An answer to a possible objection to cash-transfer charities

by B_For_Bandana2 min read1st Jul 20147 comments

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Personal Blog

This is an answer to a possible objection to cash-transfer charities like GiveDirectly. I remember reading about this on LessWrong a while ago, but I can't find the discussion now. I was planning on asking about this on an Open Thread, but I got curious, did my own research, and answered my own question, so now it gets its own Discussion post.

Cash-transfer charities do something very simple: they take money given by donors, find very poor people, and give them the money, in instalments. A prominent example is GiveWell's current top charity, GiveDirectly, which gives yearly gifts on the order of $1000 to very poor people in Kenya and Uganda. There is a lot of convincing research that cash-transfer charities are very effective at helping poor people.

There is a complicated debate about whether cash transfers are actually the very best way of helping poor people, or if there are in-kind charities that do the job a little better. This post is not about that. Instead, this post is just about a possible problem with the mechanics of cash transfers. The problem is this: say a donor in (say) the US gives money to GiveDirectly, and they send that money to a person in (say) Kenya. The recipient in Kenya now has a larger bank balance. But this doesn't actually create any wealth in Kenya; it just increases the amount of currency chasing the same pile of goods there. The person getting the transfer gains a positional advantage over her neighbors, but the total wealth there stays exactly the same, which of course is no good. What we as donors would really like to do is make sure that we are in some sense donating real wealth; that we are giving up a claim on some of the world's resources in such a way that other, poorer people then get to claim those resources themselves. But if just money, but no, like, actual stuff, is transferred, then giving to charity just amounts to a bookkeeping trick.

The way out of this, of course, is global trade. Dollars in the US aren't separate from dollars in Kenya; they both participate in the same global market. If global trade is efficient enough, then Kenya as a whole gains dollars relative to the US, and the buying power of their whole economy increases relative to the US economy. So Kenya does really get a bigger pile of goods for their higher number of dollars to chase, so I can transfer real, actual wealth just by changing numbers on a computer screen.

But again, this all depends on global trade, and in particular trade between the US and Kenya, being efficient. A way to measure this is correlation between the price of the same commodity in different countries. If the correlation is low, that suggests the two economies operate pretty much separately. But if the price correlation is high, that suggests that the two countries are both participating in the same market together, and transferring money reliably transfers wealth.

I decided to test this using the price of crude oil. Here's a graph of the price of crude oil in Kenya and in the United States, in inflation-adjusted US dollars, from January 2007 to January 2014. The red line is the US, the blue line is Kenya.

Oil price graph

US data here: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=M

Kenya data here: http://www.petroleum.co.ke/index.php?option=com_content&view=article&id=50&Itemid=108

And the correlation is 0.93, according to Excel. So the economies seem tightly connected enough that transferring money does transfer real wealth, and you can be confident that your donation to GiveDirectly doesn't have perverse unintended consequences (or at least, not this kind).

A big caveat: I am no kind of economist; this is purely the result of back-of-the-envelope, common-sense layperson's thinking, and some numbers I found on the internet. Problems I could have include:

1. My intuition that commodity price correlation implies "connectedness" in the relevant way is just wrong.

2. In theory it's okay, but just one commodity doesn't give you the whole picture.

3. Crude oil is not a good index to use.

4. Something else?

Any criticism or other thoughts welcomed.

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Claiming that the cash transferred will be chasing the same basket of goods implies Kenya is a closed economic system. Cash transfers would have benefits even if this were true. The current economy of Kenya reflects the aggregate preferences of the buying power of Kenyans. Transferring money to someone who is poor, i.e. has little voice, changes aggregate preferences. We regard the current distribution of economic power in Kenya as perverse. Not necessarily due to any causal analysis or moral judgement of the path that got them here, but simply by looking at the results. The poor desire more of the basic necessities of life, but the current system has not delivered them.

In-kind transfers relies on the idea that pumping money into the system is getting us more of the same thing that got them to where they are. But research in this area so far has indicated that IKT are just as prone to appropriation as cash transfers. If the two are roughly equal in how much benefit we expect to actually go to the poor, then cash transfers win simply by virtue of being lower friction. We can also ask beneficiaries directly about cash transfers vs IKT, but results here have been split AFAIK.

Anyway, Kenya obviously isn't a closed system. And money does result in the movement of goods and services from elsewhere. We want to look at what beneficiaries actually spend money on and look at the coupling of that as far as is possible. Oil is a good indicator to the extent that it is coupled to the needs of the poor and a bad one to the extent it isn't. Gas for generators in villages? Good. Though I don't know to what extent this is a good proxy for things cash transfer beneficiaries do with their money. Oil is a liquid (low friction) market and thus is probably not reflective of price disparities elsewhere.

Sounds like you're thinking of this post by Eliezer.

Global trade being cheap isn't necessary. It just makes the wealth transfer faster.

If you send a dollar to Kenya, this would result in USD being inflated in Kenya and deflated in the US. It would not immediately cause any wealth transfer. However, it would make someone in the US less willing to buy the now more expensive Kenyan commodities, and Kenyans more willing to buy the now cheaper US commodities. This will act to counter the changes in the values of the currencies until the dollar moves back, and they are now in balance.

This is also hastened by the fact that Kenyans don't use USD. Since there's only a small amount of USD in Kenya, moving USD to Kenya causes much higher inflation of USD. They only real way to use USD in Kenya is to buy something from the US, so it will be used for that fairly quickly.

Is your last paragraph based on specific knowledge, or are you just assuming that since USD isn't legal tender, it's not used as currency? My understanding is that USD is used as currency throughout the world.

It's not specific knowledge. I tried to look it up, but I didn't get anywhere.

In case it helps, I spent some time in Kenya, and in the remote poor rural area I was in, it was all Kenyan shillings - no dollars.

Also, even simply redistributing wealth within Kenya might be a net positive.