The nut cracker: The economics of cash transfers?
The Malawi Vulnerability Assessment Committee (MVAC) shows that over 2.8 million Malawians, representing 16 percent of the population have been unable to meet their annual food requirements during the 2015/2016 consumption period. The length of such vulnerability of course ranges between three to eight months.
This crisis has led to an increased number of organizations that have responded to either food aid or cash transfers. The question that often arises is which is better, cash transfers or food aid? This column will argue for cash transfers based in the economic gains that come with such interventions.
I will concentrate on the economics of cash transfers and the multiplier effect and show that the multiplier effect for cash transfers is much bigger than food aid. Cash transfer entails a direct cash injection into the community and therefore, its effect is dependent on how it is used. When this cash is used to purchase goods or services produced locally, this will have the effect of stimulating local demand. In addition, cash transfer have proven to be an effective intervention at meeting humanitarian needs and have the added advantage of empowering and dignifying the recipients to make choices based on their own requirements. Cash transfers do stimulate local markets and boost local economies, thus having a much greater effect beyond the initial recipients and communities.
To illustrate the concept, a household with K100 of cash from the programme may choose to spend half of it (K50) on food produced locally. The impact of this will be a stimulation of local production. This will happen since the recipient will buy food from a local producer in the same community. The producer then will have his/her income increased by the K50.
This means that overall in the community there is more income. This comes from the fact that on top of the K100, the producer has now sold produce for K50. This additional value added in goods sold by the producer plus the initial K100 injected in the community bring the total value of income in that community to K150 (the initial K100 plus the K50 earned by the farmer who produced the food).
This total of K150 is only after one round of spending. If then the producer spends locally the K50 received from selling food on other goods or services, then another round of spending will be generated in the local area. When this continues, it means that there is now a stimulation of the local community by generating further production of local goods and services.
Assuming each person who gets the cash in this spending chain spends half the amount on other goods and services in the local area and half is spent outside the local area, the chain will continue in the following manner:
K100 + K50 + K25 + K12.50 + K6.25 + ….
Therefore, the total impact on the local area of the initial cash transfer will be twice as much resulting in a total increase in local area of K200. It can be seen from the simple calculation that the size of the impact (called multiplier in economics) depends upon the proportion that leaks from the local cash pool.
To be fair, it is also important to recognise that even food aid has a multiplier effect. The point being made here is that on comparative basis the multiplier for the cash transfer is much larger than the food aid.
If the food is consumed in the first round and never reached the market then the multiplier would be zero. The reality though is that food injected in the local area is a resource which will lead to an increase in the total available resources in the local area.
There are, however, instances in which there is some multiplier from the provision of food aid when not all the food is consumed and some is sold or when the food needs to be processed before it is consumed. In some cases there will be a multiplier effect of food aid if it is bartered (exchanged) with other items.
The conclusion that I draw from the experiences of working on cash transfers in Malawi is that cash transfers have a much bigger impact on local markets and economy than food aid. While food is consumed directly by the affected household, cash is spent with many different actors in the local community.
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