DigiFI Africa’s new blog series: The various facets of digital IDs and payments

J-PAL Africa, based at the University of Cape Town, recently launched the Digital Identification and Finance Research Initiative (DigiFI Africa). Supported by the Bill and Melinda Gates Foundation, this USD$7 million research fund is designed to study the impact of innovative government and private sector payment systems and digital identification (ID) reforms on citizens and governments across Africa.

Policymakers across Africa are increasingly investing in large-scale digital identification and digital payment systems. Because these systems are so new, little rigorous research exists on how best to design and implement such systems in low-income contexts. How do these rapid changes affect the lives of citizens? How can they best be structured to lead to the most benefit? Are any groups adversely affected by these reforms? 

DigiFI Africa will cluster research around these questions, supporting research that evaluates impacts on citizens and generating results that provide guidance on critical design questions as reforms go to scale.

Improving efficiency in public spending through digital finance and digital identification has the potential to have large impacts across Africa. For example, these technological innovations have the potential to enhance record-keeping and transparency by collating administrative data and automating transactions, decreasing the potential for delays and errors in payment systems. Digitizing payments can reduce both the need for travel to access financial services and the time burden of engaging with administrative processes. In addition, digitizing the process of business registration and firm regulation can bring more firms into the tax system and raise revenues for the government.

The DigiFI Africa framing paper lays out the research agenda for the initiative. DigiFI Africa promotes research to address the following questions:

• From a government’s perspective:

  • How can digital ID systems assist with targeting and efficiency in public programs? Do digital ID systems assist or hinder in reaching marginalized populations?

  • Can digital ID systems and digital payments reduce rent-seeking? What are the generalized equilibrium effects of digital payments on rent-seeking? 

  • How can digital ID systems and digital payments assist in building incentive systems to motivate public servants?

  • How can payment design (such as targeting a specific household member to receive the transfer or changing timing the payment) affect its impact? 

•  From a citizen’s perspective:

  • How do government services linked to digital IDs affect citizens? What are the best ways to design these linked services for the greatest impact at the lowest cost? Do digital ID systems and digital payments encourage or dissuade take-up of government programs? 

  • Do digital ID systems improve the overall efficiency of government programs? If so, do these efficiency gains reduce poverty?

  • How do digital IDs affect voter participation, the fairness of elections and electoral outcomes? Does increased enfranchisement affect policy decisions? 

  • Can digital IDs promote further digitization in financial systems and thus enhance financial inclusion? How does this affect short- and long-term poverty outcomes?

  • Can digital payment schemes empower traditionally weaker household members or affect the allocation of household resources?

• Fiscal capacity:

  • Can expanding the formal economy increase the tax base through incentives and simplified processes introduced by digital payments and digital IDs?

• Externalities:

  • What is the impact of digital ID and digital payment systems on market-level general equilibrium effects? What are their impacts on wages and employment? Are there impacts on occupational choice or migration?

  • What are the spillovers on non-beneficiaries of digital ID and digital payment systems?

• Private sector impacts:

  • Can digital ID systems encourage businesses to enter the formal sector? Do these reforms reduce entry costs to entrepreneurship and enable productive investment?

  • Can digital ID systems help strengthen law-enforcing institutions and in turn affect private investment?

DigiFI Africa will run a competitive research fund with requests for proposals (RFPs) twice annually through 2022. The initiative will support researchers in conducting two phases of work:

1. Formative research that includes pilots and high-frequency monitoring systems to assess the status and health of digital payments and digital ID programs at various stages of reforms.

2. Rigorous randomized impact evaluations to test the impact of roll-outs of promising digital payment and digital ID reforms. 

Funding is open to J-PAL affiliates, invited researchers, researchers with a PhD based at an academic institution in Sub-Saharan Africa (details here), and PhD students who have a J-PAL affiliate on their dissertation committee. The Round 1 RFP closes on September 20, 2019. For more information, contact Aimee Hare.

COVID-19 and the resulting economic recession have disproportionately affected already vulnerable individuals. Governments across the world have responded with an unprecedented expansion in their social protection programming. 

There is also a push towards digital transfers to be able to safely transfer cash while curbing the spread of the disease. While there is evidence on the efficacy of grants during non-pandemic times, we know little about the effect of transfers during large shocks. 

For example, during COVID-19, cash grants might prove inadequate in stimulating the supply of goods and services as it is a demand-side intervention. So, are cash transfers helpful in responding to the pandemic? More specifically, to what extent could a pre-existing universal basic income build resilience to future shocks?

J-PAL Africa’s Digital Identification and Finance Initiative (DigiFI) was launched in 2019 to fund innovative research to help answer questions like this. In 2020, we funded follow-up surveys to a 2017 study on universal basic income in Kenya to identify whether the program helped recipients adjust to shocks resulting from the COVID-19 pandemic.

The study: The effects of a universal basic income (UBI) in Kenya

In 2017, Abhijit Banerjee, Michael Faye, Alan Krueger, Paul Niehaus, and Tavneet Suri, in collaboration with Innovation for Poverty Action (IPA) and GiveDirectly, launched a randomized controlled trial in Kenya to test the effectiveness of a UBI in eradicating extreme poverty. 

A UBI is a specific form of social protection: an unconditional cash transfer large enough to meet basic needs and delivered to everyone within a community. One of the arguments put forth by advocates of UBI is that the transfers provide a form of insurance against uninsurable or unpredictable risks (read a more extensive discussion of the potential benefits of UBI here). 

Responding to the need for rigorous large-scale experimental evidence to support the debate, researchers designed and launched a field experiment evaluating the impacts of UBI in 2017 in Bomet and Siaya counties of Kenya. 

Participants in the study were randomly assigned into four groups, three of which received digital cash transfers with varying frequency and size: 

1. One group received a large lump-sum transfer at the beginning of 2018, 
2. One group was assigned a smaller long-term transfer scheduled to be received regularly for twelve years, 
3. One group was assigned a short-term transfer for two years that had largely been concluded prior to the COVID survey, and 
4. A final group was assigned not to receive any transfer and is the comparison group.

Assessing UBI in light of COVID-19

The COVID-19 pandemic unfortunately served as a unique opportunity to examine to what extent a UBI can mitigate the impact of a large shock. 

Against this backdrop, the researchers conducted (and will continue to conduct) phone surveys in May 2020 to measure the effects of the pandemic and how they were mitigated by a UBI. To assess how outcomes in the COVID survey have changed since the onset of the pandemic, they compared this to data from the standard endline survey of households conducted between August and December of 2019. 

It is unclear if the positive effects of social protection transfers found during “normal times” (Bastagli et al., 2019) will hold during the pandemic. Concerns around supply chain disruptions may limit the effectiveness of demand-side interventions such as a cash grant. In addition, when examining non-material outcomes such as depression, the negative psychological impacts may have been too great for the cash transfer to have had any meaningful effect. 

Results from this project provide some of the first evidence of the impacts of social protection programs during the pandemic. 

The UBI led to modest but statistically significant improvements in well-being

Reduced hunger and physical and mental illness

There were modest (though significant) impacts of the UBI on recipients’ personal well-being in all three groups that received cash transfers (lump-sum, long-term transfer, and short-term transfer). 

Roughly two-thirds of households (68 percent) that did not receive the UBI experienced hunger. Recipients of the UBI were 4.9–10.8 percentage points less likely to report experiencing hunger during the last thirty days prior to the COVID survey. 

Recipients of the UBI were also 8–13 percent less likely to have had a household member sick during the thirty days prior to the May 2020 survey. Given the very low prevalence of the coronavirus in the areas studied at the time of the surveys (twelve cases total), these illnesses were almost certainly not COVID-19 cases. 

Finally, recipients were significantly less depressed in the short-term and long-term arm, though not the lump-sum arm. 

No harmful impact of UBI on public health and some evidence that it was helpful

Recipients of the UBI were significantly less (10–16 percent) likely to seek medical attention in the last thirty days, as they were less sick. This would have resulted in a decreased burden on hospitals and could have been helpful in freeing up public health system capacity which is vital during the pandemic. 

In addition, there is some evidence that the UBI reduced social interactions—such as visiting friends or relatives—which could reduce COVID-19 infections in the future. 

Mixed effects on resilience to large aggregate shocks

Regular and long-term transfers are likely to affect investment decisions and hence resilience to large shocks. On one hand, a long-term transfer could allow the individual to buy assets to buffer against any income shocks. On the other hand, the long-term transfer may encourage recipients to increase their exposure to riskier choices, such as starting a business. 

It is particularly interesting to compare the impacts of the UBI before and during COVID times to see how beneficiaries coped with the pandemic. An important caveat is that these results could be driven by seasonality and not the pandemic. As the researchers learn more, we will update the results. 

• No effect on incomes: Long-term, regular transfers led to an increase in risk-taking commercial activities. Pre-COVID, beneficiaries had diversified their income streams by creating new non-agricultural enterprises, which resulted in an increase in profits without substantial changes in labor or agricultural earnings. 

  However, when the pandemic hit these enterprises were not spared and the income gains they witnessed pre-COVID were wiped out but they did not close down.

• Higher resilience to hunger in the agriculture lean season: The UBI provides households with a safety net and hence a reduced risk of hunger. This allows them to take on more income risk. As discussed above, beneficiaries of the UBI were more likely to not go hungry during the pandemic. 

  This was also seen prior to the pandemic during the lean season (the season between planting and harvesting), which saw a significant reduction in the number of households who experienced hunger in the UBI transfer group. 

  However, during the harvest season (August–December 2019), there were no significant differences in hunger between the groups that did and did not receive the transfers. 

UBI: Unlikely tool of choice to respond to unanticipated shocks

While access to a UBI prior to and during a large shock improves well-being in the wake of said shock, it is an unlikely choice of tool to respond in such contexts. This is because the income gains from the UBI pre-pandemic are wiped out during the pandemic. This fits well with the theory that a UBI encourages risk-taking by providing a safety net. Hence, it is likely that recipients of a UBI have increased exposure to shocks. 

Further, it would likely be more effective to use a targeted response tailored to protect those worst affected by a crisis. This is by no means a criticism of UBI but rather a remark on its appropriateness in different contexts. 

Another key message from these results is the importance of supplemental income during large shocks such as the COVID-19 pandemic. These results highlight the need for infrastructure that allows cash grants to be provided universally or to a large proportion of the population in response to unanticipated crises.

Learn more about DigiFI Africa.

Read the full paper.