Association for Public Policy Analysis & Management

Rural households in developing countries face substantial risk. Existing evidence shows households living in such risky environments develop a range of mechanisms in order to minimize large fluctuations in consumption. Some of these mechanisms include risk pooling arrangements, building up precautionary savings, accumulating assets to serve as buffer stocks, or reducing income volatility trough crop diversification. Nevertheless, the overall conclusion of the literature is that although most households are able to protect their consumption from the full effects of income shocks, these levels of protection are less than optimal. Further, it has been documented that very low-income rural households in sub-Saharan Africa face fluctuations in aggregate consumption that are not only large, but also closely track aggregate changes in income.  What this evidence suggests is that a minimum level of household income may be required for households to implement any of the risk coping mechanisms intended to smooth consumption.

We investigate to what extent conditional cash transfers for very-low income households allows them to reduce consumption variability over time. CGP-eligible households are extremely poor, with 95 percent falling below the national extreme poverty line at baseline and having a median household per capita daily consumption of approximately 20 US cents. Households at such low levels of consumption spend more than 90 percent of their income in food consumption and firewood and have a marginal propensity to consume close to unity. We use data from the impact evaluation of the Child Grant Program (CGP), an ongoing cash transfer in Zambia implemented in 2010, which provides an unconditional monthly cash payment of 60 kwacha (US $12) to households with a child under age 5. To evaluate the short- and longer-run impacts of the program, a randomized control trial of 2,515 households was implemented in 2010, which has collected five waves of data for the last four years.

After 48 months, we find that cash transfers affect both social protection and productive outcomes.  On the protective side, the program reduces poverty, improves household consumption, food consumption, diet diversity, and food security. More importantly, beneficiary households have been able to stabilize their food share over time, in clear contrast to control households which face larger variations in their food consumption shares over time. We also find large impacts on crop and livestock production, the amount of land operated, and the use of agricultural inputs. Further, the CGP has a positive impact on the ownership of farm animals and allows households to experience double the volume of purchase and sales of livestock relative to the control households. Lastly, we also find positive impacts on non-farm business activity and beneficiary households being less dependent on credit sources than control households.

Overall, these results indicate that cash transfers allow households to smooth consumption over time by allowing them to use livestock as a buffer stock, build up precautionary savings, and invest in productive activities that allow them to better cope with in adverse episodes over time.