Cash Transfers and Economic Resilience

With pandemic lockdowns crippling labor demand and supply around the world, government interest in social protection and labor market programs in general, and cash transfers in particular, has increased dramatically. With new populations of the self-employed and informal wage workers as targets of government cash transfers, what can we learn from recent and older  evidence on these tools for new problems? How can we design cash transfers toward advancing the Administration priority of economic resilience and recovery? As a first crack at these questions, here is a non-exhaustive survey of evidence focusing on unconditional cash transfers designed to address pandemic-related income poverty.

Targeting favors the prepared

The effectiveness of cash transfers at alleviating income poverty is not a given, and depends on existing institutions and processes, openness to new beneficiaries, as well as the scale of response. Cash transfers are also not as effective at improving the lot of the suddenly poor (“nouveaux pauvres”, if you will) as for the structurally or chronically poor.

In Latin American and the Carribean, the key difficulty was reaching informal workers who would not exist in social security databases. In Brazil, the Emergency Aid Transfer exclusively targeted low-income informal workers and the unemployed. Building on the existing unified registry for government social programs and allowing new registrants to enroll via new state bank accounts, the program successfully alleviated poverty. Since black and indigenous Brazilians were more likely to be poor before the pandemic than other groups, effective targeting of the transfers also reduced racial inequality in poverty.

In Colombia, the government was able to consolidate existing social security databases into an expanded master database, and reach more households than with prior programs. Nonetheless, phase one only covered those with existing bank accounts. An impact evaluation of the existing unconditional cash transfer targeting low-income households and senior citizens found that the transfers had modest benefits in financial resilience among recipients who had lost income during the pandemic, making them 15 percent less likely to sell assets.

In contrast, the Togo government lacked a comprehensive social registry for targeting the poorest individuals. The government instead relied on a voter database to target informal workers, with simple enrollment via mobile phone. In partnership with Give Directly, the government targeted rural regions that had the severest lockdowns. During the second phase, the team further targeted the poorest individuals through a combination of mobile phone usage data, phone surveys, and satellite imagery. Researchers found that this combination was more effective at reaching the poorest, relative to alternatives.

Another important dimension of program beneficiaries is the recency of their unemployed status. This ex ante study of 10 Latin American countries found that while cash transfers can be effective in replacing livelihoods for the “structurally” poor in the bottom income quintile, they are less effective for those who suddenly became poor with lockdowns, in the second and third income quintiles from the bottom. This is because suddenly poor workers are less likely to trust ad hoc programs, imperfect targeting, and limited scale of transfers. How, then, can future programs better facilitate economic recovery of informal workers? 

Putting Money to Work

Previous research has found that cash transfers can have a wide range of positive welfare effects, including promoting increased resilience and mitigating the impacts of economic shocks. Over the course of the pandemic, job losses have skyrocketed, with the ILO estimating as many as 25 million jobs lost worldwide. These losses have been especially concentrated among vulnerable groups including women, youth, and informal workers. In response, some governments launched cash transfer programs to alleviate sudden income poverty, and perhaps improve these workers’ resilience in the long run. 

Early results suggest that these interventions can be effective. In Kenya, a cash transfer program for female micro-entrepreneurs was effective in increasing their profits, inventory spending, and food expenditures. The transfers also spurred a reopening of previously closed businesses, suggesting that cash transfers can be particularly effective when credit constraints were binding. In Tunisia, a study of an existing cash transfer program for female entrepreneurs started prior to the pandemic found that the transfers helped entrepreneurs cope with livelihood shocks without having to skip meals or pull their children out of school.

Given the recency of the pandemic, the impacts of these cash transfer programs on long-term livelihood and resilience outcomes are ambiguous. Here, studies on cash transfer programs administered during other shocks could be instructive. One such study examined the long-term impacts of cash transfers to micro-entrepreneurs in Sri Lanka following the 2005 tsunami. The authors found a 10-percentage-point-higher enterprise survival rate among male cash transfer recipients five years after receipt of the transfer, but no difference in enterprise survival among female recipients. One plausible explanation is that female micro-entrepreneurs were operating in less profitable sectors, with fewer opportunities for return on investment. Indeed, these women were more likely to spend the transfers on household needs.  

Building for the next normal

There are ongoing studies measuring the impacts of cash transfers during the pandemic. While early evidence is mixed, cash transfers do seem to improve workers’ resilience to shocks, and -- more importantly -- may improve long-term resilience for some.

How can we best facilitate a return to individuals being self-financing, the first principle of our new Economic Growth Policy? Besides the obvious point that bigger social protection budgets are better, Governments and donors can also consider:

• Using unconventional sources of targeting data for the poorest;
• Restructuring transfer programs for the newly poor, who often cannot telework during multiple waves of lockdowns;
• Creating user-friendly, low-tech interfaces for enrollment (to reach the suddenly poor);
• Applying sustainable interventions to promote adaptation, such as cash plus reskilling; and
• Addressing other barriers to gainful employment, such as occupational norms and care burdens for disadvantaged groups such as women.

As countries diverge in the stringency and duration of lockdowns as well as the private sector’s response, keeping an eye on long-term economic resilience is as important as ever. USAID will continue to keep you posted on the latest rigorous evidence on impacts of cash transfers in our host countries, as related studies come out.