The price effects of cash transfer programmes: Insights from research

Cash transfer programmes are widely regarded as effective tools for poverty reduction. They have been linked to long-term benefits, including improved school attendance, better health outcomes, and overall economic growth. However, a crucial question remains: do these transfers also raise local prices, thereby reducing their net benefits, especially for non-recipients?

In this episode of VoxDevTalks, host Tim Phillips speaks with Eeshani Kandpal, from the Center for Global Development, who delves into the broader economic implications of cash transfer programmes, particularly their effect on prices.

Why are policymakers interested in price effects?

Cash transfer programmes, both conditional and unconditional, have been extensively studied. Research has demonstrated their ability to:

• Reduce poverty, even in the long run, as seen in Mexico’s Oportunidades (formerly PROGRESA) programme.
• Improve health outcomes for both recipients and their families, as evidenced by studies on South Africa’s Older Persons Grant.
• Generate significant economic multipliers, with research from Kenya’s GiveDirectly programme showing that for every US$1 that is transferred into the local economy, almost $2 is generated in economy-wide additional economic activity.

Despite these well-documented benefits, an important question arises: do these transfers lead to inflationary pressures in local economies?

"If there is money being pumped into a local economy and that is leading to all this additional economic activity, there is greater demand for certain goods and services…. We want to ask if there are [inflationary] impacts... because that gives us a sense of the net effect of the cash transfer."

Understanding price effects in these contexts is crucial as rising costs could erode the gains of cash transfers, particularly for non-recipients who do not receive the additional income but must pay higher prices for essential goods.

For policymakers, understanding the broader economic implications of cash transfers is key to designing effective programmes. While general equilibrium effects are often viewed as unintended consequences, recent research highlights their significance in assessing the overall success of a cash transfer scheme.

"Policymakers want to understand what the total impact of their intervention is… In certain settings, for example, in the Middle East, where food price increases have been linked to civil unrest, there are many reasons to want to understand whether there are price effects or not."

The role of context: When and where do prices rise?

Research suggests that price effects are highly context-dependent. Several factors determine whether cash transfers will cause prices to rise:

• Remoteness of markets: More isolated communities are more vulnerable to price increases because supply responses are slower.
• Type of goods: Perishable goods, such as fresh eggs, meat, and dairy, are more likely to experience price increases than non-perishable goods, which are easier to transport.
• Programme design: The structure of the cash transfer—whether it is temporary or permanent—affects how recipients and markets respond.

Kandpal’s research in the Philippines documents significant price increases for perishable food items in remote areas, which led to nutritional deficiencies among non-recipients.

The duration of cash transfers also influences their economic effects:

• Short-term, lump-sum transfers (e.g. GiveDirectly in Kenya) may lead to immediate investments that boost local economic activity.
• Ongoing, long-term cash transfers (e.g. conditional cash transfers in Latin America and the Philippines) tend to support consumption smoothing, leading to different market dynamics.

Research suggests that in lower-income countries, ongoing transfers are more likely to influence local markets due to sustained demand increases.

Scaling up cash transfers: The risks of rapid expansion

One of the challenges with cash transfer programmes is scaling them up efficiently without causing unintended economic disruptions. Research has shown that saturation—the proportion of households receiving the transfer within a community—affects price dynamics.

Kandpal’s study in the Philippines found that in villages where 65% to 95% of households received transfers, non-recipient households faced significant hardship, including increased child stunting due to reduced access to protein-rich foods. This highlights the potential drawbacks of high programme saturation in poor, remote areas.

"For the 5 to 35% of the village that isn’t receiving the cash transfer… they’re still quite vulnerable… There isn’t a Goldilocks pace of scale-up, but if you are scaling up, and if you are going to be treating much of the village in remote and poor areas, consider geographic targeting, at least in the short-run. Consider covering the entire village in the remotest parts of the country, rather than just a few households."

Lessons for policymakers: Minimising unintended consequences

Kandpal offers several policy recommendations to mitigate negative price effects:

• Geographic targeting: Instead of means-testing individual households, targeting entire communities can prevent localised inflation from disproportionately affecting non-recipients.
• Supply chain improvements: Investing in transport infrastructure and market integration can help ensure that increased demand leads to higher supply, rather than just higher prices.
• In-kind transfers for nutrient-rich foods: In cases where rising prices might threaten food security, in-kind transfers (e.g. powdered milk, fortified cereals) can complement cash transfers.
• Gradual scale-up: Expanding programmes incrementally allows time for supply-side adjustments, reducing the risk of sudden price surges.

"If you do scale up too quickly, you don’t leave yourself the ability to work on those other complementary inputs as well. It’s not just about the cash, it’s about everything else that those markets need to be able to respond to the cash."

The path forward for cash transfers

While existing studies provide valuable insights, further research is needed to refine policy recommendations. Key areas of interest include:

• Differentiating price effects on perishable vs non-perishable goods.
• Understanding the long-term economic adjustments in cash transfer communities.
• Evaluating the impact of infrastructure investments on mitigating price increases.

"We need to be thinking about the price effects on perishables versus non-perishables… reporting impacts on the overall food basket is not sufficient."

Cash transfers remain a powerful tool for poverty reduction, but their broader economic effects must be carefully managed to maximise benefits and minimise unintended harms. By considering market dynamics, supply chain constraints, and programme design, policymakers can enhance the effectiveness of cash transfer schemes and ensure they achieve their intended outcomes without disadvantaging vulnerable non-recipients.

As Kandpal summarises: "The reward is a programme that works as designed, as intended."