What Happens to People and Businesses When Cash Transfers Scale?

A decade ago, giving money directly to those in poverty was seen as a radical idea. Today, that perception is shifting. Study after study has revealed that giving money directly is a viable and efficient method to help alleviate poverty. It’s less paternalistic as well—empowering the recipients of aid in ways that many other methods do not.  

That’s not to say it’s perfect. While those that received the money tended to be better off, previous research painted a complicated picture of the effects on nonrecipients. To scientifically evaluate these programs, there will by necessity be nonrecipients. In this case, rigorous evaluation requires randomized controlled trials, meaning that in order to know if giving cash directly to those in need works, some people—people that are deeply in poverty—receive the aid and others don’t. For instance, a previous study showed life satisfaction decreased for those who didn’t receive a cash transfer when their neighbors did.

There are also concerns about how a cash transfer program scaled-up might affect the economy at large. With a sudden injection of cash, would the local economy see inflation? Would there be other unexpected shocks that could lead to inequality?

A group of researchers recently attempted to answer some of these questions. In partnership with the nonprofits GiveDirectly and Innovation for Poverty Action, economists Dennis Egger, Johannes Haushofer, Edward Miguel, Paul Niehaus, and Michael Walker led a large-scale cash transfer RCT in rural Kenya. Over the course of several years, the team, which at its peak consisted of 75 people, examined the effect of a $1,000 cash transfer. The money was significant—about three-fourths of a household’s annual income. The cash was given over the course of about 8 months to over 10,500 of the poorest households. With an estimated 4.3 people per household, it made for an experimental group of around 45,000 people. In all, the RCT included over 65,000 households, or about 280,000 people. To put the scope of the research in perspective, it’s as if the research team conducted an RCT with the entire city of Orlando, Florida, giving $1000 to every sixth household.

It’s as if the research team conducted an RCT with the entire city of Orlando, Florida, giving $1000 to every sixth household.

The team just released the results of their work in a working paper. They found positive economic and psychological outcomes for the recipients of the money, perhaps not surprisingly. Importantly, the team did not find negative effects on the economy overall or for those who didn’t receive the money. In fact, everyone seemed better off.

To find out more, I spoke with coauthor Johannes Haushofer. We discussed why it was important to conduct a cash transfer RCT at this scale, if his team was worried about resentment or backlash from those who didn’t receive the money, and why cash transfers programs seem to have a higher bar of evidence than other forms of aid.

Evan Nesterak: This study built off some of your previous work. Why did you want to conduct such a large-scale randomized control trial on giving money directly? Why did you feel like it was important to scale up?

Johannes Haushofer: One of the most frequent points of concern around cash transfers has been that if they become broader policy, rather than just being implemented in small-scale experiments, they would lead to changes in the in the economy at large that are negative. Specifically, people have worried about cash transfers leading to inflation in the local economy, and that was the motivation for the new study. Conversely, there was the hope that cash transfers would have positive effects beyond just the households that are directly targeted. That was the flip side of that motivation, and that’s what turned out to be true.

How did you assess whether these cash transfers had the negative or positive effects you mentioned?

The main innovation of this study is that we randomized the delivery of cash transfers both at the village level and at the level of an administrative unit, above the village level, called a sublocation. Sublocations consist of 10 to 15 villages each, and we randomized, first, sublocations into either high or low saturation. High saturation means the two-thirds of the villages in the sublocation received transfers. Low saturation means that one-third of the villages in the sublocation received transfers. In the second stage, the villages were randomized according to this rule, and that generates spatial variation in the intensity of cash transfers that allows us to make statements about the effects of transfers both on recipients’ households and also on nonrecipient households, and on the local economy more broadly.

Researchers randomized 653 villages overall. Low-saturation areas saw one-third of villages receive cash transfers. High-saturation areas saw two-thirds of villages receive cash transfers. Source: Egger et. al (2019)
A map of the study area, including treatment and control villages, markets, and towns. Source: Egger et. al (2019)

Your team found that the cash transfer investment had a fiscal multiplier of 2.6. What’s a fiscal multiplier? What does a multiplier of 2.6 mean in this case?

A fiscal multiplayer refers to the amount of extra economic activity that’s generated in the local economy, when a single dollar is spent in that economy by the government or some outside organization. If the multiplier is larger than 1, that means that each dollar that’s injected into the economy generates more than $1 of value. In our case, it generated $2.60 of value, which is quite high.

Is that something you were expecting? Were you expecting something lower or higher?

The recent estimates in the United States are around 1.5 to 2 for the fiscal multiplier. In front of that background, we might have expected something larger than 1, certainly, but maybe not quite as large as 2.6. We were surprised by quite how large the multiplier was.

You analyzed the effect that the cash transfer had on households as well as businesses. Let’s start with the households. What effect did this extra cash have on households that received it? What did people spend money on? How did it change or improve their lives?

We see large increases in consumption, which is the cardinal measure of well-being in studies like this one; and on asset holdings and income from agriculture and other businesses. Money often gets spent on things like home improvement and livestock, and those are productive investments. Along with these economic changes, we see improvements in psychological well-being.

“Along with economic changes, we see improvements in psychological well-being. Those are evident both in the recipient households and in the nonrecipient households.”

What effect did the cash transfer have on businesses? How did the cash transfer to households end up affecting business in the community?

We see strong impacts on businesses. Revenue grows significantly, which then, of course, because businesses are owned by households, helps those households. We think one of the main mechanisms through which the impact on businesses happened is by taking up what we call slack in the operation of the business. We think there was significant underutilized capacity in the existing businesses that is now being used more efficiently.

For example, think of a shop owner who spends eight hours a day staffing their kiosk waiting for customers. When there is a local demand shock, induced by cash transfers, more of that time would be productive and translate into revenue. We think that’s one of the main mechanisms by which businesses grew.

The households that didn’t receive the cash ended up doing better too. Can you explain how spillover effects work and maybe expand on some of the benefits to the nonrecipient households?

Among nonrecipients, we also see large increases in consumption. That effect was roughly of the same magnitude as among recipients. Nonrecipients also have higher psychological well-being. That effect is somewhat weaker in the nonrecipient households, but it’s positive and we can reject that it’s negative. One possible reason for these spillovers is that nonrecipient households find employment with the recipient households, and we see a little bit of evidence of that. Nonrecipient households are also farmers who sell their products and shop owners who sell products. And because there is now more money to go around the business of these nonrecipients also improves.

Were you worried at all about giving that large amount of money to a subset of people? Were you worried about inequality or that a gift of that magnitude could cause resentment or jealousy?

That’s of course a risk. For that reason, we paid very close attention to conflict in the village and to impacts on psychological well-being. Probably because of the positive economic spillovers, we see no impacts on conflict, and we see positive impacts on psychological well-being even in the nonrecipients. So we find no evidence of negative effects.

Were the researchers worried about inequality or that a gift of that magnitude could cause resentment or jealousy?

These results seem promising. Recipients and nonrecipients are both better off. So, where do you go from here?

One of the big, unresolved questions with cash transfers is whether they are better or worse than other things that governments and organizations could be doing with the money instead. There’s been some work that compares cash to other interventions, but it’s only just beginning. I think we need a lot more work in that domain comparing cash with alternatives.

Could you say more about that? The cash transfer in this case totaled about $10 million. What would be an example of something that you could do with the $10 million that might be more effective or worth at least testing compared to giving it out in $1,000 increments?

There’s another very successful antipoverty program that’s received a lot of attention in recent years. It’s called the Ultra-Poor Graduation approach. It’s a combined program that consists of the transfer of an asset, such as a cow or a bike, which the households can choose, and some training in how to use the asset and run a business with it. In some cases they also get some cash. That program has been shown to be highly effective in alleviating poverty in many countries around the world. But we know relatively little about how it would compare to just giving the recipients cash.

I’ve been wondering recently about the policies and ideas that people are required to marshal evidence for. It seems that giving money directly to people in poverty is an idea where you need an inordinate amount of evidence compared to the idea of giving people things. When you think about it, though, being in poverty means not having enough money, so money might actually be the simplest thing. But it seems like it has required a higher threshold of evidence. What are your thoughts on why that might be the default?

It’s true that just giving poor families free cash is often met with higher levels of skepticism than giving other things like goods. I think the reason for that is ultimately prejudice against the capabilities of the poor. They’re frequently seen as not being able to handle money, and that being the reason for their poverty. What we’ve learned in the research is that they are actually excellent stewards of money, and they are poor for reasons that have nothing to do with their ability to manage it. Ultimately, the answer to that question is not, though, to demand a lower standard of evidence from cash transfers, but a higher standard of evidence from all the other interventions that are being done all the time without a lot of evidence behind them.

“The poor are frequently seen as not being able to handle money, and that being the reason for their poverty. What we’ve learned…is that they are actually excellent stewards of money, and they are poor for reasons that have nothing to do with their ability to manage it.”

I wonder if some of these type of cash transfers that have been conducted in the developing world might provide insights for what may happen in the U.S. if a similar program existed. There have certainly been stimulus packages, and, most recently, we have Andrew Yang’s platform centered on a universal basic income. Both different, of course, but in the same league. Is there anything we can take from this experiment and perhaps apply it to a place like the U.S.?

Yes, I think there are two things to say. The first is that strictly speaking, we don’t know how these results would translate, because, of course, the context is very different. My conclusion from that is that we should try it. Experiments like this can be done everywhere, and they should be done everywhere, including in developed countries. There are efforts now underway to test cash transfer programs in the U.S. and other developed countries. Second, the reason we should feel encouraged to do those experiments is that we certainly didn’t see evidence of negative effects in Kenya. Again, it’s difficult to know whether that would be similar in developed countries, but it at least gives us some hope that there would’t be large negative effects.

Is there anything you would like to add?

One thing that I like to mention is that these are studies that are conducted in collaboration with real people living in poverty in Kenya. One of the things that we take very seriously in our work is research ethics. We go through several levels of approval with every study that we conduct, and we treat the people who participate with the greatest possible degree of respect and gratitude for making this work possible, which, of course, ultimately is geared toward improving their lives.

This interview was edited for clarity and length.