Cash Transfers, Risk Management, and Cognitive Development in Early Childhood Based on joint work with collaborators from the World Bank (Patrick Premand and Renos Vakis), the Inter American Development Bank (Norbert Schady) and partners in Nicaragua (CIERUNIC and CIASES) Karen Macours Paris School of Economics

Motivation (1)  Households in developing countries are often highly exposed to risk  Growing sense that exposure to risk of agricultural households might become even more pressing Climate change leading to higher weather variability Climate change leading to changes in weather patterns Globalization and market integration leading to more fluctuations in food prices …  Adaption, coping and risk management abilities are often limited for poor agricultural households Lack of formal insurance, in combination with many other market imperfections But also possibly: low aspirations, lack of information, status quo bias,…

Motivation (2)  Households use a variety of strategies to deal with risk Income diversification Asset accumulation Formal and informal insurance …  But large welfare cost of risk and shocks remain  Policy ? Social safety nets Insurance schemes Interventions that enhance household risk-management (other than insurance…)?

“Atención a Crisis”  Innovative pilot in Nicaragua specifically designed to explore the complementarities between a safety net and productive interventions to improve risk management in the medium-term  Implemented after major drought, and in environment with overall high exposure to drought shocks  Program objectives: Safety Net in the short term: Reduce the negative impact of aggregate shocks that deplete the accumulation of human and physical capital investments, and reduce the need to use adverse ex-post mechanisms for coping with shocks Foment upward mobility and poverty reduction through the accumulation of productive assets in the long term: Improve the asset base of beneficiary households and the capacity to diversify income and reduce poverty through strengthening risk management strategies ex-ante in a manner that is sustainable over time

This presentation  Findings of a randomized impact evaluation Asset creation protect households against negative impact of shocks through better risk management and income diversification Social safety net helps protect cognitive and socio-emotional development in early childhood Sustainability of impacts after the end of the program =>Role of behavioral changes and aspirations

Outline  Setting  Pilot program  Are households better protected against shocks two years after program ended?  Role of aspirations  Are there sustainable improvements in early childhood development?  Role of behavioral changes  Conclusions

“Risky” Setting  Nicaragua: one of the poorest countries in Latin America Many risks: natural disasters, weather, economic,… Despite frequency of droughts, strong dependence on self- employment agriculture (beans and corn), and very little diversification into non-agricultural activities  Drought shocks have a negative impact Total consumption decreases upto 50%, food consumption upto 27% 60% of households report a drought shock in last year  Households perceptions of increased weather risk (rainfall data confirm significant changes in rainfall patterns)  Households consider agricultural activities riskier than other type of economic activities

Some details on the “Atención a Crisis” pilot program  Program of the ministry of the family (MIFAMILIA)  6 municipalities in rural Nicaragua with high levels of extreme poverty and frequent droughts  3000 poor and vulnerable households  Combine conditional cash transfers with interventions targeted at increasing the productive capacity of poor households  1000 hh: CCT  1000 hh: CCT + vocational training  1000 hh: CCT + productive investment grant  November December 2006  Women primary beneficiaries of program  Heavy social marketing and design facilitated group dynamics

Design/Timing of the Impact Evaluation  Randomized selection in two steps Random Control (50) and Treatment communities (56) Within treatment communities: Lottery to select families in each of the 3 packages  Baseline in 2005 No baseline differences between treated and control households, nor between different treatment groups  Follow up survey – July-August months after the program began  Program ends December 2006  Second follow-up survey in ~ 2 years after end program

Beneficiaries of the training package

Beneficiaries of the productive investment package

Questions on productive component  Are beneficiaries better protected against shocks 2 years after the end of the program?  What are the underlying mechanisms? Role of asset creation: Differences between packages Information on income diversification Attitudes towards risk and risk-management  Role of social interactions in changing aspirations?

Relationship between shock intensity and key outcomes in T and C

Main findings on risk management  Beneficiaries are better protected against negative impact of agricultural shock On total consumption and food consumption Protection highest for productive transfers (T3)  2 years after the end of the intervention, the impact of productive transfers significantly positive, and significantly larger than other interventions in presence of shocks  Mechanisms? Program induced income diversification  More livestock activities/income  More nonagricultural activities/income Program leads to changes in attitudes towards nonagricultural and agricultural activities

Role of changing aspirations? “Before the program, I just thought about working in order to eat from day to day. Now I think about working in order to move forward through my business. Through experiences, one learns and opens up towards the future. By talking to others, one understands and learns.” Beneficiary of the productive investment package

Change in aspirations through interactions with leaders  Program design facilitated multiplier effects by building in mechanisms to enhance social interactions  Positive role of leaders Positive experiences of, and interactions with, nearby leaders can help open people’s aspiration window Note that this does not imply targeting to leaders: multiplier effects are the largest when both leaders and other beneficiaries received the largest package  Social interactions and changing aspirations might be important for sustainability of program impacts

Returning to the social safety net  Were there sustainable improvements in early childhood development?  Motivation for focus on ECD Little evidence on the impact of cash transfers on cognitive and emotional development in early childhood Cognitive development in early childhood is an important predictor of success throughout life Literature on how nutritional supplements and early childhood stimulation programs affect early childhood development Much less is known about programs that affect investments of parents directly Children have very large delays in cognitive development

Main results 1. Significant program effects on early childhood development, and particularly so on cognitive and social- emotional skills 1. Effects persist 2 years after the program ended 1. Households who got the productive investment package still have significantly higher consumption than households with basic package, 2 years after the program ended 1. Yet, no significant differences in early childhood development outcomes between children in households who randomly got the larger transfers versus basic treatment => Suggest that something other than (or in addition to) the cash explains the treatment effects on child development

Changes in household investment patterns

Behavioral changes contribute to sustainability  Changes in the importance and composition of food expenditures Upward shift in the Food Engel curve Decrease in food share devoted to staples Increases in food share devoted to animal proteins, and fruits & vegetables  Increase in stimulation: Increase in proportion of children at a given expenditure level who have access to books, pen & paper Significant increase in number of hours read to  Improvements in measures of investment in child health  Remarkably: these changes are smaller but still significant in 2008, even for the basic package  Behavioral changes: At any level of expenditures, treated and control communities spend resources differently

Conclusions  Productive safety nets can help households to manage risk while protecting children’s development (CCT plus) On the short-term: through social safety net On the longer-term:  Through facilitating income diversification through asset creation  Through changes in aspirations  Through behavioral changes  Understanding better which design features contribute to such changes is key

Thank you!