Can Cash Transfers Promote the Local Economy? A Case Study for Cambodia

Abstract

Providing the poorest with safety nets and some form of social protection is becoming part of the agenda of the majority of developing countries. And while cash transfer programs started 15 years ago with experiments and pilot projects, there is currently a scaling up of policies in many parts of the developing world. These policies involve large financial flows which are likely to impact markets, employment and prices.While previous research on cash transfer programs has primarily concentrated on micro-economic effects, this paper analyzes general equilibrium effects of social transfer policies using a computable general equilibrium model applied to Cambodia. It identifies the potential impact of these transfers on the local economy, looking particularly at prices and market responses to an increase in demand through production and trade. Our findings show that, for goods and services for which domestic supply is not elastic enough to respond to a significant rise in demand, prices will increase, affecting the value of transfers on poverty reduction. However, productivity gains from the health and education component of conditional cash transfers appear to be likely to mitigate the price effects associated with cash transfers alone. Our simulation results also show strong complementarities between social protection and rural development policies. At a given level of public spending, a combination of these two types of policies is likely to generate more poverty reduction than cash transfers alone, while also significantly benefiting the local economy. The results indicate that in the context of weak market integration and insufficient supply response, cash transfers would be more effective if embedded in development strategies that improve trade and domestic production. Social protection programs could therefore become more effective when implemented simultaneously with productivity-enhancing policies.