Cash Transfers Can Improve Lives — Even for Those Who Don’t Receive Them
CEGA Senior Research Associate Layna Lowe describes the General Equilibrium project, a large-scale unconditional cash transfer program in Kenya, led by CEGA Faculty Co-Director Edward Miguel. Read the full paper here.
Mugabo is a construction worker in Kibirizi, Rwanda. Recently, people from nearby villages have been hiring him and his crew for home improvement projects like installing roofs that are more durable. These people were part of a cash transfer program by GiveDirectly, a nonprofit that delivers cash to poor households via mobile payment systems. Mugabo did not receive a cash transfer himself, but his business revenue has soared since those around him began spending their cash. Mugabo’s fortune is a spillover effect, an outcome from an intervention without directly participating in it.
Measuring spillover effects helps identify the total impact of an intervention, including the impact on those who receive it and those nearby who do not. Positive spillover effects indicate that an intervention improved the lives of others like Mugabo. Negative spillover effects indicate that others were adversely affected and the intervention might do more harm than good. Understanding the broader welfare consequences of an intervention–from cash transfers to health programs and education reforms to new technologies–can support thoughtful policy decisions.
Why cash transfers: introducing the General Equilibrium Effects of Cash Transfers study
Spillover effects are especially relevant for an intervention like unconditional cash transfers, where large amounts of money from the outside suddenly enter an economy. Assuming recipients spend their cash, the money moves from wallet to wallet, household to household, and business to business. Soon enough, initial cash infusions begin to create ripple effects throughout the local economy.
One study that measures the spillover effects of GiveDirectly’s cash transfer program is the General Equilibrium Effects of Cash Transfers (GE), led by CEGA Faculty Co-Director Edward Miguel, affiliated professor Paul Niehaus, and CEGA postdoc Michael Walker.
In 2014, GiveDirectly delivered one-time unconditional cash transfers of about $1,000 to over 10,500 households in rural western Kenya. One transfer was equivalent to 75% of a typical household’s annual expenditure, a major income shock. In total, all the transfers amounted to 15% of the area’s GDP. Given such a massive influx of cash into the region, the GE team found an opportunity to study what a large economic stimulus would do to a local economy.
The design
We designated households in 653 contiguous villages in Siaya County, western Kenya as eligible or ineligible for a cash transfer. Eligibility was based on having a grass-thatched roof, as opposed to a roof of a more durable material, which was a simple way of identifying the poorest households in the village.
We also randomly divided villages into two groups. In one group, all eligible households in a village received a cash transfer but ineligible households did not. In the second group, no households received a cash transfer.
Above the village-level, groups of villages were randomly divided into high saturation or low saturation clusters. In high saturation clusters, two-thirds of villages received cash; in low saturation clusters, only one-third of villages received cash. Effectively, more cash was delivered into high saturation clusters.
The data collection
Before and after the cash transfers were delivered, we conducted surveys of households, enterprises, and market prices. Surveys were conducted with eligible and ineligible households, in villages where cash was delivered and was not delivered, across high and low saturation clusters. This extensive data collection allowed CEGA researchers to trace how the money moved through the economy and to understand how cash transfers generate spillover effects.
The results
Cash transfers had large, positive impacts on households that received transfers — their annual spending rose by 13%, spent mainly on food and durable assets. Even households who did not receive cash transfers experienced the same, and businesses located where more cash was infused saw large increases in revenue.
If not with a cash transfer, how did non-recipient households fund their additional spending?
Recipient households received and spent most of the cash transfers in nearby businesses. Businesses turned their higher revenues into higher wages. These higher wages increased the income of non-recipient households, thus creating a positive spillover effect on their consumption.
In addition to the increased spending, we found increased housing value, in line with a previous study (Haushofer and Shapiro 2016) that shows recipient households often spend cash transfers on housing materials. This explains why Mugabo and his crew got more home improvement work once households in nearby areas received cash transfers.
To ensure that the intervention was not causing more harm than good, we looked at several other outcomes. Prices of goods in local markets throughout the rollout of the intervention experienced a modest 0.1% average price inflation. Recipient households were not spending more on temptation goods, such as alcohol, tobacco, and gambling, nor were they decreasing their labor supply.
GE’s ability to measure spillover effects is a major contribution to the cash transfer literature, which may have previously understated the true overall impact of large-scale cash transfer programs. Another merit of this study is its estimate of an important macroeconomic quantity, the transfer multiplier — for every $1 injected into the economy, how much in GDP does the economy grow? We found that as each dollar moved from person to person, it increased economic activity by a factor of 2.4.
GE is currently collecting another round of household, enterprise, and market price surveys to understand the long-term effects of unconditional cash transfer programs, and data collection will wrap up in mid-2022.
