In response to the Covid-19 crisis, governments around the world are imposing strict restrictions on movement and activities. Many lower income countries have acted swiftly, imposing restrictions shortly after or even before any cases of Covid-19 was registered.
These restrictions have taken different forms, ranging from the stricter rules on movement and gatherings seen in countries like South Africa and Uganda, to lighter rules such as the Tanzanian model.
While these restrictions are justified, in lower income countries they have the potential to cause severe economic disruption to the lives of those at the bottom of the pyramid, who often rely on day-to-day work. These impacts are already being seen by a range of surveys on low income households that have taken place in recent weeks.
For example, Financial Sector Deepening Kenya (FSDK) and BFA Global have found that many people have experienced severe shocks to their income sources through the loss of casual work due to lowered demand for MSME goods and services, and through a reduction of remittances from urban to rural areas as urban areas are disproportionately affected by lockdowns.
At the same time, traditional coping mechanisms, from personal savings, borrowing, and loans groups, and finding extra work, are being stretched. Consequently, households are beginning to resort to reducing consumption, selling productive assets, and other counter-productive methods to stay afloat.
Cash transfers as a response
In this context, social cash transfer programmes are a vital component of efforts to support low income communities.
These are already widespread: as of 2015, 40 out of 54 African countries had unconditional cash transfer programmes in place, typically supporting bottom of the pyramid individuals and families (who are also most likely to be at risk during this crisis).
For example, Kenya’s Inua Jamii cash transfer programme provides transfers of around $40-52 every two months to around 1.6 million households, including over 800,000 elderly people, and over 350,000 people facing hunger and malnourishment.
Where these exist, governments are already using them as a conduit to funnel extra cash to support households during the crisis. For example, several South American countries have used their pre-existing G2P payment ecosystems to send transfers to vulnerable households extremely quickly.
However, many countries face two issues. First, the coverage of these programmes is often limited, and typically excludes urban people of working age. Second, in many countries the programmes involve the disbursement of physical cash in person at common locations, or a need to cash out at the last mile, which will hinder social distancing efforts.
Both issues require a careful response to expand social safety nets that exist, set up new ones where they don’t, and build digital disbursement options including at the last mile.
New infrastructure creation and regulatory support are essential components of this. However, there are several behavioral aspects that should be considered as well.
Encouraging people to switch to digital services is difficult, but this crisis may provide a trigger point that drives mass change. There are a few methods that could support this.
Firstly, offering incentives to cash out digitally, or to make digital transactions directly from disbursement accounts as micro-incentives, status rewards, and peer comparisons have been shown to be extremely effective at driving similar changes elsewhere.
Another method is ensuring that there are suitable use cases for onward digital transactions, for example purchasing health insurance or healthcare through bank transfers.
Lastly, embedding nudges in the process, for example encouraging health insurance purchases through default setting or peer norm setting, and training people on digital financial service usage at cash out points.
While providing cash transfers is an essential short-term solution to the economic damage caused by new restrictions on movements, the changes that are made now could also have positive long-term implications. Expanded or newly created social cash transfer programmes will be able to form the basis of an expanded social safety net post-crisis.
This could take the form of providing wider basic income support or providing larger one-off capital support to spur rapid economic change. These could be conducted by governments, or by other partners through the infrastructure that has been built.
In addition, this newly created infrastructure will allow governments to respond to future crises more rapidly and effectively, by providing cash support to vulnerable populations immediately on the onset of the crisis.
More digitized cash transfer systems, in which beneficiaries don’t simply cash out immediately, can also provide recipients with the benefits of being financially included.
For example, cash flows and transactions can form the basis of credit scoring for loans, and digital micro-insurance can be targeted to those who would benefit the most. The former is likely to be particularly important as restrictions ease: from the lessons of previous health crises, credit will likely be essential for rebuilding businesses that are viable but need a capital injection.
Whilst it is essential to provide support to people that need it as quickly as possible, governments and other stakeholders should bear in mind the long-term benefits that new infrastructure could bring as they do so. Guaranteeing that the infrastructure is set up to last, that people have the information on how to use it effectively, and that the cash transfers fit into a wider environment of monetary and capacity support for effective financial decision-making, will ensure these benefits are realized.
Louis Graham is the Engagement Director at Busara Center for Behavioral Economics