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Cash transfers in emergencies: Evaluating benefits and assessing risks

HPN Network Paper 35

David Peppiatt, John Mitchell and Penny Holzmann

Humanitarian Practice Network (HPN) - Overseas Development Institute (ODI)

June 2001

SARPN acknowledges the ODI as a source of this document: www.odihpn.org
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Abstract

In terms of both theory and practice, there appears to be a strong case for cash-based responses to food emergencies where the supply and market conditions are appropriate. Amartya Sen’s work on entitlements offers a solid theoretical base for cash transfers, and the practical experience so far, limited though it is, provides evidence that direct cash distribution, in the right circumstances and with careful planning and monitoring, can be more timely, less costly and more empowering to local communities than traditional food distribution. Nevertheless, there appears to be a reluctance within the humanitarian relief system to include cashbased responses in emergency response portfolios.

This paper reviews the theoretical underpinnings of a cash-based approach to food emergencies, and presents case-studies of cash distribution. These examples, which are drawn from Africa, South Asia and the Balkans, highlight both the risks and the benefits of cash-based responses as against traditional food aid. On the one hand, cash is more cost-effective because its transaction costs are lower; it is more easily convertible, allows for greater beneficiary choice and can stimulate local markets. On the other hand, cash can be used in ways not intended by the donor, can contribute to local inflation and poses security risks not normally associated with food aid. The paper concludes by setting out the conditions under which cash aid might be an appropriate response, and highlights how its associated risks can be minimised. There can be no ‘blueprint’ for the use of cash across all emergencies and in all circumstances; instead, agencies need to weigh the benefits against the risks on a case-by-case basis.

Executive Summary

The idea of distributing cash relief in famines is controversial. Although it is increasingly recognised that food aid serves not purely as a nutritional intervention, but also as a transfer of an economic resource, there is considerable reluctance to distribute cash in place of food. Indeed, since the monetisation of food aid is now accepted as important in strengthening livelihood strategies, it is surprising that the idea of direct cash transfers is so rarely thought of as a practical alternative by the relief community. Nonetheless, there appears to be a growing willingness to at least consider the use of cash as an alternative to either direct food aid delivery or the delivery of non-food relief items, and as the medium of support in safety nets.

This paper tackles some of the key questions posed by cash distribution. Its focus is on distribution in natural disasters, and/or in relatively peaceful settings. (Cash distribution in the midst of a complex political emergency – where there may be no functioning state – throws up very different issues, such as the breakdown of markets and of a working banking system.) Although the paper is principally concerned with straight cash transfers, it also draws some lessons from Cash-For-Work (CFW) programmes. While its starting-point and emphasis lie in the use of cash as a substitute for food, it also goes a step further and considers cash as a substitute for non-food items, particularly in rehabilitation programmes, and its use in safety-net programmes.

The paper summarises the theoretical rationale for using cash, reviews agency experiences of cash distribution, and outlines the main benefits and risks involved in this type of response. It identifies a number of advantages that cash distribution has over traditional food distribution. These include the potential for faster delivery and lower transaction costs, and the possible beneficial impact of a cash injection on local markets and trade. Delivering cash rather than food also addresses the problem of identifying requirements, since beneficiaries are in a position to determine these themselves. The range of food items that can be purchased may be wider and more appealing than the standard food-aid basket. Finally, there may also be benefits to be had in terms of livelihood security.

Against these advantages, one must weigh the risks of cash responses. The key potential danger stems precisely from money’s flexibility and fungibility: how can donors ensure that their aid is going where it is intended? Targeting can also become more difficult, since cash is of inherent value to everyone, and does not allow for self-selection. While the impact of an infusion of cash may stimulate a local economy, it may also lead to inflation and increased prices, potentially penalising people not included in the programme. There are also potential problems to do with security: even in relatively stable environments, agencies distributing large amounts of cash face the risk of theft; this risk is heightened in conflict-related emergencies, where beneficiaries of a cash distribution may also be targeted by belligerents for that very reason.

Although there is clearly more work to be done in this area, this paper suggests that, in the right circumstances, cash distributions can be a viable alternative to food aid. However, there is no general ‘blueprint’ for agencies to follow; ultimately, the decision to distribute cash or food depends on a case-by-case assessment of the benefits and risks involved.



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