Who’s the winner, credit or grant?

Isn’t this the chicken-or-egg question of welfare economics?

You’re right. For many decades now, economists, sociologists and policymakers have been toying with the question: what works better when providing monetary assistance to the poor and the needy — loans that they can use to set up myriad micro ventures or straight, informal cash transfer of grants that do not necessarily carry the riders that go with formal credit.

And the jury is still out on this?

Well, there are some new, insightful inference coming up, thanks to a comprehensive study undertaken by researchers from the International Food Policy Research Institute (Ifpri). The study — ‘Grants vs. credits for improving the livelihoods of ultra-poor: Evidence from Ethiopia’ — by Ifpri scholars Getaw Tadesse and Tadiwos Zewdie shows that livelihood grants seem to be more productive than livelihood credits.

Interesting. The general consensus has been that credits worked better.

Yes; hence the study becomes relevant for policymakers across the world, especially for those in the developing countries, where, as the Ifpri study notes, extending help to those who live below $1.9 a day has been a gargantuan task considering demographical, political and social reasons. The Indian experience has also been along similar lines.

Tell me about the Ethiopian experience.

During 2015-16, Ethiopia’s government ran a livelihood investment grant for the ultra-poor who are not creditworthy but capable of doing activities that could get them some income. This pilot project had funds and other assistance from a few international development agencies as well. The Ifpri team looked at the effectiveness and impact of the grant transfer scheme in comparison with conventional approaches (credit-based livelihood grants). And the results surprised many, especially those who believe the ultra-poor are not worthy of creating gainful income from grants.

What’s the most important difference they’ve mapped?

Those who had received the ‘grants’ were poorer than the credit clients. Still, they managed to put up a better performance in terms of investment behaviour and many other parameters. To be frank, there have been numerous studies that evaluated welfare impacts of asset transfers to the ultra-poor. The notable ones have been the one from Bangladesh, where aid agency BRAC has done similar projects among very poor households. Their cash transfer had shown promising results. So was the transfer of livestock assets in rural Rwanda, which improved milk production and household income of the beneficiaries (J Argent, B Augsburg, I Rasul, Journal of Economic Behavior & Organization ).

Interesting.

There’s more. A recent study from six African countries, published in the Science journal, showed economic status of the very poor that received grants significantly improved the economic status of the beneficiaries. Similarly, the current Ifpri study suggests that livelihood grant not only addressed the needs of the ultra-poor but also improved the productivity of the livelihood development fund by offering better returns and faster capital growth.

Impressive. I hope this could be an eye opener for policymakers in India as well.

But to be fair, there are some riders. Investment grants helped the ultra-poor generate income and accumulate assets faster than livelihood credits only when there was efficient targeting and training. It required intensive coaching and monitoring, which led to better allocation of funds. The Ifpri study expects the grant pilot programme to see a further scale-up. Though the results cannot be generalised, considering that the study focussed only on the Tigray and Amhara regions of Ethiopia, the results could be pointers for policymakers in developing countries.

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