Ending Poverty: Today or Forever?
In which I criticize one of my favorite organizations
Epistemic status: as an Economics student who reads a fair amount of dev econ, this might be one of the only things in the world I'm actually ~qualified for. 85% confident that the main claim of this post ("GiveDirectly has presented no strong evidence for their claim that the costs of ending extreme poverty will rapidly & significantly decrease") is true.
Disclaimer: I ❤️ GiveDirectly and think they're doing fantastic work! That’s why I want them to be even better 😇
Claims, claims, claims
Recently, GiveDirectly collaborated with Rational Animations to make this YouTube video. The aim of the video is in its title: showing that extreme poverty can be eradicated by directly giving money to the world's poorest, through organizations like GiveDirectly.
I think that the evidence presented in the video definitively shows that giving all the extremely poor people in the world money for a year can end extreme poverty for that year. This is true almost by definition, but I'm genuinely glad that a bunch of researchers decided to check anyway. There's always a chance of unforeseen second order effects, like maybe all the people getting the money would just spend it all on drinks and alcohol (almost certainly not) or it would cause huge inflation (nope, though really you could guess that one with Econ 101).
Our friends estimate the cost at about $258 billion dollars to end extreme poverty for a year, and point out that this is a small portion of yearly philanthropic spending or rich government's budgets. They are certainly right about the second part (and probably about the first). It would be good to just give all the extremely poor people some money every year so they would no longer be extremely poor.1
Where the video loses me, though, is when they make a very strong claim with huge implications based on minimal evidence. This starts at 10:39 in the video, but I've transcribed it for you here:
We also know that cash transfers improve recipients' lives immensely. But what would be the impact on recipients' neighbors and the economy as a whole? A 2022 study led by Dennis Egger found that every $1,000 of cash given actually has a total economic effect of $2,500, thanks to "spillover" effects growing the local economy, as recipients spent more money at their neighbors' businesses, those businesses spent money, and so forth. Not only did recipients' incomes increase, their neighbors' incomes also increased by 18 months later. Even neighboring villages without any recipients saw increased incomes, which could have been from a 'spillover' effect as well. These effects mean our cash transfers will go further, and we may find that we've reached our goal of ending extreme poverty sooner - and for less money - than we would otherwise expect. The research suggests that the $200 to $300 billion figure we'd need to give for the first year will decrease every year thereafter [animation of a stack of dollar bills, halved each year] as the economies of entire regions and countries grow and lift their poorest residents out of extreme poverty. [emphasis mine]
Okay. There is an absolutely massive difference in cost between "$258 billion the first year, progressively less each year, maybe after X years no cost at all" and "$258 billion every year, eternally". One of these is a cost the rich world may be willing to bear, out of solidarity and self-interest and even just the wish to be on the right side of history. The other is just a pipe dream for teary-eyed optimists like us.
If a lot is riding on the answer to an empirical question, it would be wise to reason well about it before making strong claims one way or the other. But this is just a popularization video, perhaps it shouldn't be held to such high standards? Well, in another comment on this forum, GiveDirectly has linked to this video as their "explained in detail" source for the claim, which they also make in e.g. this post. There is, as far as I can tell, no other analysis hidden in a sidebar somewhere on their website (though if you do find one, please inform me ASAP!) This video is what we have to work with, so it's what I'll be critiquing in this post.
The study they're referencing to support their claim, Egger et al. (2022), is very well designed and has no serious flaws as far as I can tell, but it plainly isn't evidence for the claim they're making here. So what does the study say? Well, the video describes its contents correctly (just takes a much stronger conclusion from it than the authors do). For every dollar given, another 2.5 dollars are spent in the local economy. This takes the form of an increase in consumption by non-recipient households, almost equal to the consumption increase of recipients (!), at about 335 USD PPP to the recipients households' $339. They also show that this consumption increase is caused by higher earned income, rather than dissaving (spending money you'd saved up before), which is a good sign.
Why these spillover effects, though? The authors think what's happening is there's a lot of slack in the local economy. Small-scale manufacturers find themselves waiting for customers or eating and resting a lot of the time, due to a lack of demand. Often 'integer constraints are binding', which means e.g. there's too much demand for one person to handle, but too little to keep two people busy, so now one person spends a lot of time doing nothing. Generally, low scale due to few customers (due to low ability to pay, because everyone's poor) causes a lot of that sort of inefficiency (see Bassi et al. 2022). Because more people had the resources to pay for stuff, the workers who were otherwise just twiddling their thumbs got to do more work. There was excess capacity, capital or labor sitting around doing nothing, and now it's doing something.
That's a genuine welfare and efficiency improvement. However,
It's a one-time effect. Demand goes up -> slack disappears. That's why "slack" is such a useful word to describe the phenomenon - increasing demand pulls the economy taut, like a rope. There's no slack left, afterwards.2
Once the donations stop rolling in, there'll be nobody pulling the rope, and the economy will go slack again. This is because according to our study, most (73%) of the money donated is being consumed, which is exactly the cause of aforementioned spillovers, but also means it doesn't stick around. The resources have been consumed. So slowly decreasing the amount of money donated just means slowly letting the spillover effects disappear as well.
So the argument given in the video falls flat - or at least, requires a lot more evidence than presented. There is, however, a more conventional argument for this kind of claim which is not made explicitly in the video, but bears looking at anyway.
I am, of course, talking about the poverty trap. A poverty trap is a situation where someone could increase their future income significantly if they had access to more money or capital right now, but they don't, so instead they stay stuck in poverty.3 Some typical examples would be:
An entrepreneur wants to buy a machine that would make her business much more efficient and so pay back its costs quickly, but she lacks capital, so she can't buy the machine.
A smart kid in a poor country wants to go to high school, but his parents can't afford to send him, so instead he earns much less at a menial job.
A day laborer doesn't earn enough money to buy nutritious food. Due to malnutrition, he can't work as hard or often as he'd like, which keeps his income low, which is why he doesn't have enough money for good food.
If there are a lot of these kinds of cases, then we could expect a large injection of money to push these people into a new, higher-income equilibrium, which would then maintain itself without needing more outside money. This would be an excellent case for GiveDirectly's claim. But how common are poverty traps really?
Let's just say it's complicated. Development economists are strongly divided on this issue, with some (Sachs) believing that everything is poverty traps, others (Easterly, Moyo) saying that there are very few in practice, and a third camp (Duflo, Banerjee) doing the whole "both sides are partially right, we should just look at the evidence" thing, which is entirely correct and appropriate but still somehow annoying. Anyway, I won't force a whole literature review down your throats. Let's do some quick tests instead.
Microfinance programs, the development economics hype of the 2000s, are private-market (sometimes subsidized) programs to lend money to the world's poorest, based on the premise that they're stuck in poverty traps and so they could simply pay back the loans after using the money to gain a higher income. Results were mixed, with limited effects on the micro-level (the people actually borrowing the money) and macro-level effects, as always, very hard to identify. But micro-finance's failure to live up to the hype might be due to the other issues with loaning money in poor countries, like weak contract enforcement and lack of information about borrowers, which often led to interest rates around 60%/year, unheard of in Western countries. Perhaps simply giving money to the poor can get around this?
A simple way of checking is to see if the people given money are still doing better later on, once they're no longer receiving any money. Earlier in the video, a few such studies are mentioned. Blattman, Fiala, Martinez (2014) found large positive impacts on work (+17%) and earnings (+38%) four years later of a big one-time cash transfer (combined with help for planning to start a business) to young people interested in becoming artisans. The same authors' followup (Blattman, Fiala, Martinez 2020), however, found that these effects had ~entirely disappeared nine years after the transfer. Fiala et al. (2022) returns to declare triumph for cash transfers after all, saying that these same recipients who were indistinguishable from the control group after nine years were suddenly doing better-than-controls again after COVID-19 hit, perhaps due to larger durable asset stocks. Not implausible, but I would note that p = 0.08, which is already suspicious but especially so when you're doing studies on the same population every four or so years without statistically (e.g. Bonferroni) correcting for that. Also, note that this was not a pure randomized cash transfer program, and it's impossible to separate the effects of the help with business planning from the cash transfers themselves.
Conclusion
GiveDirectly made the claim that if we were to give money to all the world's poorest, this would not only lift them out of poverty in that year, but strengthen the local economy, lowering the cost of poverty reduction in future years by a lot every year, until poverty is eventually eliminated (as implied by the video's title). This is a claim with huge implications and in my opinion, the evidence GiveDirectly brings in the video is insufficient to support it. Their main argument, that of economic slack, does not support an effect of the size or type claimed, and the empirical support is weak. A side argument not explicitly mentioned but implied, that of poverty traps, is deeply controversial in the literature and the studies named in the video don't provide strong support for the existence of long-term poverty traps, or at least those of the type that could be solved with cash transfers. And none of those studies at all support the proposed long term effects on non-recipients, which are a fairly integral part of the argument.
So basically: I think GiveDirectly is doing amazing work and I hope I wasn't too harsh on them, but like any organization with a mission, they have incentives to overstate their (potential) impact, and in this case I think they did. Maybe the effect described in the video does exist! I certainly think it's worth finding out. But making strong claims about such things requires strong evidence, and I haven't seen it yet.
They would still be in normal poverty, which is also bad, but less bad than extreme poverty.
There will always be some, at the edges of the economy. Night store owners spend little time interacting with customers and lots on the phone (to the eternal aggravation of the few customers who do enter). Desk-job-havers and night security guards alike also spend a lot of time surfing the web, but that's less slack and more of a principal-agent problem: they could be doing productive work, they're just not incentivized to.
Debatably, slack could be considered a "regional-level poverty trap".