Can behavioral science help cash transfer recipients to save?

Following the declaration of COVID-19 as a pandemic in 2020, governments and humanitarian organizations ramped up their adoption of cash transfer services in order to reach vulnerable populations. As of April 2020, a total of 151 countries had planned, introduced, or adopted 684 social protection measures in response to COVID-19. But experts say recipients of cash transfers find it difficult to save and cater to their long-term goals. Research found that poverty can increase risk aversion and discourage long-term investments. Kate MacLeod, a behavioral scientist with ideas42, a nonprofit design and consulting firm, said she has seen this happening with cash transfer beneficiaries. “They want to start a business, send their children to school, have all kinds of long-term goals to help them improve their future, but they have trouble taking the immediate action that will lead to the long-term goal,” she said. ideas42 uses insights from behavioral science to address complex social problems and is now working with six governments in Africa to introduce behavioral science programs into their cash transfer services. These include the Democratic Republic of Congo, Ethiopia, Ghana, Kenya, South Sudan, and Tanzania. The firm has identified behavioral barriers that prevent beneficiaries from achieving their long-term financial goals. These include the salience of the immediate need over a long-term goal, social norms around spending, the uncertainty and lack of social proof in business, and a lack of physical tools to store money. In response, the organization is designing behavioral modification tools and trains recipients on how to set up businesses, set goals, and make plans to save and invest. Among the tools that ideas42 has designed and which were deployed in Tanzania are self-affirmation activities, SMS reminders, posters that normalize saving and investing, goal-setting and plan-making activities, and money-partitioning pouches. In 2019, the Tanzania Social Action Fund, or TASAF, introduced their behavioral science project with the support of the World Bank and ideas42. Officials were trained in behavioral science designs in order for them to train beneficiaries. “The idea was to inculcate a saving behavior among the beneficiaries,” Erastus Mumanga, TASAF’s executive director, explained. So far, the government of Tanzania has rolled out the behavioral science project in 68 local government authorities and enrolled 200,000 individual beneficiaries with plans to scale up to the remaining local government authorities, Mumanga said. Upon testing the TASAF interventions, ideas42 found that 65% of the beneficiaries in Tanzania were likely to save while 22% were likely to make a productive investment. “We found that the behavioral science aspect is more practical in facilitating the saving aspect to the individuals. More people are being exited from the cash transfer program because more people are investing in productive aspects,” Mumanga said. In Mexico, the Progresa/Oportunidades, a similar cash transfer program with behavioral science interventions, was found to have a 20% increase in a household’s monthly savings. However, a study on the program found that the results were not significant when household debt is accounted for. “This highlights the need to include both savings and debt as part of cash transfer programs to enhance their effectiveness,” the study found. Daniel Clarke, director of the Centre for Disaster Protection, a U.K.-funded organization that finds ways to prepare for and respond to disasters, is not entirely convinced that financial education on saving is the big solution. “There's a lot of research into whether financial education programs work, and as I understand it, the very short answer is they almost never do,” he said. Clarke said that financial literacy should be combined with social capital where social protection participants are committed to each other in a classic microfinance arrangement. “There has been a lot of research on a lot of informal organizations that have set out with objectives of trying to help people save better and there has been a lot of success,” he said. According to Clarke, the magic happens in microfinance and that's where a lot of impact seems to come from. “We find from microfinance that a lot of impact has come through increasing what academics call social capital,” he said. He added that social protection programs should spend less money on financial education and instead avail more of the funds to the people targeted by the cash transfer programs. “The best thing is just to use all the money, all the budget you have by just providing it as cash,” he said.