Cash or Kind: The Economics of Redistribution

You wake before dawn in Nairobi on a Tuesday in July 2011. On your desk sit two briefing folders, both stamped urgent, both prepared by analysts who have not slept. Outside, the worst drought in sixty years is consuming the Horn of Africa. The UN has declared famine in two regions of southern Somalia. Across Kenya, Ethiopia, and Djibouti, 13.3 million people face acute food insecurity. Camps in Dadaab, already the world's largest refugee settlement, are receiving 1,300 new arrivals every day.

You are the minister responsible for welfare distribution in the affected Kenyan counties. The international donors have released emergency funds. You have enough to run a serious pilot program across forty villages in Turkana and Marsabit counties, and the results will shape national policy for years. Your team has designed two versions.

Envelope A contains the plan for food parcel distribution. Every eligible household receives a monthly package: 12.5 kilograms of maize, 1.5 kilograms of pulses, and 0.75 liters of vegetable oil. The caloric value has been calculated by nutritionists to meet 70 percent of a family's monthly requirements. Local NGOs have experience running this system. The supply chain is established. You know what people will receive.

Envelope B contains the plan for mobile cash transfers. Every eligible household receives 1,500 Kenyan shillings per month (roughly $18 at 2011 exchange rates) deposited directly to an M-Pesa account. Kenya's mobile money network already covers the region. Recipients can spend the money at any local market, on any good or service they choose. The transfer amount is calibrated to match the market value of the food parcel.

The humanitarian logic for Envelope A is powerful. Families are starving. You know they need food. You can guarantee food reaches them. Local markets in drought-affected areas are thin and unreliable; injecting cash could drive up prices and hurt non-recipient households. Food aid has a sixty-year institutional history behind it.

The humanitarian logic for Envelope B is equally compelling. Families know their own needs. Some need medicine for a sick child more than they need maize. Some need to repair a water storage container. Some need to pay a debt that is about to cost them their last goat. Cash respects their judgment. And M-Pesa, launched in Kenya in 2007, had already reached 70 percent of adult Kenyans by 2011.

Which envelope do you open?