The global economic landscape has been reshaped dramatically by the far-reaching effects of the COVID-19 pandemic. As nations grappled with the immense challenges posed by the crisis, many turned to direct cash payments as a lifeline for their most vulnerable citizens.
In 2020, over a sixth of the world’s population benefited from various forms of cash transfer programs, providing crucial support in the wake of the pandemic. These initiatives, implemented by governments worldwide, played a pivotal role in buffering the economic impact of the global health crisis.
From Brazil’s Auxílio Emergencial program to the US’ Economic Impact Payments, countries across the income spectrum ramped up or initiated cash transfer schemes to safeguard their populations. Notably, even lower-income nations like Togo rolled out the Novissi cash transfer program during the pandemic, underscoring the universal relevance of such interventions.

The Power of Cash Transfers in Times of Crisis

The concept of utilizing cash transfers to shield livelihoods and uplift impoverished communities is not a newfound strategy. It represents a straightforward method of extending essential social protection to those in need, enabling individuals to weather sudden disruptions and aiding their recovery in the aftermath of crises.

Debunking Misconceptions and Unveiling Benefits

Despite the invaluable support they offer, cash transfer programs often find themselves embroiled in debates. Concerns about creating dependency and reducing the labor supply, coupled with the considerable costs associated with these initiatives, have raised questions about their sustainability and initial implementation.

For instance, Uganda’s Social Assistance Grants for Empowerment program encountered significant politicization and resistance during its establishment and subsequent expansion due to apprehensions about financial sustainability and potential welfare dependence. Moreover, austerity policies during economic crises can directly impact social assistance programs, as observed when Greece suspended and later terminated its housing benefit scheme following the 2010 economic downturn.

However, dispelling the notion of cash transfers as mere “handouts,” substantial evidence exists regarding their positive impact on recipients. These programs serve as potent tools for reinforcing household resilience and creating opportunities that extend far beyond the immediate beneficiaries.

Unveiling the Economic Multiplier Effect

An often-overlooked aspect of social cash transfers is their profound economic multiplier effect. Research conducted in collaboration with renowned institutions like the World Bank and the United Nations’ International Labour Organization has shed light on the substantial potential of this multiplier effect to bolster the financial sustainability of cash transfer programs.

The central premise revolves around the concept that every dollar disbursed and subsequently spent, rather than saved, can amplify the total income within the economy beyond its original value. A domino effect ensues: a smallholder farmer utilizing a portion of the grant to purchase fertilizers triggers a chain reaction, empowering local merchants and cascading through the economy, resulting in a surge of taxable gains that transcend the initial recipients. This effectively “multiplies” the original grant’s impact on the economy.

Economic Transformation in Action

Extensive analysis encompassing 23 studies of 19 cash assistance programs across 13 countries has yielded compelling evidence of this multiplier effect. In Brazil, the Bolsa Família program, a cornerstone of the nation’s social welfare initiatives and one of the world’s largest cash transfer programs, was found to elevate real GDP by R$1.04 for every R$1 (£0.16) disbursed, representing a modest yet positive spillover into the Brazilian economy.

Similarly, the GiveDirectly initiative in rural western Kenya, which offered a one-off transfer of US$1,000 (£791) to 10,500 disadvantaged households, engendered a potent economic shock with a staggering multiplier of 2.5 per US$1. Thus, every US$1 disbursed generated a value of US$2.50 locally, signifying a compelling positive spillover within the local economy.

Transitioning Perspectives: From Expense to Investment

In essence, social cash transfers possess the potential to not only bolster the underprivileged and vulnerable segments of society but also to invigorate the broader economy. Rather than being perceived merely as an expenditure, these initiatives warrant recognition for their true value as strategic investments in a nation’s entire economic framework.

Authored by:
Conrad Nunnenmacher, PhD Research Fellow in Innovation, Economics, Governance, and Sustainable Development, United Nations University
Franziska Gassmann, Professor of Social Protection and Development, Maastricht University
Julieta Morais, Researcher in Social Protection, United Nations University