Local communities can become more economically self-sufficient, reducing their dependence on aid
ECONOMIC MULTIPLIER EFFECTS CAN DOUBLE THE MONEY’S IMPACT ▾
- The estimated multipliers of financial aid are typically in the range of 1.5 to 2.5, meaning that an injection of $1 million of cash generates an additional income of $1.5 million to $2.5 million for the local economy. Examples include the DECT cash transfer in Malawi (a multiplier effect of 2 to 2.5) and the Bolsa Familia cash transfer program in Brazil (1.88).
- Cash tends to produce bigger multiplier effects than vouchers as vouchers are restricted to particular goods or shops, usually larger retailers with the administrative systems to work with aid agencies. For instance, the multiplier effect of an IRC winter cash assistance programme in Lebanon (2.13) was more than 40% bigger than a WFP food voucher programme (1.51) that was running in the counry at the same time.
- Programmes that provide in-kind aid, such as food or medicines, can also produce multiplier effects if the goods are purchased in the country (local expenditure by aid agencies on staff and logistics also contribute). But the economic impact is often smaller and concentrated in the hands of a narrower group of people, notably the wholesalers who provide the goods. In rural Zimbabwe, where both cash and food were distributed, the multiplier effect of food aid (1.67) was 55% lower than that of cash (2.59).
THE EXTRA ECONOMIC ACTIVITY CAN HELP CREATE JOBS AND CONSUMPTION FOR THE ENTIRE COMMUNITY ▾
- The money is often spent locally, ensuring its multiplier effects benefit the areas that most need it. In Nepal, for instance, 74% of the money received from a WFP cash-for-work programme was spent in the district in which it was received, including 14% in recipients’ villages, and just 1.1% outside the district.
- An analysis of the PROGRESA conditional cash-transfer programme in Mexico found that households that did not receive any financial aid benefited from its wider economic multiplier effects, with their consumption of goods increasing by up to 12% and their probability of owning livestock rising by about 10%.
- In Zambia, two unconditional cash transfer programmes run by the Government have produced far-reaching effects, not just on their primary objective, food security and consumption, but also on a range of productive and economic outcomes. After three years, household spending was 59% larger than the value of the transfer received, implying a sizeable multiplier effect. These multipliers worked through increased non-farm business activity and agricultural production.
- Financial aid can have other positive economic impacts. It can increase liquidity and enable recipients to repay debts and re-enter credit markets. The Citizens Damage Compensation Programme in Pakistan, for example, helped the microfinance sector recover when it was struggling to manage the impact of the floods due to non-repayment of loans (OPM, 2013). It reached an estimated 8 million people.
- In addition, an analysis of eight studies that assessed the impact of financial aid on child labour found that the additional money led to a decrease in child labour.
THE ADDITIONAL MONEY IS OFTEN INVESTED IN PRODUCTIVE ASSETS ▾
- A study of GiveDirectly’s unconditional cash transfer scheme in Kenya found that households receiving the money increased their assets, including livestock, by 58%, helping them to boost their monthly income from livestock by 48% and from self-employment by 38%. Food consumption also rose by 20%.
- The PROGRESA conditional financial aid scheme in Mexico has had substantial and sustainable economic impacts. Research has revealed that about a quarter of the money is invested in land and livestock, especially by those without these assets, enabling a 24% increase in consumption, even after the programme had finished. The study concludes that “increased entrepreneurial activity brought on by cash transfers has increased the potential for self-sufficiency” and sustained long-term improvements in welfare.
- After two years of transfers, the Zambia Social Cash Transfer programme led to a 34% increase in land dedicated to crop production as well as an increase in the use of agricultural inputs, including seeds, fertilizers and hired labour. The growth in input use led to an approximate 50% increase in the value of overall production, which was primarily sold on the market.
- In 2008, the Ugandan government provided $382, about a year’s income, to thousands of poor 16- to 35-year-olds. The money came with few strings—recipients only had to explain how they would use the money to start a trade. Researchers at Columbia University found that four years after receiving the cash, recipients were two-thirds more likely to be practicing a trade than non-recipients, and their earnings were more than 40% higher.
- One study found that men’s annual income five years after receiving a one-off cash payment in Sri Lanka had increased by 64%–96% of the grant amount, and the probability of their businesses surviving grew by 10 percentage points.
THERE ARE NO LASTING INFLATIONARY IMPACTS ON THE ECONOMY ▾
- Most studies have found little or no inflationary effects from financial assistance programmes, and no lasting impacts. This is because the number of people receiving the money, and the amount of funds dispersed, are usually small relative to the wider economy. Markets are also normally very responsive to changes in demand.
- An IRC evaluation of the 2013-2014 winter cash assistance programme for Syrian refugees in Lebanon is an interesting example as it was able to compare price effects in the mountains, where the aid was provided, and those in lower, less cold areas where people did not receive the aid. The evaluation found no meaningful trend to higher prices.
- Even when large numbers of people and large amounts of money are involved, there has been no evidence of inflation. Examples include: unconditional cash grants to over 1.5 million people in Somalia during the 2011 famine; $400 million provided to Pakistan in 2010 in the wake of devastating floods; and $6 billion of financial assistance provided to victims of Hurricanes Katrina and Rita in the USA. In all cases, there was no inflation.
- In fact, cash has sometimes been found to lower prices by reducing traders’ credit risks and operating costs, as Oxfam discovered when it assessed its financial assistance programme in Sudan.
- Food aid can temporarily depress prices but with potentially long-term negative consequences. If food is imported in bulk, prices can fall but this can have a negative impact on local production and trade of the food, reducing the local supply, which can increase prices after the food aid finishes.
x2
Every dollar spent on financial aid can generate an additional two dollars of economic activity in local markets.
24%
About a quarter of Mexico’s PROGRESA conditional financial aid scheme was invested by recipients in land and livestock, improving their self-sufficiency.