I recently have commented on the trouble with welfare transfers to lower income earners as a remedy for poverty. Another problem I did not touch on has recently been making headlines. An important reason that government income transfer programs do not solve the poverty problem is that they are hotbeds for corruption.
In an excellent essay on the American welfare state, Garry Galles explains why it is impossible to stop people from using welfare payments to fund purchases "inconsistent with the intent" of welfare if they desire to do so. In California, for instance, millions of dollars in welfare payments on debit cards have been withdrawn and used at casinos and strip clubs. Of course not every recipient of welfare spends their money that way, but the bottom line is that whoever receives more income can spend more on whatever they really, really want. Galles points out that designating that welfare payments must be spent on food does not stop the problem either, because the welfare payments merely frees up cash they can now spend on other things.
This problem of corruption is not merely an American phenomenon. India spends $28.6 billion, 2% of its GDP, on poverty reduction programs, but a World Bank report documents that, "despite recent progress, India is not getting the “bang for the rupee” that its significant expenditure would seem to warrant. . ." For example, only 40% of grain earmarked for the poor reaches its intended target. A main reason for this dismal performance is what the report calls "considerable leakage of subsidies to the non-poor." This is understood to mean that India's program is "beset by corruption."