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Why Cash Aid Distributions Have A Beneficial Ripple Effect


Instead of giving the poor food or other services like education, what about just giving them cash? This is an idea that's gotten a lot of traction in the development world over the last decade. Now a major new study suggests that those getting the money are not the only ones who benefit. NPR's Nurith Aizenman reports.

NURITH AIZENMAN, BYLINE: One of the biggest advocates of this kind of cash aid is a nonprofit charity called GiveDirectly. In 10 years, it's given out more than $140 million to impoverished families in low-income countries with no strings attached. They decide how to spend it. Michael Faye is president and co-founder of GiveDirectly?

MICHAEL FAYE: Do you feed your newborn? Do you send your older daughter to secondary school?

AIZENMAN: Or maybe you invest it in a business to make your family more money. Study after study has shown that if you give families the power to make these choices, their kids end up getting more schooling, nutrition and health improves. But as the use of cash aid has spread, there's been concern about the potential impact on the wider community, the people who are not getting the aid, a lot of whom may be barely out of poverty themselves. Ted Miguel is an economist at the University of California, Berkeley.

TED MIGUEL: There's a fear that you just have more dollars chasing around the same number of goods, and you could have price inflation, and that could hurt people who didn't get the cash infusion.

AIZENMAN: So Miguel and his collaborators teamed up with GiveDirectly to conduct a massive experiment. They identified 60,000 impoverished households across a rural area of Kenya then randomly assigned them to essentially two groups - one got no help from GiveDirectly; the other got a one-time cash grant of about $1,000.

MIGUEL: So it's a really big income transfer.

AIZENMAN: And not just for the individual families; in the communities where they lived, this represented a sudden flood of cash.

MIGUEL: The cash transfers were something like 17% of total local income, local GDP.

AIZENMAN: 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.

MIGUEL: That money goes to local businesses. They sell more. They generate more revenue. And then eventually, that gets passed on into labor earnings for their workers.

AIZENMAN: The net effect - every dollar in cash aid increased total economic activity in the area by more than $2.50. But did prices just go up, too?

MIGUEL: We actually find there's a little bit of price inflation, but it's really small. It's much less than 1%.

AIZENMAN: The study, published this week on the website for the National Bureau of Economic Research, also uncovered some evidence for why prices didn't go up. A lot of the local businesses reported that, before the cash infusion, they weren't that busy.

MIGUEL: They may be a shopkeeper that doesn't really have that many customers. It's a poor area. They may be someone working at a grain mill that only has one or two customers an hour.

AIZENMAN: And so when they suddenly get more customers, they don't have to take extra steps, like hiring more workers, that would drive up their costs and their prices. Eeshani Kandpal is an economist with the World Bank.

EESHANI KANDPAL: It's a super credible, interesting study and very carefully done.

AIZENMAN: Kandpal has done studies of her own on cash aid, and she says the findings in this one are really striking. But she does have a caveat about these results.

KANDPAL: I'd be curious to see if they persist in the longer run. Eighteen months is certainly not short.

AIZENMAN: But she says when it comes to lifting people out of poverty, it's not terribly long, either.

Nurith Aizenman, NPR News. Transcript provided by NPR, Copyright NPR.