Recently, there has been a lot of discussion and a heated debate (see here, herehere) on the relative effectiveness of providing cash transfers versus offering more traditional, in-kind or conditional transfers – such as grants of livestock—as a way to address rural poverty.
The idea behind providing cash is powerful and appealing in its simplicity: with cash transfers, one can reach out to more poor households, or provide more substantial financial boost to some families by cutting down administrative project costs. There is an ingrained belief that most low-income households will spend this money wisely, depending on their individual needs. As Chris Blattman notes on his blog:
But I’ve seen many, many, many projects that spend $1500 training and all the “other stuff” in order to give people $300 or a cow. Is it fair to ask, what if we’d just given them $1800? Or what if we’d given six people cows? Seriously, your one guy does six times better than that?
Many charities, non-profit organizations, and advocates of traditional approach to economic development are opposed to the idea of simply giving cash to the poor and focus instead on implementing various programs that invest in income-earning assets, such as livestock. Some examples include Heifer International, BRAC, and Bandhan. One of CARE USA’s signature programs works to improve the dairy value chain in rural Bangladesh through various channels. However, very often, rigorous evaluation of their programs is lacking and, since different programs are bundled with training and other services, isolating the effect of a livestock transfer can be difficult.
So, one may also wonder: what is the economic return to livestock? Understanding profitability of this common asset may be an important step in answering the question: cash or cows?
|Photocredit: BCG India|
In a recent study, Anagol, Etang, and Karlan (2013) examine the economic returns to owning cows and buffalos in rural India (two districts in Uttar Pradesh) and reach a surprising conclusion:
Our main finding is that, on average, households earn negative returns on their investments in cows and buffaloes if labor is valued at market wages: we estimate average returns of negative 64% and negative 39% for cows and buffaloes respectively. If we value the household’s own labor at zero, estimated average returns increase, to negative 6% for cows and positive 13% for buffaloes.
The study painstakingly documents how these measures were derived and reports several robustness checks. The result is puzzling. Why would the households hold on to the asset that is not economically profitable?
We are well-aware that developing countries often lack financial intermediaries that advanced nations have and take for granted. Livestock is a grazing savings account that provides an illiquid form of assets, the authors argue. What’s more important, is that this form of savings is indivisible – and makes it more difficult for informal borrowing to occur since a neighbor or a relative cannot ask for 5 or 10% of the value of the cow. In addition, sales of milk provide a crucial mechanism of income diversification that allows agricultural households to smooth consumption in-between growing seasons when local labor market opportunities are scarce, and there is large variation in the marginal returns. Livestock is also an aspirational asset and has a lot of social and cultural value.
Visiting two villages in Andhra Pradesh last month, we met with wage laborers who are credit and savings-constrained and cannot afford livestock. This in turn prevents future savings, investments and productivity increases.
So the issue is not as simple as asking whether we need to give cash or cows. What we currently lack is more rigorous evidence for both types of approaches, as well as efforts to find possible complementarities between the two approaches. We need better-targeted programs that help address market failures in the dairy sector, provide easier access to banking services, and offer education and training, especially to women who are often excluded from formal labor markets.
 There is a substantial variation in the calculated rates of return across different quintiles. In addition, only 12% of the sample actually sell milk, suggesting that households may have a high valuation of milk produced at home. As authors note, “if the value of self-produced milk was 20% higher than the market price, the average accounting return to cows would rise from -6% to +10% (p. 12).