Unconditional Cash Transfers: Lessons from Ecuador

Poor people, especially in developing countries, have inadequate financial resources and face liquidity issues which constrain expenditures on their children’s health and education. Cash transfers ease these constraints by providing households with financial support. To ensure that cash transfers are spent on essential needs, transfers can be attached to specific conditions such as mandatory vaccinations or school attendance requirements for children. If cash transfers are tied to such conditions, they are defined as conditional cash transfers. Unconditional cash transfers, on the other hand, place no constraints on recipients spending.

Araujo, Bosch and Schady (2016) present an overview of the largest cash transfer program in Latin America, known as Bono de Desarrollo Humano (BDH), which was introduced in Ecuador in 2003. They evaluated BDH’s impact on children’s education outcomes in households that participated in the unconditional cash transfer program.

The BDH program covered 40 percent of households in Ecuador, and the transfer amount was 20 percent of the average income of participating households. More specifically, each household received $15 in 2003, which increased to $35 and $50 in 2009 and 2014, respectively. A poverty score determined eligibility which was derived from a household census that included household composition, home value, access to services, and income, among other factors. No conditions were attached to the transfers; however, households were encouraged to spend transfer income on their children.

The authors evaluated whether receiving cash transfers as part of BDH changed education outcomes of children whose families participated in the program, focusing on two specific questions. First, is it better to target “early childhood families”—households with children under six years old—versus other families? Or, given that education in Ecuador is free and mandatory until age 14, is it preferable to target families with children over 11 years old so that resources are provided when children decide whether or not to continue their education?

To answer the first question, eligible households were first randomly allocated into two groups. The first group received transfers in 2004 while the second group received transfers three years later. The households were allocated randomly into the early or late group to prevent selection bias. Starting in 2004, participating families were surveyed annually for ten years to obtain information on children’s educational progress. The authors did not find evidence that targeting “early childhood families” improved education outcomes relative to families with older children.

To answer the second question, the authors take advantage of the fact that eligibility of households was determined by a poverty score not designed specifically for the BDH program. People in and around the chosen poverty level would be very similar, although only those below the threshold received transfers as part of BDH. By comparing families near the threshold who received the BDH program benefits with those families who did not, the authors found that children whose parents got transfers were more likely to complete secondary school by a modest amount of two percent.  The effects for female children were larger than for male children. In summary, the impact of cash transfers on children’s education in Ecuador, as part of the BDH program, was minimal.

Although the above analysis was based on a specific experiment in Ecuador, the results can be used to draw policy implications for poverty remediation programs elsewhere. The modest effect of cash transfers on children’s education in this case shows that cash transfers that are not subject to specific conditions may not be able to have the same effect as conditional cash transfers on human capital development. This is because households receiving the cash are not incentivized to invest the additional income in their children’s education compared to other immediate needs. Conditional cash transfers, therefore, may be a better program for ensuring human capital development of the next generation.

Article source: Araujo, Caridad, Mariano Bosch, and Norbert Schady. “Can Cash Transfers Help Households Escape an Inter-Generational Poverty Trap?” National Bureau of Economic Research No. w22670. (2016).

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