Over the past decade there has been a surge of interest in a novel approach to helping the world's poor: Instead of giving them goods like food or services like job training, just hand out cash — with no strings attached. Now a major new study suggests that people who get the aid aren't the only ones who benefit.
Edward Miguel, an economist at the University of California, Berkeley, and a co-author of the study, says that until now, research on cash aid has almost exclusively focused on the impact on those receiving the aid. And a wealth of research suggests that when families are given the power to decide how to spend it, they manage the money in ways that improve their overall well-being: Kids get more schooling; the family's nutrition and health improves.
But Miguel says that "as nonprofits and governments are ramping up cash aid, it becomes more and more important to understand the broader economy-wide consequences."
In particular, there has been rising concern about the potential impact on the wider community — the people who are not getting the aid. A lot of them may be barely out of poverty themselves.
"There's a fear that you just have more dollars chasing around the same number of goods, and you could have price inflation," says Miguel. "And that could hurt people who didn't get the cash infusion."
So Miguel and his collaborators teamed up to conduct an experiment with one of the biggest advocates of cash aid. It's a charity called GiveDirectly that, since 2009, has given out more than $140 million to impoverished families in various African countries.
The researchers identified about 65,000 households across an impoverished, rural area of Kenya and then randomly assigned them to various groups: those who got no help from GiveDirectly and a "treatment group" of about 10,500 families who got a one-time cash grant of about $1,000.
"That's a really big income transfer," notes Miguel. "About three-quarters of the income of the [recipient] households for a year on average." It also represented a flood of cash into the wider communities where they lived. "The cash transfers were something like 17% of total local income — local GDP," says Miguel.
Eighteen months on, the researchers found that, as expected, the families who got the money used it to buy lots more food and other essentials.
But that was just the beginning.
"That money goes to local businesses," says Miguel. "They sell more. They generate more revenue. And then eventually that gets passed on into labor earnings for their workers."
The net effect: Every dollar in cash aid increased total economic activity in the area by $2.60.
But were those income gains simply washed out by a corresponding rise in inflation?
"We actually find there's a little bit of price inflation, but it's really small," says Miguel. "It's much less than 1%."
