Cash or Kind?
Posted by butalidnl on 4 October 2011
In programs aimed at alleviating poverty, the question is often asked: do we give help in cash, or in kind? On first glance, people will opt to give help in kind, because it feels more concrete. Also, if you give a poor person something like rice, they will really receive rice (assuming, of course, that it doesn’t get diverted by corruption).
The whole logic of aid in kind is that the goods are actually given. but this does not necessarily mean that they will be used, or used properly. In Africa, donors found out that many anti-malaria mosquito nets they distributed free to people were not being used (being “too hot”) or even made into wedding dresses. Often enough, food aid rots in warehouses, or are not utilized properly by recipients.
Are cash gifts better, then? It is also possible to misappropriate cash. Think of the man who uses the cash family support money to buy alcoholic drinks instead of food. But it is this flexibility of use which makes cash a better form of subsidy. With cash, a family can decide to buy corn or cassava instead of rice, or grow camote and use the money to buy vegetables or fish. Or pay the fare for a daughter who goes to the city to become a domestic worker.
One problem with giving aid in kind is that it distorts the market. If rice is given out for free to some recipients, these people will no longer buy rice from the local merchants, making them lose business and profit. It may end up undermining their business so much that some merchants would go bankrupt. This means that there will be no alternative distribution of rice in case the government supply stops. It also affects the supply of rice for those who are not part of the program.
If aid is given in the form of a subsidy on the price of a product, there would still be market distortion. The experience of Eastern Europe during their communist days shows this. There, the price of bread and potatoes was subsidized, but animal feed was not. So, animals were fed bread and potatoes. People also threw away their one-day old bread. And even when food shortages developed, the price for bread and potatoes remained low, and people continued with their wasteful ways.
Waste and Corruption
Giving in kind gives a lot of opportunity for corruption. Let us again take rice as an example. Rice is first bought from merchants, it is then stored, transported, stored in regional/local centers and distributed to recipients. The recipients need to be identified, ration or ID cards need to be issued. People will have to distribute it, and keep records of each step in the process.
Corruption could range from: getting payments from recipients to get in the list, distributing low-quality rice, paying merchants too much for rice, rice diverted to be sold privately, etc..
There is a also a lot of possibility for waste, especially if the product is perishable, which rice is at some point. Problems in transport and planning would cause the rice to rot in central warehouses, while distribution centers may lack rice. There was a massive over-importation of rice due to corruption, and a lot of rice was spoiled.
Distribution in cash is preferable to goods in normal situations. However, calamities are a case apart. Calamities are often accompanied by the physical disruption of the market infrastructure. It would make more sense to distribute goods in kind.
At the same time, people wanting to donate relief should preferably do so in the form of cash. Because there is the possible problem that the things donated e.g. old clothes, are expensive to transport and may be inappropriate for the need. Donating cash to a help agency which in its turn could buy the necessary products would often be a better solution. The cash should be used to buy relief goods as close to the calamity as possible, to minimize transport costs, market distortion and waste.