POOLING RESOURCES IN FAMILY NETWORKS: New evidence from Mexico of the positive impact on investment in children’s education

01 Nov 2018

Analysis of the impact of an anti-poverty policy that provided conditional cash transfers to poor households in Mexican villages reveals the benefits of extended family networks for providing financial access for human capital investment. The study by Manuela AngelucciGiacomo De Giorgi and Imran Rasul, published in the November 2018 issue of the Economic Journal, finds that:

• In the 18 months after cash transfers are first provided, food consumption increases by up to one quarter for members of extended families, regardless of whether the cash transfer was given directly to their household or to one of their relatives in the same village.

• Extended family members that directly received the transfers increased their children’s enrolment in secondary school by 12%. In contrast, school enrolment did not increase among transfer recipients without close relatives in the village.

• There are substantial longer-run impacts for households able to use support from extended family members to finance investment in their children’s human capital: five years after cash transfers are first provided, households in extended family networks increase food consumption by 14% more than others.

• Members of extended families also continue to have higher enrolment rates than households without close relatives in the village.

The research analyses a novel motive for financial flows and resource pooling in family networks in village economies – and how it interacts with the provision of cash transfers. Providing financial access for human capital investment is essential for breaking the cycle of poverty, as profitable investment – in human capital or other high-return assets – can stop the intergenerational transmission of poverty.

Risk-sharing in extended families

An important difference between rich and poor countries is how well developed their financial markets are. Nowhere is this contrast more acute than in rural parts of less developed economies, where formal insurance and credit markets can be altogether absent.

This is despite households in rural economies having a great need for insurance or credit, especially as they typically work in agriculture and are subject to weather shocks, or risks from health shocks to themselves or to their livestock (Angelucci and De Giorgi 2009; Attanasio et al, 2015).

In these kinds of rural economy, extended family members can play a key role in informally providing their members financial assistance in times of needs. This risk-sharing role of extended families has been long studied in development research.

The new study adds to this body of work by emphasising that extended families have another key motivation for providing their members with informal sources of finance: to help finance long-run investments by family members. This role can be especially important for investments that are hard to collateralise, such as in the education of children. By enabling such big-ticket and high return investments to be undertaken, extended facility members can raise the long-run consumption of all their members.

The work thus provides novel insights on how extended families affect consumption and investment choices of their members when credit and insurance markets are unavailable (Cox and Fafchamps 2008).

Testing strategy

To take their ideas to data, the researchers use information collected from over 20,000 households in 500 villages in southern Mexico. These data were originally designed to conduct an experimental evaluation of a large-scale anti-poverty policy that provided conditional cash transfers to poor households: the Progresa (now Prospera) programme.

In the study, data are collected from households every six months, and they contain detailed information on food consumption and investment choices of households. The data is long-term, spanning the period before Progresa was introduced, to around five years after Progresa transfers first started to be disbursed to eligible households.

To construct the extended family network in each village, the researchers use information on the paternal and maternal surnames of household heads and their spouses. This makes it possible to construct extended family networks in each of the 500 villages in the data, covering 20,000 households and over 100,000 individuals.

The analysis reveals that 20% of households are ‘isolated’, in that none of their extended family members reside in the same village. The remaining 80% are connected in the sense that they are embedded within an extended family network. This exercise reveals there are around seven family dynasties in these rural Mexican villages on average.

The researchers then exploit the village-level randomisation to evaluate the Progresa programme to infer causal effects of the cash transfers to eligible and ineligible households. The value of transfers provided is substantial, corresponding to about one third of a household’s monthly pre-programme food expenditures. Hence the Progresa programme provides a substantial cash inflow to extended family networks, most of which have at least one member receiving these transfers.

Results

The study finds that the presence of extended family members in the same village affects the consumption and investment choices of their members. In the 18 months after transfers are first provided, food consumption increases by up to one quarter for members of extended families, regardless of whether the cash transfer was given directly to their household, or to one of their relatives in the same village. Moreover, extended family members that directly received the transfers increased their children’s enrolment in secondary school by 12%.

In contrast, school enrolment did not increase among transfer recipients without close relatives in the village. This is because the cash transfers provided by Progresa are insufficient to cover the full cost of sending a child to secondary school. Therefore, even with a cash transfer, poor families typically need some further financial assistance. Only those with extended family members present in the same village have this source of informal finance available to them.

The researchers then trace through the longer-run impacts of households being able to use support from extended family members to finance these kinds of non-collateralisable investments into their children’s human capital.

They find that these initial differences have persistent effects: five years after Progresa transfers are first provided, households in extended family networks increase food consumption by 14% more than those without extended family members present. This medium-term differential increase in consumption may reflect the returns to extra schooling of children in extended families. In addition, members of extended families continue to have higher enrolment rates than households without close relatives in the village.

Conclusions and policy implications

The research studies a novel motive for financial flows and resource pooling in family networks in village economies: to relax credit constraints and facilitate investment, especially in non-collateralisable assets for which credit market imperfections are most binding. Providing financial access for human capital investment is essential for breaking the cycle of poverty, as profitable investment – in human capital or other high-return assets – can stop the intergenerational transmission of poverty.

References

Angelucci, M, and G De Giorgi (2009) ‘Indirect Effects of an Aid Program: How Do Liquidity Injections Affect Ineligibles’ Consumption?’, American Economic Review 99(1): 486-508.

Attanasio, OP, C Meghir and C Mommaerts (2015) ‘Insurance in Extended Family Networks’, NBER Working Paper No. 21059.

Cox, D, and M Fafchamps (2008) ‘Extended Family and Kinship Networks: Economic Insights and Evolutionary Directions’, in TP Schultz and JA Strauss (eds), Handbook of Development Economics, Vol. 4, Elsevier.

Consumption and Investment in Resource Pooling Family Networks’ by Manuela Angelucci, Giacomo De Giorgi and Imran Rasul is published in the November 2018 issue of the Economic Journal.