound evidence to show that not only are in-kind welfare policies normatively problematic, but also hold no advantage over cash transfers, and several damning disadvantages.

You can read the full working paper here.

David K. Evans, Anna Popova ‘Cash transfers and temptation goods : a review of global evidence.’ Policy Research working paper; no. WPS 6886 (2014).

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.