May 30, 2007

Cheap Instead of Free: Lessons in Effective Aid

by Laura Starita

The logistics of aid are notoriously difficult: Getting medication, supplies or food to communities that need them is difficult, especially where roads are poor or where the need surpasses resources. Considering these hurdles, aid workers find it unfathomably frustrating when they see needed items they distribute go unused. One example is anti-malaria programs, which face challenges in encouraging the use of bed nets.

Neglecting to include educational programs to explain and reinforce how and when to use bed nets or related supplies is often at fault. But in some cases, lack of use correlates directly with the fact that many items such as bed nets and worm medications are provided free. Most programs distribute the items free of charge because most recipients are impoverished. Unfortunately, human nature often leads people to conclude that free products are worthless. 

Making people pay for products just may be an effective way to boost usage. This is obviously a contentious idea, yet last week the Chicago Graduate School of Business announced the results of a study in Zambia where the price of Clorin – a bleach solution used to kill pathogens in household drinking water – was changed at random for each buyer to determine any correlation between price and use. The study authors determined that by charging for the product, they filtered out people who had no intention of using it anyway, and stimulated more consistent use among those who did. It showed that charging for the product was an effective way of allocating limited resources to those most likely to put them to good use.

All this points to the fact that we in developed nations – including those with the most-informed in aid policies – often misunderstand the lives and spending patterns of impoverished people in developing nations. It’s logical to assume that the poor do not engage in discretionary spending and that every cent is dedicated toward food and shelter, but that’s simply not true. A recent study by the Massachusetts Institute of Technology’s Poverty Action Lab shows that poor people do spend some income on “luxuries” such as coffee, tea, sugar, tobacco, alcohol and entertainment.

All this is not to say that aid programs should never give things away – especially one-time interventions such as vaccines that require only short-term compliance. But for items that require continued use, it seems some payment-oriented models can improve aid effectiveness.

University of Chicago Graduate School of Business: The Economics of Pricing

Beyond Philanthropy Post on MIT Poverty Study: How the Poor Live