Do welfare programs create dependency? For decades, that question has roiled the United States where supporters call such programs an essential lifeline for the poor and critics condemn them as encouraging laziness and the welfare trap.
Latin America and the Caribbean is no stranger to the debate, especially as it concerns conditional cash transfer (CCT) programs. Those efforts at social assistance have fended off the worst short-term impacts of poverty for tens of millions of households. They also have boosted long-term capacity by requiring parents to enroll their children in school and seek critical health services. But, as they succeed, skeptics argue that they run the risk of creating a culture of reliance, of idleness and chronic unemployment.
Cash Transfer Programs boost employment
My research shows those fears may be misplaced: CCT programs may actually increase participation in the labor force. I looked at a nationwide program in Bolivia that, starting in 2006, granted a CCT to all families with children in public school, conditional on their children attending classes 80% of the time. I found that in Bolivia, where school enrollment rates were already over 90% before the implementation of the program and where the conditions were thus already met, cash transfers did not increase adult joblessness. On the contrary, they created opportunities for mothers of recipient children to start their own businesses, enter the labor market, and begin to move towards independence. In other words, the so-called “free cash” originating in Bolivia’s CCT program did not perpetuate the cycle of dependence; it was helping to end it.
Women are the big winners
In 2016 economists from Harvard and MIT analyzed data from randomized controlled trials on seven cash transfer programs in developing countries, including Honduras, Mexico and Nicaragua. They found no evidence that the programs discouraged work.
My study suggests that the authors may actually have understated the ability of such programs to actively encourage employment. Their investigation focused on programs that targeted poorer beneficiaries. The Bolivian CCT, by contrast, is not means-tested. It is given to the very poor who need the extra cash to cover basic households expenses. But it is also awarded to those who are slightly better off, would have sent their children to school even in the absence of the program, and could use the money to find a way into the labor force. Given that 95% of Bolivian male household heads were already working in some capacity — compared to 70% for female household heads– the extra resources benefited those somewhat better-off women in entering the labor force. It helped them to overcome cash limitations to employment.
How exactly did that occur? The Bolivian CCT, providing just 200 bolivianos (US $25) annually for each child, is small. Still, a woman with four kids and an additional US $100 would have enough to start a small business, like buying clothes or food in a big city and reselling them in the countryside. And that extra cash made a difference. The CCT, I found, increased the probability of female households working by four percentage points, mostly through self-employment, and their time working each week by 2.5 hours.
This is in line with various findings from other parts of the world that providing cash transfers to the poor can in fact promote work. A review by World Bank economists shows that giving cash grants to poor entrepreneurs allows to them to expand their businesses and thus increase their work hours. Meanwhile, another recent study found that providing cash transfers to groups of Ugandan youth who banded together for vocational training and business start-ups led to increases of 17% in hours worked. As in my study, those effects may have had to do with the nature of the beneficiaries. That is because the recipients, though poor, were better off than the general population and needed extra cash to either start or scale-up businesses.
Cash Transfer Programs and access to credit
The Bolivian study has an additional implication. I looked at the availability of financial services in the nation’s municipalities and found that the overwhelming majority of employment gains from the program occurred in areas where banks and other financial institutions had few if any branches. Access to credit in these largely rural areas was limited, or if provided by informal lenders, prohibitively expensive. While the results from my study highlight the effectiveness of CCT programs at helping women without access to credit, they also highlight a far from ideal picture when it comes to financial development.
That can be changed. Anti-poverty programs, like CCTs, should target poor areas with low access to financial services. As is currently being discussed in some policy circles, CCTs could even be used as collateral for loans. The key is helping recipients get the cash they need to start businesses.
The evidence seems clear. CCT’s programs, like that in Bolivia, are not promoting dependency. Their beneficiaries are not using the extra assistance to escape into idleness or splurge on luxury goods. They are not willingly dropping out of the marketplace. On the contrary, when given a bit of cash assistance, they are likely to start their own businesses and seek a way out of poverty for themselves and their families.