Author Topic: Giving poor people cash is a good idea  (Read 3298 times)

Reyed Mia, Daffodil

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Giving poor people cash is a good idea
« on: October 14, 2018, 10:51:50 AM »
Giving poor people cash is a good idea. Giving entrepreneurs cash might be a great one

Give the people money
The idea of giving poor people people cash, no strings attached, has gotten increasingly popular over the past several decades. Rather than offering education, job training or food, mounting evidence shows that simply handing people money and letting them decide what to do with it, is usually a more impactful poverty alleviation option. Experiments find that people are far less wasteful with that money than you might think, using it almost entirely on food, health, and education.

This evidence has buoyed the movement for a taxpayer-funded universal basic income (UBI)—an amount of money that would ensure every person can purchase their basic needs. It has also led the US Agency for International Development to benchmark many of their programs against a cash transfer that costs the same amount as the intervention. While giving people cash isn’t a panacea to all the world’s problems, unlike many more complex programs, it is clearly effective at giving people a boost.

But for all the good giving people money has done, there is research that suggests there might be an even better way to give that cash away. Instead of giving money to just any anybody, governments and philanthropists can give it to entrepreneurs who have ideas for creating or expanding a business, but don’t have access to financing. When their businesses succeeded, they create jobs that allow people to provide for themselves, and governments to spend less on direct welfare. That was the big idea behind YouWin.

Nigeria Wins
All sort of companies emerged from YouWin. Almost 30% were manufacturing companies, 15% were agricultural and another 15% were in information technology. A number of education startups also won grants, including several private schools, as well as a company that made educational comic books.

The World Bank conducted an impact analysis on the first phase of the program,, in which 1,2000 entrepreneurs out of 24,000 applicants were awarded $50,000. Of the the 2,500 finalists in first phase, the 480 best business plans were selected based on the assessments  of independent judges from the audit and consulting company PricewaterHouseCoopers and Nigeria’s Enterprise Development Center. Among the other 1,920 top-rated plans, 720 were chosen at random for grants.

To see whether the grant made any difference, the World Bank would compared those 720 randomly-selected winners to the 1,200 finalists that received nothing.

YouWin seems to have been an astonishing success. Based on follow-up surveys three and six years after the program, a study by the World Bank economist David McKenzie, published in the American Economic Review (paywall), found that grant winners were far more likely to have businesses with over 10 employees, and that their businesses were both more innovative and profitable than businesses created by those who weren’t selected. In other words, that $50,000 grant made a huge difference—not just to the entrepreneurs, but to the people they hired.

McKenzie estimates that program generated a little over 7,000 new jobs, costing the government about $8,500 per job. This is an excellent return on investment compared to other job-creation programs, which typically cost between $11,000 to $80,000 per job, according to McKenzie’s research. These other programs include business training, wage subsidies, and smaller grants (pdf). The result is so impressive that the development economist Chris Blattman wondered on his blog if this was the “most effective development program in history.“

Unfortunately, politics doomed YouWin’s future. In 2015, then-president Goodluck Jonathan lost an election to Muhammadu Buhari. Jonathan was a major proponent of YouWin, and Buhari was not interested in extending a program he wouldn’t get credit for. Rather than conducting more business plan competitions, YouWin has been reorganized into an education program for entrepreneurs, not just those who won the competition. There is little evidence that such capacity building programs work.

Business-plan fever
Though YouWin may be essentially dead, the program’s results didn’t go unnoticed. It’s caught the interest of both development economists and leaders across Africa facing youth unemployment issues. And YouWin’s results are not an aberration. Although the Nigerian competition is the most powerful evidence in favor of the business-plan competition, another smaller study of a competition held in Ethiopia, Tanzania, and Zambia also had promising results.

Several countries across the continent have since held, or are going to hold, competitions for entrepreneurs. The biggest of these competitions is set to be held in 2019 in Kenya. Over $20 million will be disbursed to Kenyan entrepreneurs. The program will be primarily funded by the World Bank.

Kenya’s competition shares many similarities with YouWin. Quartz spoke with Joseph Kanyi, an entrepreneurship specialist in Kenya’s department of trade who helped get the program off the ground. He said the evidence of YouWin’s success was an essential factor in gaining support from the World Bank and Kenya’s government to implement the program. Through the Kenyan competition, researchers hope to learn even more about what makes these programs effective. For the Kenyan program, 250 applicants will have their business plan randomly selected with only the most minimal screening and no additional support. (In the Nigerian competition, by contrast, once applicants passed the first threshold, they  got help developing their business plans.)

If these unscreened Kenya applicants are successful, it would demonstrate that business-plan competitions might work with little administrative cost. The Kenyan competition will also be testing the impact of grants of $9,000 and $36,000. If smaller grants work nearly as well as big ones, that could also make the program less costly.

All of these tests are being done with the intention of making future business competitions, in Kenya and elsewhere, more efficient.

The economics
The most interesting aspect of these programs is that they suggest that there are a lot of good ideas out there that are not getting financed. Economic theory holds that people with good ideas should be able to get the money to make it happen. Banks and investors exist to make loans and get equity to promising businesses.

In the US and other rich countries, the financial system generally works well at funneling financing to people with sound business plans. But in many African countries, that isn’t the case. World Bank economist Francisco Camarate de Campos notes that African entrepreneurs often face serious capital constraints because the financial sector isn’t large and sophisticated enough to identify the best loan candidates.
Reyed Mia (BBA and MBA in Finance)
Assistant Director
Daffodil International University
Manager, Bangladesh Venture Capital Ltd.
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