A research study on informal finance has revealed that in East Africa, the movement of money varies significantly based on whether communities are organized around family structures or age-based groups.
In various parts of the world, many individuals rely on informal financial systems, borrowing from and lending to their social networks. This understanding provides valuable insight into local economies and aids in the battle against poverty.
A recent study, co-authored by an economist from MIT, sheds light on a fascinating aspect of informal finance: In East Africa, the flow of money greatly differs depending on whether societies are structured by family ties or by age groups.
In many regions, extended families serve as the fundamental social unit. However, there are communities with significant age-based social groups where individuals enter adulthood together and maintain closer relationships with those in their age group than with extended family members. This distinction influences their financial interactions as well.
Jacob Moscona, an MIT economist and one of the paper’s co-authors, states, “Our research indicates that social structures significantly impact how people establish financial connections.”
He explains: “In age-based communities, if someone receives a cash transfer, the funds predominantly circulate among their peers within the age group, rather than extending to younger or older family members. Conversely, in kin-based systems, money tends to be concentrated within the family network rather than among peers in the same age group.”
This dynamic has observable effects on health. For instance, in kin-based societies, grandparents commonly share their pension income with their grandchildren. The study shows that in Uganda, an extra year of pension payments to an elder reduces the risk of child malnutrition by 5.5% in kin-based societies, a contrast to age-based communities where such intergenerational support is less frequent.
The paper titled “Age Set versus Kin: Culture and Financial Ties in East Africa” is featured in the September issue of the American Economic Review. Its authors include Moscona, an assistant professor of economics at MIT, and Awa Ambra Seck, an assistant professor at Harvard Business School.
The investigation into informal financial arrangements has long been a significant focus for economists. For instance, MIT Professor Robert Townsend has substantially contributed to this field through innovative research on financial practices in rural Thailand.
While the comparison of age-based social groups with traditional kin-based ones has mainly been explored by anthropologists, the current study brings economic insights to the forefront. Among the Maasai in Northern Kenya, for example, anthropologists have noted that friends within the same age group possess closer bonds than with anyone else except for spouses and children. Maasai age cohorts often share food and accommodations more frequently than they do with their own siblings. This study adds valuable economic perspectives to existing knowledge.
To carry out their research, the authors first examined the Kenyan government’s Hunger Safety Net Program (HSNP), a cash transfer initiative launched in 2009 across 48 regions in Northern Kenya. This program included both age-based and kin-based social groups, allowing a comparison of its impacts.
The findings revealed that in age-based societies, the cash transfers from the HSNP recipients were spent primarily on individuals within the same age cohort, with no additional support flowing between generations. In kin-based societies, transfers did benefit multiple generations, but there weren’t informal cash flows otherwise.
In Uganda, where both kin-based and age-based societies coexist, the researchers analyzed the rollout of the Senior Citizen Grant (SCG) program, which began in 2011. This initiative provides seniors approximately $7.50 monthly, accounting for about 20% of per-capita spending. Similar programs are being introduced throughout sub-Saharan Africa, including places where age-based organization is prevalent.
Again, the results indicated that financial flows were closely aligned with the kin-based and age-based social structures. Specifically, they discovered that the pension program significantly improved child nutrition in kin-based households, where intergenerational ties are strong, while no such effects were documented in age-based societies.
“These policies produced significantly different outcomes for the two groups, reflecting their distinct financial ties,” says Moscona.
According to Moscona, there are crucial reasons to assess these differences in financial flows: to deepen societal understanding and to rethink the design of social programs suited to these dynamics.
“This highlights how important social structure is in shaping financial relationships,” Moscona asserts. “It also has considerable implications for policy making.”
When considering social policies aimed at alleviating child or elder poverty, it’s vital to understand how informal cash flows operate within a society. This research illustrates that a thorough grasp of social structure should be prioritized when designing effective policies.
“The organization of society leads to various vulnerabilities,” Moscona explains. “In kin-based communities, because younger and older members support each other, generational inequality is often less pronounced. However, in age-based communities, both the young and the old face systemic vulnerabilities that can exacerbate poverty. Furthermore, within kin-based arrangements, entire families may struggle economically, while in age-based societies, relationships often cross family lines, fostering greater equality. These dynamics are essential to consider in poverty reduction strategies.”
