Part II: Safeguard Considerations in the Use of Cash Compensation in Resettlement Processes

In Part I of this blog (The Allure of Cash Compensation in Resettlement Processes), last week I told the story of Fernando, a man forced to leave his home as a result of a new hydropower project, who received a large sum of cash as compensation but ultimately ended up in financial ruin. Accordingly, I would like to return to the question: if resettlement cannot be avoided, is cash compensation an appropriate mitigation measure? This question is important because there are positive examples of how cash compensation can be used as an important driver of socioeconomic development. Such recognition has been gradually shifting the discussion among resettlement professionals toward seeking a greater understanding of the factors that favor or hinder the success of cash compensation schemes. Common factors that could make a difference between development and impoverishment are:

1. The existence of alternatives from which the beneficiaries can choose. Different people have different needs, and having options empowers them to pick the most appropriate solution for them. The lack of options increases the risk of impoverishment for the affected population.
2. The level of vulnerability of the affected population. The same compensation measures may have different effects on the affected population, depending on their level of socioeconomic vulnerability. Vulnerable groups are usually at a higher risk of impoverishment when they receive cash compensation than when they are the beneficiaries of housing solutions.
3. The legal status of the land and the houses affected. People displaced by a project who do not have legal titles to their property, and those whose living arrangements are so precarious that if appraised may not render much money, may be better off receiving housing solutions.
4. The amount of economic compensation. This amount may or may not be enough to cover the market value of the affected property plus transactional fees, taxes, installation of utilities, the cost of logistics, and other fees associated with the relocation process. Unless the valuation methodology accounts for these different costs, the amount of cash compensation offered by executing agencies in many cases may not allow the restoration of similar levels of living, making the provision of housing solutions a more suitable alternative.
5. The time it takes to receive the cash compensation. In some cases, it may take a long time for the affected population to receive their compensation payments, and in the meantime, the value of properties may have increased, the local currency devaluated, or the area could have been subject to changes that affect the displaced population. If these risks are present, housing solutions or vouchers may be better suited than cash compensation.
6. The existence of an active market for land, houses, and jobs that allow affected people to acquire new houses and access basic services in similar or better conditions than before the affectation. Urban areas usually enable non-vulnerable people to find replacement houses faster than in rural areas, making cash compensation a viable option.
7. The type of livelihood affected. Cash compensation may be appropriate when the livelihoods of the affected people do not depend on the land, or if they do, the extent of the affectation is only a fraction of the property (i.e. less than a quarter), and its functionality is preserved.
8. The presence of economic activities. Many houses have a dual residential and commercial purpose, so the solution needs to take both aspects into account. In such cases, cash compensation may be a more suitable alternative than providing a housing solution whose location or accessibility does not allow the continuance of their commercial activities.
9. The role of social networks. In cases of relocation into new houses, social networks can help hold a community together, provide goods and services, allow the exchange of information, provide a sense of identity, and facilitate informal credit, among other benefits. On the other hand, when people receive cash compensation peer pressure can discourage changes and investments leading to upward social mobility. It can also create difficulties to switch the status of existing relationships (i.e. from friends and relatives to paying customers), and risk alienation and social exclusion if past favors to the cash recipient are not returned. This is a key issue that oftentimes is not well understood.

These factors are based on the resettlement policies of the Inter-American Development Bank and the World Bank. While this list is not exhaustive, it provides a starting point for the analysis of cash compensation. The listed factors should be considered during the social impact and risk analysis, as part of the preparation of resettlement plans required by multilateral financial institutions, to determine whether cash compensation should be an appropriate measure in each particular case. We can no longer assume that cash compensation is inherently good or bad before conducting this data-driven analysis.

At a practical level, we need to go beyond checklist compliance with policies and regulations, even in cases when adopting measures other than cash compensation is inconvenient. We need to strive for methodologically sound resettlement plans, focusing on the expected impacts of the displacement process on the living conditions of the affected population. We need to enhance our understanding of the factors leading to the success or failure of cash compensation and apply this knowledge to provide the best solutions for each case.

We also need to place greater emphasis on developing accurate baselines of the affected groups, offering them support to facilitate their adaptation process, defining indicators to monitor the changes created by resettlement, and evaluating the impacts of these changes on the living conditions of the affected population. We need to keep in mind that the ultimate goal of social safeguard policies, such as IDB’s policy on involuntary resettlement, is to protect the local population from hardships that can usually be avoided with proper social management measures.