Worldwide, cash transfer programs are used to fight poverty. Developing countries typically spend between 1% and 2% of GDP on cash transfers (“Cash Transfers: a Literature Review”, DFID Policy Division, 2011). International donors also invest substantially into such programs.

The rationale for cash transfers goes beyond relieving short-run poverty. In their 2011 book Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, eminent development economists Abhijit Banerjee and Esther Duflo explain the approach as follows: People are poor because of all kinds of detrimental factors, such as family, geography, and just bad luck.

Yet they are unable to get out of poverty because they are trapped. Living barely above subsistence level, it is very difficult for them to become more productive because most of their scarce resources are spent on food consumption. Unable to invest in skills and education and, therefore lacking in professional qualifications, the poor remain poor. And, to add insult to injury, so do their children.

If one subscribes to this reasoning, then the availability of financial resources is crucial for getting people out of this vicious cycle. Yet, this policy position is not uncontroversial. The opposing view is that cash transfers reduce people’s incentives to solve their own problems, being largely spent on conspicuous consumption (ceremonial activities, movies, television and DVD players) instead of education, health, and other long-term investments.

Thus, in the end, the effectiveness of such transfer programs depends on what recipients do with the money. Do they spend it on useless blink or on education and investment in own skills?

EVIDENCE FROM AROUND THE WORLD – AND FROM GEORGIA

In the academic literature, one can find opposing views on whether an “unconditional cash transfer” leads to improvements in education outcomes (measured, for example, by scholastic achievements, skills acquired, and academic performance).

Evidence from Ecuador and Nicaragua (Paxson and Schady: "Does money matter? The effects of cash transfers on child health and development in rural Ecuador," World Bank Policy Research Working Paper Series 4226, 2007) shows that transfer programs have positive effects on early childhood cognitive development. While the analysis relates to preschool child development, thus reflecting improved health care and nutrition for young children, it suggests that parents are willing to spend the additional cash on the future of their children.

Other studies are not as encouraging. De Brauw and Hoddinott (“Must conditional cash transfer programs be conditioned to be effective? The impact of conditioning transfers on school enrollment in Mexico”, Journal of Development Economics, 96(2), 2011) look at conditional cash transfers in Mexico and show that for households which incorrectly understood transfers as unconditional, school enrollment was significantly lower than for the others. In the same vein, Bourguignon, Ferreira, and Leite (“Conditional cash transfers, schooling, and child labor: micro-simulating Brazil's Bolsa Escola program”, The World Bank Economic Review, 17(2), 2013) argue that unconditional transfers have no significant impact on school enrollment.

To contribute to the social policy debate in Georgia, we look at the impact of the Georgian State Social Assistance Program (SSAP) on university enrollment. The program was introduced in 2005 and runs to this day. It provides unconditional cash transfers to people living in extreme poverty. Program recipients are selected by virtue of being below a certain quantitative poverty threshold. We use this threshold to carry out a so-called regression discontinuity analysis, i.e. comparing applicants who are just above and just below the threshold. These two groups are very similar in their income and other socio-economic parameters and mainly differ in their eligibility for assistance.

Besides assessing the impact of cash transfers to poor families, our analysis contributes to another debate going on in development economics. Unlike the SSAP program, a government may consider providing conditional cash transfers which have to be invested in e.g. education and health, considered beneficial for the recipients. While conditional cash transfers cannot be easily spent on conspicuous consumption, they are associated with higher bureaucratic and administrative costs (Baird, McIntosh, Özler: “Cash or condition? Evidence from a cash transfer experiment”, Quarterly Journal of Economics, 126(4), 2011). Moreover, whether or not conditionality improves outcomes relative to unconditioned transfers is yet to be conclusively established.

In our analysis, we use the Social Service Agency (SSA) dataset on the SSAP beneficiary status of Georgia’s households between 2005 and 2010. In total we have over 1.8 million observations taken from about 500,000 families (over 40% of the Georgian population!). We match these data with data on entry examinations and scholarship allocations from 2007 to 2013 from the National Examination Center (NAEC).

As described above, our analytical approach draws on the assumption that people slightly above the poverty threshold (who are eligible for assistance) and those slightly below it are quite similar with respect to their socio-economic characteristics. They only differ with regard to whether they receive assistance or not. Hence we can use the group below the threshold as a “treatment group” (the group which received transfer payments and was thus affected by the policy measure)  and the group above the threshold as a “control group” (a group which did not receive cash transfers). In this way, we can isolate the effect of assistance from other factors that may also play a role in educational decisions.

Importantly, the average values of important socio-economic parameters around the poverty threshold (a score of 57000, which presently determines eligibility for transfer payments) such as age, number of siblings, gender ratio, and family size, do not change around this threshold. Thus, the control group and the treatment group are indeed very similar in their socio-economic statuses.

Overall, we find that receiving cash transfers increases the chance of university enrollment by 0.8 percentage points (in the sample, university enrolment rate is 12.7%). However, we find that the effect is stronger for males, possibly reflecting gender-specific preferences – a bias towards males – by parents in the South Caucasian countries. For male children, the effect is 1.7 percentage points. The treatment effect is also stronger – 1.1 percentage points – for cities dwellers (as compared to inhabitants of rural areas). Accordingly, it is strongest (2.4 percentage points) for male children in urban families.

WHAT TO DO?

Our study provides support for the effectiveness of the SSAP program in reducing poverty, as we find a statistically significant and positive impact of unconditional cash transfers on university enrollment rates. While a 0.8 percentage point increase does not sound like a lot, it is quite significant considering that only 12.7% of children from poor households make it to universities. In essence, we find that SSAP increases university enrollment for the poor by anywhere between 5 (for rural girls) and 20% (for urban boys).

If unconditional transfers have such a strong impact on university enrollment of the poor, the government may consider other, complementary approaches to nudge the poor to invest in skills and education. In particular, one might also go for conditional transfer programs, such as need-based university scholarships that would encourage students from poor family backgrounds to continue their education. Such measures would reduce the pressure to leave the educational system and start working early with low education and correspondingly low productivity and income levels.

A recent policy experiment conducted in the village of Dzevri (see “Bringing Light to Georgia’s Darkest Corners”, by Eric Livny) demonstrates that the promise of university scholarships (by a private donor) has tremendous impact on children’s motivation to attend classes, study hard, graduate and enroll in universities and professional colleges. In the absence of scholarships, the norm for Dzevri children (girls in particular) was to drop out, marry early, and spend their lives in a small village. All of this changed with the arrival of a private donor, bringing school completion and college enrollment rates from 0 to 100% in just 3 years.