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What happens when you give large amounts of cash to a poor person in a rural Kenyan village? One well-documented outcome is that people generally buy more, and more nutritious, food, and also invest some — with great returns.  The unexpected success of cash transfer programmes has put pressure on NGOs to show they do better with aid money than the poor would do for themselves.
But The Economist recently drew attention to a less well-documented effect of cash transfers — one which casts them in a more negative light. In a study by behavioural scientists in Kenya and the United States, published last month, cash transfers of up to US$1,525 were given to selected poor households across 60 villages in Kenya — the average transfer of $357 being enough to double most villagers’ wealth.  Researchers asked people how satisfied they were with their lives before, and at points several months after, the intervention.
While ‘life satisfaction’ rose, predictably, among recipients, it also decreased among non-recipients: overall, average life satisfaction in the villages fell.
The implication — also observed in rich countries — is that people’s satisfaction with their lives is determined not so much by their absolute income, but by how they match up economically to their neighbours.  And this begs the question: are cash transfers not a powerful solution to chronic poverty after all?
The findings should be taken with a pinch of salt. Firstly, neighbours’ life satisfaction recovered after 15 months. Secondly, life satisfaction was just one of six wellbeing measures captured by the researchers. The others — including stress (assessed by a survey and testing cortisol levels), depression, and reported happiness — never declined in a significant way.
The study’s design also needs serious scrutiny. Just half of eligible households received cash, while the remainder were explicitly told they would not receive a transfer — either then or in the future. More commonly, transfers go to every poor household in a village — a design that seems much less likely to aggravate neighbours.In sum, important questions about the welfare effects of cash transfers under different programme designs are not well understood and need much more research.
What’s more, these concerns apply to a wide range of aid programmes, not just cash transfers. When someone receives school equipment, food, or even a stable job, is their neighbour’s reaction likely to be different from when they receive cash? It is likely that, however a beneficiary’s condition improves, a neighbour’s perception of ‘normal’ will shift upwards, leaving them less satisfied with their lot. But so far these are only hypotheses. [4,5]
As far as the broader aid-versus-cash-transfer debate goes, the Kenya study doesn’t cast doubt on cash transfers themselves. Given that poor households are typically judicious in their use of transfers, it is becoming much harder to make the case for traditional, ‘in-kind’, aid: the popular donor argument that recipients lack the decision-making or budgeting skills to look after cash themselves increasingly rings hollow.
The bigger picture, then, is that the burden of proof now lies with traditional aid organisations to show that their ‘product’ really beats what a poor person would buy for themselves. If it doesn’t, why not just give them the cash?
Sally Murray is a country economist at the International Growth Centre (IGC), a research institution based at the London School of Economics and in partnership with the University of Oxford, both in the United Kingdom. She works in Rwanda, overseeing the IGC Rwanda’s research on urbanisation, energy, public sector performance and tax. She can be reached via Twitter: @sally_bm
 The Impact of Cognitive Behavior Therapy and Cash Transfers on High-Risk Young Men in Liberia (Innovations for Poverty Action, 2012)
 Your Gain Is My Pain: Negative Psychological Externalities of Cash Transfers (Princeton University, 31 October 2015)
 Erzo F. P. Luttmer Neighbours as negatives: relative earnings and well-being (The Quarterly Journal of Economics, August 2005)
 Laurie Simon Bagwell Veblen effects in a theory of conspicuous consumption (The American Economic Review, 1996)
 James S. Duesenberry Income, Saving, and the Theory of Consumer Behavior (Harvard University Press, 1949)