People worldwide often rely on informal financial systems, utilizing personal networks for borrowing and lending. Understanding these networks is critical to understanding local economies and tackling poverty. A recent study by MIT economist Jacob Moscona highlights a fascinating case in East Africa, where the structure of social groups—whether based on family units or age groups—significantly influences how money is circulated.

In many societies, extended families serve as the primary social structure. However, East Africa presents a unique case with its many age-based social groups. In these societies, individuals are initiated into adulthood in cohorts, creating strong intra-cohort bonds that influence financial transactions. Moscona’s research shows that in age-based societies, financial transactions are more likely to occur within these cohorts rather than across generations. This contrasts sharply with kin-based societies where money flows within family lines.

This difference in financial behaviour has real-world implications for public health and welfare. For example, in kin-based societies, it is common for grandparents to share pension income with grandchildren. The study shows that in Uganda, an additional year of pension payments in such societies reduces the likelihood of child malnutrition by 5.5 per cent, unlike in age-based societies, where such intergenerational financial support is rare.

The study’s findings are published in the paper “Age Set versus Kin: Culture and Financial Ties in East Africa,” co-authored by Moscona and Awa Ambra Seck of Harvard Business School. It adds to the body of economic research on informal financial arrangements, a field previously enriched by the work of scholars like MIT’s Robert Townsend, who studied finances in rural Thailand. Traditionally, the analysis of age-based versus kin-based groups has been more common among anthropologists, as seen among the Maasai of Northern Kenya, where age-group friends share resources extensively, often more so than with their siblings.

The researchers analyzed the Hunger Safety Net Program in Kenya, which included both kin-based and age-based groups. They observed that monetary benefits in age-based communities primarily benefited the recipient’s own cohort with little spillover to other generations. Conversely, in kin-based communities, financial benefits were observed across generations. The study also examined Uganda’s Senior Citizen Grant program, which confirmed similar patterns of financial flow aligned with social ties, significantly affecting child nutrition in kin-based households.

These observations underscore the significant impact of social structures on financial interactions and policy effectiveness. Understanding these differences is crucial for designing social programs that address poverty and improve welfare. Moscona emphasizes that recognizing how informal financial flows within different social structures interact with formal interventions can lead to more effective policies, reducing poverty and inequality.

This study highlights how the fabric of society—the nature of its social ties—shapes financial behaviours and, by extension, influences the well-being of its members. In societies where kin-based groups predominate, financial support between generations promotes less inequality, while in age-based groups, the absence of such support makes individuals more vulnerable. This knowledge is vital for policymakers crafting interventions that effectively combat poverty and enhance social welfare.

More information: Jacob Moscona et al, Age Set versus Kin: Culture and Financial Ties in East Africa, American Economic Review. DOI: 10.1257/aer.20211856

Journal information: American Economic Review Provided by Massachusetts Institute of Technology