Cash aid — a better approach to foreign aid?

Earlier this month, Lebanon launched two cash assistance programs to address the country’s prolonged economic crisis, which has left over three-quarters of the population in poverty. 

This program hints at an age-old debate surrounding the use of cash aid for development. These interventions, which entail direct cash transfers to developing communities as opposed to aid made in-kind through goods, services, or other forms of support, have been met with skepticism by donor countries. This begs the question; should more aid be delivered as cash aid?

The main appeal of a cash aid program comes from its simplicity and scalability, relatively low overhead costs and the control it bestows on aid beneficiaries. It would enable assets to go directly to the communities in need, rather than being lost through implementation and procurement with traditional aid programs.

Numerous successful cash transfer programs have succeeded in short-term trials, addressing issues like education, mental health, teen pregnancy and HIV prevention, etc. Results have been mixed for long-term studies, but certain successes show promise, notably the Mothers’ Pension Program in the United States, which boosted child longevity, education access, child nutrition, and adult income levels.

Based on this, cash aid may seem like the obvious solution. However, development assistance is more nuanced than that. Some argue that cash transfers are not sustainable and do not always address what recipients need — like quality education, access to healthcare, societal protection for marginalized groups and economic freedom. It is also difficult to measure the success of more complex, multidimensional programs that aim to use cash-based aid to address various societal concerns.

Conducting a comparative assessment of cash-based aid programs with more traditional forms of aid promoted by national aid agencies can shed light on the effectiveness of cash transfers. One study, conducted by the U.S. Agency for International Development (USAID) in rural Rwanda examines the benefits of different aid approaches. 

In the study, one group followed a traditional USAID strategy that addressed malnutrition through “superior information, direct transfer of productive assets, and improvements in household diet and sanitation.”  This was benchmarked against a cash-based aid program implemented by GiveDirectly, a US-based nonprofit that makes unconditional household grants via mobile transfers. Researchers found that the traditional health program was more successful at generating savings but did not improve household dietary diversity, child anthropometrics, or anemia, while a cost-equivalent cash transfer drove more asset investment and debt reduction.

This analysis demonstrates the unique benefits of cash aid and enables a different way of thinking about cash-transfer programs. Cash aid programs maximize the scope of choice and encourage more beneficiary participation, which is notably lacking in traditional aid programs. The benefit of the cash transfer programs is that they “require donors to be explicit about their preferences and to justify interventions that constrain beneficiary choices.” In other words, cash aid brings more accountability into a system long dominated by donor countries at the expense of the developing countries they were meant to help.

In recent years, aid agencies have become more willing to consider cash-based programs. In a recent report, USAID concluded that household grants have significant positive impacts on many development priorities like “monetary poverty, household investment, school enrollment, health service use, female empowerment, nutrition outcomes, and stimulating the local economy.”

Yet, skepticism still plagues the donor community. 

The primary concern with cash aid is the fear of corruption. Many believe that expanding cash-based aid would only encourage more corruption since it consists of direct cash transfers rather than aid made “in-kind.” 

Another issue with cash-based aid is the security of these cash transfers. Most cash aid distributions are digital, something convenient for aid recipients but a fact that primarily benefits service providers who profit from these technologies. Given that the primary argument for cash transfers is eliminating intermediaries, this “cashless” form of cash-aid introduces a new set of intermediaries, the payment service providers, who can dictate the conditions of these transactions. The digitalization of cash transfers brings its own set of risks. There is the obvious risk of data breaches, and coupled with governments’ concerns about crime and corruption, digital transactions also bring the risk of “surveillance capitalism” or increased surveillance in already marginalized communities.

Weighing the benefits and the risks, more aid should be given as cash aid, but under certain conditions. Cash-based aid has successfully improved the lives of the poor while giving voice to beneficiaries in a system extensively dominated by donor countries. Through its efficient and relatively cost-effective methodology, cash-based aid can bring a wide range of developmental improvements, sometimes more effectively than traditional aid programs.

However, cash aid tends to be more effective when used to supplement other aid programs, specifically those that promote “invisible infrastructure” or social systems for long-term development, making cash aid more sustainable. Knowing this, cash aid can actually complement existing aid programs and enhance their ability to deliver results to recipients. 

Political manipulation is bound to exist, but this should not be a limiting condition for cash aid. Aid agencies should undertake corruption risk assessments across the entire cash transfer chain using the Worldwide Governance Indicators, the Corruption Perceptions Index, and the Varieties of Democracy databases.

Targeted communications through local NGOs can connect with remote populations to enable greater transparency. Unambiguous eligibility criteria can also eliminate political bias, along with complaint mechanisms to hold governments accountable. Digital cash aid does pose risks for data privacy, but it also enables funds to pass through fewer hands, limiting the potential for corruption. The private and public sectors can work in tandem to establish a set of rules and standards for these digitized cash transfers to prevent further risk to beneficiaries.

Through greater transparency and accountability, cash aid can supplement traditional aid programs and bring much-needed reform to the foreign aid system. The question of cash aid or aid in-kind is not as black and white as it seems, and a combination of the two can enhance the aid regime as a whole.

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