Cash Transfers and the Local Economy: Evidence from Brazil

Cash transfers have been adopted worldwide and credited with significant reductions in poverty. However, their economy-wide effects continue to spark heated debates, particularly due to potential adverse effects on the labor market. New research studies the impact of a flagship government-run program—Bolsa Família in Brazil—on local economies, in a context where such concerns are particularly strong, as eligibility is means-tested. Using an expansion of Bolsa Família that generated significant variation in the size of the program across Brazilian municipalities, it shows that:

• Cash transfers lead to broader economic gains beyond direct poverty relief, including increased employment, banking activity, and tax revenues. As a result, each dollar distributed through the Bolsa Família program generated around $1.50 in economic activity within the local economy.
• The results are consistent with cash transfers stimulating local demand, despite means-testing. The increased economic activity is concentrated in non-tradable industries and most of the employment gains are captured by non-beneficiaries. Moreover, the increase in economic activity occurred even though the reform also had unintended impacts consistent with concerns that means-tested cash transfer programs incentivize families to alter their behaviors to qualify for benefits.
• Such economy-wide effects substantially increase the marginal value of public funds of the Bolsa Família expansion and thus affect the evaluation of cash transfer program effectiveness.