The latest trend in development aid is to transfer money directly to poor households without attaching conditions. Recipients will invest that money in a small business and education. This approach works, says Professor of Development Economics Erwin Bulte, but it also has its limitations.
The idea is that poor people will invest that money in education
Bulte: ‘Yes, studies have shown that people invest in their future. In the beginning, the fear was that transferring money to households would mean that the men would spend it on alcohol and tobacco, but that’s not the case. Men also care about their families and spend that money on a better roof over their heads, a small business and school tuition.’
‘There are two reasons why giving money directly works. The first: capital in poor areas is scarce, and the return on small investments is high. The second: you have to give a small monthly amount for a longer period. That affords people some rest and lowers the stress of surviving each day. Less stress means that people think more carefully about spending their money.’
And you don’t have to deal with corrupt governments?
‘That’s true. Research has shown that sometimes as much as 80 percent of the money disappeared into the pockets of civil servants, whether or not they were corrupt. But don’t forget that a large portion of development funding is spent on houses, cars and insurance for the western relief workers on location. You can eliminate almost all of those transaction costs.’
But does it lead to an area’s development?
‘We don’t know what it will be like in five years for families and regions that receive money. But we do know that the effect of microcredits is small after five years. That’s because of the nature of the investments. Small businesses are vulnerable and they have no buffers. Financial setbacks lead to bankruptcies. Or you buy good seeds, but your harvests fail after two dry summers.’
So the credits help only a little?
‘You help individual households, so you risk creating a sort of flea market economy consisting of very small businesses. Almost none of those grows into a middle or small business, and you need larger businesses for economic development. To get those, a government should invest in good management, infrastructure and schooling. If a household wants to invest in school tuition, then there have to be schools with teachers who’ve been trained well. So other large-scale projects remain necessary.’