Food, Agriculture and Natural Resources Policy Analysis Network (FANRPAN) Food, Agriculture and Natural Resources Policy Analysis Network (FANRPAN)
 


Can cash transfers promote food security in the context of volatile commodity prices?
February 2009
Benjamin Magen, Cynthia Donovan, and Valerie Kelly

Acknowledgements: FANRPAN acknowledges USAID as the source of this document


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Executive summary

This working paper synthesizes the theoretical and empirical literature on the use of cash transfers in response to food crisis situations, with particular attention to their use in situations that are exacerbated by volatile, often inflationary, commodity prices. The paper is designed for policymakers who are wondering if cash transfers might be an appropriate instrument in the context of 2008ís unstable commodity prices for both food and energy, but are unfamiliar with the literature and discussions surrounding the cash vs. food debate. After defining some key terms and presenting a brief review of the theory behind cash transfer use, the paper synthesizes evidence from studies that have evaluated past cash transfer programs. While the focus is on examples from Sub-Saharan Africa (primarily Malawi, Mozambique, Zambia, Kenya), there are also valuable lessons incorporated from other regions of the world.

What is a Cash Transfer: The concept of a cash transfer (also sometimes referred to as income transfers or cash subsidies) is that a recipient is given cash (often in the form of checks, money orders, or sometimes vouchers) as a safety net to not only improve their ability to purchase sufficient amounts of food but also enable them to retain productive assets or continue to make productive investments.

When to Use Cash Transfers: Cash transfers should be considered in circumstances where (1) households do not have sufficient resources to obtain food, and (2) food supply is adequate and markets are functioning. Markets should be able to meet increased food demand created by the program; financial and administrative systems should be sufficiently strong and transparent to avoid fraud; and security should be adequate to protect households from theft of cash.

General Arguments in Favor of Cash Transfers: Firstly, beneficiaries achieve higher satisfaction from cash transfers than in-kind transfers due to the greater flexibility. Secondly, cash transfers can be more cost effective than in-kind transfers because of reduced transportation and associated costs. Thirdly, cash transfers have expansionary effects on local economies because the cash enters local markets, creating demand for goods and services. These general arguments are supported by empirical evidence summarized below:
  1. Beneficiary satisfaction: Beneficiaries of cash transfers are found to have more meals per day while they depend less on damaging coping strategies such as begging. Households generally, but not always, indicate that they are happier receiving cash instead of food. In many cases they are able to pay off debts and work in their own fields more.

  2. Program costs: Cash transfer programs appear in many cases to be less expensive in terms of program costs than in-kind aid, though in situations of high inflation this may not be the case. Also, length of the program must be considered; the initial costs of setting up a cash transfer program can be high and may not be justified for a single year.. The question as to whether a cash transfer program is more cost-effective (i.e., produces better results at a lower cost) than in-kind food aid has not been answered adequately to date. Studies conducted tend to have different results and in many cases the monitoring and evaluation methods employed are not as robust as they need to be.

  3. Expansionary (indirect) impacts: It has been argued that in-kind transfers have a disincentive effect on agricultural production by depressing producer prices, whereas cash transfers represent direct cash injections into the food market by beneficiaries. For example, in Somalia households used cash transfers to repay debts to food retailers, thus enabling the merchants to restock and continue operations. The Food and Cash Transfer (FACT) program in Malawi found that each dollar transferred had economic effects more than double the original value, and a Zambian study found positive multiplier effects through increased purchases of food and other goods and increased demand for labor. Notably, though, some have argued that cash transfers can cause a disincentive effect for beneficiaries to work and may cause inflation if food supplies are limited, leaving all consumers potentially worse off.
Design and Implementation Challenges: The above described benefits depend to a large extent on how well the cash transfer program is designed and implemented. Keys issues that must be addressed include:
  1. Cash disbursement mechanisms: Many programs use local financial institutions to distribute cash, minimizing transaction costs with electronic banking and local disbursement. Frequency of distributions is an important consideration, as more frequent distributions can help programs to deal with inflation and ensure that money is more likely to go for food rather than nonfood items. Lastly, program staff may need training to support and administer cash transfer programs.

  2. Targeting issues: Targeting must be correctly handled to avoid missing large numbers of the poor, and to keep from distributing to the less needy. In-kind programs can use the distribution of less desirable commodities to discourage non-targeted recipients from participating in the food distribution program. Cash is more fungible and may be more attractive to the non-poor than food aid, so the need to prevent corruption and have careful targeting tends to be greater with cash transfers than in-kind aid. Using communities to help select beneficiaries is one method that has been useful in ensuring that transfers go to the poorest in each community, although it is not without problems.

  3. Conditional transfers to focus development impacts: The multiplier effects from cash transfer programs are documented. If a specific development goal is desired, it may be valuable to put conditions on cash transfers, such as child school enrollment. Cash for work programs or commodity voucher programs have been used successfully and reduce the chances of the cash transfer diminishing work incentives.

  4. Inflation: Rapid inflation can reduce the impact of cash transfers, since the purchasing power of the transfer will be reduced over time. Policymakers can program for this possibility, both on the funding side and on the design side. Programs have successfully dealt with inflation by increasing the value of transfers when needed, based on indexing with food prices. In such circumstances, there are inherent tradeoffs between budgetary considerations and providing beneficiaries with support that is viewed as reliable and predictable. More frequent distributions also help households deal with the inflation by more frequent purchasing. In hyper-inflation environments, though, goods may gradually become unavailable on the market, and thus food distributions may be needed, rather than cash. There is also a discussion regarding the possibility that cash transfers will cause inflation through the increased cash flowing through the market and the higher demand increasing prices. The literature does not show significant evidence of this, but most of the programs analyzed to date are small-scale, short-term interventions that are less likely to result in inflationary impacts. When it comes to addressing inflation, cash-transfers alone may not be adequate.
Unanswered Questions: The donor community appears more accepting of cash transfers than in the past, yet many point out that the empirical evidence on cash transfer costs and impacts remains weak, suggesting that more rigorous monitoring and evaluation is needed. Suggestions for additional research include:
  • Documenting the views of civil servants, politicians, aid organizations, and civil society in countries where cash transfers are being used or proposed in order to understand the degree of political support for such programs;

  • Conducting more rigorous cost-effectiveness studies of cash transfers in comparison to food aid, (including recommendations for reducing costs or increasing effectiveness of each type of program).

  • Better assessments of the inflationary impacts of cash transfers, as well as an assessment of how well they work when introduced on a large scale to economies that already have high inflation.

  • Understanding how intra-household dynamics may influence the relative success of inkind versus cash transfers and the extent to which these dynamics need to be taken into account during program design.
Conclusions: Cash transfers can be a more effective tool than in-kind food aid for fighting food insecurity in conditions where markets function well. A cash transfer program combined with other forms of assistance can lead to high beneficiary satisfaction and economic growth. Systematic monitoring of events and evaluation of impacts is needed to ensure that cash transfer programs have the desired impacts and are well integrated with other forms of food security assistance. Rather than assuming a rigid single response of cash only or in-kind only, a combination of response options for different households in different environments may be the most efficient strategy. This requires both capable administrators and flexibility of program implementation.

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