I think this Economist article is getting way overblown. The project that Blattman evaluated wasn't just a cash transfer, but included training and facilitation to help groups of young people get together and write proposals for funding. There's no evidence to suggest that young people would spontaneously get together if they were just given cash. Overall the evidence that cash transfers (or other purely demand-side programs) alone improve high level health and education outcomes (e.g. Reduced Maternal mortality) is spotty.
Is there any evidence that conditional or unconditional cash transfer programs improve the quality of basic services through the mechanism that you suggest? The most successful cash transfers in Latin America occurred after decades of public investment in public schools and clinics. In poor, rural areas (like those in Indonesia) where service utilization tends to be low, there are often no alternatives to the run down public school or clinic. Do private markets for basic services spontaneously emerge in the wake of cash transfers? Seems to me that the best policy is to combine with supply-side strengthening programs.