Adam Schwartz passes along this article stating that India is going ahead with plans to convert its myriad subsidies for the poor into a single cash distribution scheme tied to its biometric identity card system.
My knee-jerk response is that this is great: subsidies are distortionary, and fairly paternalistic. The premise is that elites or policymakers can better decide what the poor need than the poor themselves, which is a bit grating if you really think about it. While some might be more tolerant of India’s subsidies because they are designed by other Indians rather than by white people/foreigners/etc., I am definitely not.
The other perspective is that when people are given cash instead of an in-kind handout or a subsidy, they will spend it poorly – wasting it on stuff that’s useless or bad for them, like alcohol or tobacco. I’m pretty sympathetic to this view, too, and I don’t see it as contradictory to my dislike of paternalism. People may have reasonable goals that they can’t stick to, and subsidies can be a useful tool for committing their spending. There’s increasing interest in the possibility that these kinds of commitment problems are important in driving persistent poverty. One of my favorite papers, by Banerjee and Mullainathan, develops a very intuitive model that could explain this behavior. A counter-intuitive prediction of that model is that if the poor face the temptation to misspend, large lump sums of money may be preferable to getting the same amount of cash in small installemtns: rather than “burning a hole in your pocket, the large sum lets you buy something worthwhile instead of frittering away your cash on trivialties. On the empirical side, Kathleen Beegle, Emanuela Galasso, Jessica Goldberg, Charles Mandala and Tavneet Suri are working on a project that will randomly vary whether workers receive payments in lump sums or small installments. I’m also in the planning phases of a project with Lasse Brune that will look at this issue.
But understanding the fundamental determinants of consumption behavior is a pretty hefty task; even an optimist like myself must admit that it will take economists a long while to sort it out. Looking directly at cash transfer programs, however, we already know quite a bit. Evidence from various African contexts shows that unconditional cash handouts can have big benefits. One potential drawback is that they may reduce labor supply; since people tend to work for money, that’s easy to predict from even very simple economic models.
Tempering the large measured benefits of giving money to the poor, however, is the fact that many of those findings are specific to programs that target women. And lest we assume that, for example, the Zomba Cash Transfers project would have had the same benefits had it targeted men alone, work by my advisor and Hans-Peter Kohler suggests that while a cash windfall accruing to women leads to decreases in sexual risk-taking, the same windfall for men leads to rises in the amount of risky sex people have. The obvious inference is that this has to do with transactional sex: the men are able to buy it, the women able to avoid selling it.
It’s hard to say how this would play out in India. In some ways, gender inequities are far worse there than in Africa – while Africa does have “missing women”, for example, there is no evidence of the female infanticide nor of the deep favoritism toward young male children that is famously prevalent in much of India. On the other hand, my impression from visiting India is that transactional sex is not nearly as common there, which may be related to a culture that is prudish enough that some people still riot over public kissing. But the former issue is still a major concern – if men control this money moreso than the subsidies it replaces, and if women show less son preference than men, this program could do harm to girls that are already some of the most disadvantaged children on earth.
On balance, I think the shift to cash will do good on net. But this program is just crying out for a randomized phase-in process. There are legitimate questions about its impact, and the system lacks the capacity to roll it out to everyone at once. This is the textbook example of a case where a government should randomize the phase-in, say by locality, to see what the effects are. Unfortunately I don’t see any evidence that they’re planning to do that. And I’m sure this isn’t for lack of expertise – virtually any microeconomist would love to be able to access data on an experiment like that. I’ll even offer up myself: if Mr. Chidambaram happens to read this, I’ll gladly drop what I’m doing for a couple of days to set up a randomly-ordered list of the remaining districts where the scheme is to be rolled out. And I’ll do it for free!