Are cash transfers susceptible to high food prices?
Typically, cash transfers provide just enough purchasing power to buy food and basic groceries, and perhaps make a contribution towards school fees or health costs. On both unconditional and conditional programmes there is no restriction on what cash recipients can buy. However, participants are usually sensitised about the purpose of the programme, to encourage food purchases, for instance, if the objective is to protect household food security.
The use of cash transfers to achieve food security goals raises two important questions:
- Food prices vary between global and local markets, and also within countries. So which prices should be used to set the cash transfer level?
- Prices can fluctuate due to regular inflation, seasonal cycles, or ‘price spikes’ associated with food crises. What happens if prices change after the cash transfer level is set?
The Institute of Development Studies, in the UK, analysed panel data on Ethiopia’s Productive Safety Net Programme (PNSP), which surveyed participants and a non-participant control group, in 2006 and 2008. The PSNP is one of the few social protection programmes that delivers both cash and food transfers to participants, providing a rare opportunity for comparative analysis. Econometric methods were used to compare the impact of different payment modes.
Although the cash transfer was set equivalent to the cost of a standard food package when the PSNP was launched in 2005, Ethiopia has experienced high inflation rates, especially since 2007, which reduced the real purchasing power of PSNP cash payments relative to food transfers. This was confirmed by the current research, which also found that:
- The PNSP has had a positive effect on income growth and food security, especially for ‘food only’ and mixed (cash plus food) payment households.
- PSNP food recipients enjoyed higher income growth relative to ‘cash only’ recipients, whose income gains were partially undermined by inflation.
- PSNP participants are starting to favour food over cash transfers – between 2006 and 2008, the proportion of survey respondents who expressed a preference for food increased while those who preferred cash transfers fell.
- Food transfers or ‘cash plus food’ packages enable higher levels of income growth, livestock accumulation and self-reported food security.
Table: 1 - Cash versus food transfers: advantages and disadvantages (Larger version)
This evidence raises important issues for global humanitarian response and social protection policy. Can cash transfers respond quickly enough to dramatic price rises, seasonality or even to regular food price inflation? Do policymakers have the budgetary flexibility to adjust cash transfer amounts frequently? What is the optimal mix of cash and food transfers at times when food prices are unpredictable?
Programme participants would benefit from receiving adjusted cash payments or extended payments during drought years, or when prices rise. But this would require a more flexible programme design, delivery and (especially) budgeting, which is extremely challenging for administrators. The PSNP cash transfers budget would have needed to treble in two years, just to keep pace with food price inflation in Ethiopia between 2006 and 2008.
Any social protection programme that aims for household food security, therefore, must buffer social transfers against shocks such as high food prices. This implies a design phase that includes:
- inflation forecasting
- assessing local markets
- building a contingency fund into programme budgets, and
- taking into account characteristics of different beneficiary groups, before choosing between alternative payment methods.
Rachel Sabates-Wheeler
Institute of Development Studies,
University of Sussex, Falmer,
Brighton BN1 9RE, UK
T +44 1273 606261
R.Sabates-Wheeler@ids.ac.uk
