Unlocking the Power of Social Ties: How Age-Based and Kin-Based Societies Shape Financial Flows in East Africa

Across the globe, informal financial arrangements play a crucial role in the lives of millions, as people borrow and lend money through their social networks. Understanding these intricate patterns sheds light on local economies and offers valuable insights in the fight against poverty.

Uncovering the Diverse Dynamics of Informal Finance

The Influence of Social Structure on Financial Ties

A groundbreaking study co-authored by an MIT economist reveals a striking contrast in the way money moves within East African communities. The research illuminates how the underlying social structure, whether organized around family units or age-based groups, profoundly shapes the patterns of informal finance.In many parts of the world, the extended family serves as the fundamental social unit. However, hundreds of millions of people live in societies where age-based cohorts play a more prominent role. In these communities, individuals are initiated into adulthood together and maintain stronger social bonds with their age peers than with extended family members. This social dynamic, in turn, has a significant impact on their financial behaviors."We found there are major impacts in that social structure really does matter for how people form financial ties," explains Jacob Moscona, an MIT economist and co-author of the study. "In age-based societies, when someone receives a cash transfer, the money flows in a big way to other members of their age cohort but not to other [younger or older] members of an extended family. And you see the exact opposite pattern in kin-based groups, where money is transferred within the family but not the age cohort."

The Ripple Effects on Health and Wellbeing

These distinct patterns of financial flows have measurable consequences for the health and wellbeing of individuals and communities. In kin-based societies, grandparents often share their pension payments with their grandchildren. The study reveals that in Uganda, an additional year of pension payments to a senior citizen in a kin-based society reduces the likelihood of child malnutrition by 5.5 percent, compared to an age-based society where such intergenerational transfers are less common.

Bridging the Gap Between Anthropology and Economics

The study, "Age Set versus Kin: Culture and Financial Ties in East Africa," published in the American Economic Review, represents a unique collaboration between economists and anthropologists. While the analysis of informal financial arrangements has long been a crucial research domain for economists, the specific examination of age-based social groups has traditionally been the purview of anthropologists.The current study adds valuable economic data to the existing body of anthropological knowledge. For instance, among the Maasai people in Northern Kenya, anthropologists have observed that age-group friends have closer ties to each other than anyone apart from a spouse and children, frequently sharing food and lodging. The new research provides quantitative insights into how these social dynamics translate into financial flows.

Uncovering the Nuances of Cash Transfer Programs

To conduct their research, the scholars analyzed two major cash transfer programs in East Africa: the Kenyan government's Hunger Safety Net Program (HSNP) and the Ugandan Senior Citizen Grant (SCG) program. These initiatives, which provide direct cash payments to targeted populations, offered a unique opportunity to observe the interplay between social structure and financial flows.In age-based societies, the study found a spillover in spending by HSNP recipients on others in the same age cohort, with no additional cash flows to those in other generations. In kin-based societies, however, the researchers observed a spillover across generations, even as informal cash flows remained limited outside the family.Similarly, the analysis of the Ugandan SCG program revealed that the pension payments had significant positive effects on child nutrition in kin-based households, where intergenerational ties are strong. In age-based societies, the researchers found no such evidence of these beneficial effects.

Rethinking Social Policy for Greater Impact

The findings of this study have profound implications for policymakers and social program designers. Understanding the nuances of how social structure shapes financial flows is crucial for crafting more effective interventions."It's telling us something about how the world works, that social structure is really important for shaping these [financial] relationships," Moscona observes. "But it also has a big potential impact on policy."If a social policy is aimed at addressing childhood or senior poverty, experts must consider how the informal flow of cash within a society interacts with the program. The current study demonstrates that accounting for social structure should be a high-priority consideration in designing more impactful policies."In these two ways of organizing society, different people are on average more vulnerable," Moscona explains. "In the kin-based groups, because the young and the old share with each other, you don't see as much inequality across generations. But in age-based groups, the young and the old are left systematically more vulnerable. And in kin-based groups, some entire families are doing much worse than others, while in age-based societies the age sets often cut across lineages or extended families, making them more equal. That's worth considering if you're thinking about poverty reduction."By shedding light on the intricate interplay between social structure and financial flows, this groundbreaking research offers a valuable framework for policymakers and development practitioners to design more effective interventions and tackle the complex challenges of poverty and inequality in East Africa and beyond.