Safety Nets for Protecting the Poor

What can we learn from International Experience?

----------------------

K. Subbarao

Lead Economist, Poverty Group,

The World Bank

Outline of the presentation

• Food subsidies• Cash Transfers• Public works• General lessons • Guidelines and concluding remarks

1. Universal food subsidies…..

• Countries that switched from universal to targeted programs have lowered costs without hurting the poor (Tunisia, Sri Lanka, Jamaica, Jordan, and Mexico),

• The poor benefited from switching to a self-selected targeting mechanism by subsidizing commodities consumed by them disproportionately (see Tunisia example)

TABLE 10 – ABSOLUTE INCIDENCE OF UNIVERSAL FOOD SUBSIDIES,INTERNATIONAL COMPARASION

% of Benefits Accruing to Quintile

Country ProductPOOR

1 2 3 4RICH

5Tunisia(1990)

Food subsidies 17 20 21 22 20

Algeria(1988)

Food Subsidies 13 17 20 23 27

Sri Lanka(1978/79)

Wheat, Bread Sugar 1416

1717

2119

2321

2527

Brazil(1974)

RiceWheat

1915

6662

1523

Jamaica(1988)

Powdered Milk, Wheat, andCornmeal

14 20 20 21 26

Cereals Quartile GroupEgypt (1982) Urban Rural 10

133030

4227

1839

Source: Brazil, Jamaica, Egypt, Sri Lanka: Reproduced from Grosh (June 1992).Tunisia: INS, 1990 Household Expenditure Survey, District of Tunis (quintiles per adult equivalent); total covers durum-wheatproducts, bread-wheat products, cooking oil, sugar and milk.Algeria: World Bank (1991), 1988 Household Expenditure Survey (per capita quintiles); total food subsidies covers durum-andbread-wheat products, cooking oil, sugar and milk.Numbers may not add due to rounding.

TABLE 20 – ABSOLUTE INCIDENCE OF TARGETED FOOD PROGRAMS,INTERNATIONAL COMPARASION

% of Benefits Accruing to Quintile

Country Product 1 2 3 4 5Tunisia (1993) SELF-SELECTION: Food Price

Subsidies (total)21 20 21 20 18

Morocco SELF-SELECTION: Food PriceSubsidies, High Extraction Rate Flour(FNBT)

23 24 22 18 13

Jamaica SELF-SELECTION: Food Stamps atHealth Clinic

44 31 18 5 2

Chile SELF-SELECTION: Food Supplementat Health Clinic

41 28 18 10 3

Peru GEOFRAPHIC TARGETING: FoodSupplement by neighborhood

42 30 20 6 3

Jamaica MEANS TEST: Food Stamps 47 29 15 6 3Jamaica, Chile, Peru: Reproduced from Grosh (June 1992).Tunisia: Quintiles per adult equivalent. INS, 1993 Enquête Restreinte sur la Consommation des Produits Subventionnés; Districtof Tunis. Total expenditure and sugar consumption patterns extrapolated from 1990 household expenditure survey (adjusted forinflation and adult equivalent); total food subsidies covers durum-wheat products, bread-wheat products, cooking oil, sugar andmilk. Morocco: Living Standards Survey, 1990/91 (per capita quintiles). Numbers may not add due to rounding.

More on targeted food subsidies..

• Even when food transfers were targeted, but the targeting mechanism was means tests administered by program managers, the costs of such targeting proved prohibitive -- thus in India, it costs $5.6 to transfer $1 worth of income through a means-tested food subsidy program.

Cash Transfers….

• Cash transfers are best administered when target groups can be clearly identified. The transfer serves a poverty-reducing function only if the chosen household characteristic is correlated with poverty. The best example is child allowances in former Soviet Union, social pensions for the elderly in Namibia and South Africa.

Cash transfers…..

• Without the right level of administrative capacity and information base, any form of cash assistance is open to potential abuse.

• Some countries have tried to target cash assistance through communities. Did they succeed?

Uzbekistan’s community targeting

• One of the poorest countries: 58% poor in 1996, and 31% extremely poor, with sharp regional differences…

• In October 1994, a program of social assistance in cash was introduced, and “mahallas” were asked to administer.

• Households have to apply, an investigation follows, and a recommendation is made.

Uzbekistan…….

• A combination of government instructions and committee discretion,

• Government instructions included some indicators (large families with many children, families of the unemployed, families in which the main breadwinner is fully or partially disabled, pensioners living alone, etc.)

Uzbekistan…..

• The mahalla committee launches an extensive investigation including the use of land and the family’s other assets, etc.

• To summarise, households are selected by combining fixed rules, formal application and extensive information gathering and investigation by the committee, and then discretionary allocation.

Potential advantages….

• Does not rely on a single indicator of welfare, but relies on local knowledge,

• Some degree of self-targeting since only families who are perceived to be in need will apply,

• Limits social resentment since applications are discussed at an open community meting,

• Avoids a dependency syndrome.

Potential disadvantages...

• Large amount of discretion to mahalla elders (in a country with no democratic traditions), clientelism,

• Social stigma, too much intrusion into privacy, embarrassing to discuss household poverty in public….

• Result: Share of recipients declined from 20.5% in 1994 to 11.9% in 1997.

Uzbekistan: Targeting outcomes

• In the poorest quintile, only 49.1% have applied for help; of those who applied only 16% were refused help; 38.6% knew the scheme but never applied; and 12.3% did not know about the scheme..

• Recent developments suggest that mahallas are being integrated into the administrative system, and less a grass roots institution...

Mexican cash transfers…..

• Procampo is a direct cash transfer program to compensate for the expected negative price effect of NAFTA on the producers of 9 traditional crops.

• A fixed payment (1000 peso) per hectare that is delinked to production made twice a year, prior to the planting season when the need for cash is greatest….

Mexican cash transfer….

• Impact on agricultural income (consumption) is 8.1 percent (average for all households) -- increasing with land ownership.

• With 1000 peso transfer, probability of HYV increases by 22%, and chemical fertilizer use by 19%

• Overall, $1 transfer led to $1.9 change in consumption (income).

Mexican transfer...

• Interestingly, income from livestock also increased due to procampo,

• Mexico’s success due to excellent information base and administrative capacity. The choice given to small producers to adjust their consumption investment profile with a fixed cash transfer proved beneficial.

Public works….

• Several countries (both low income and middle income) have tried this program both as a contra-cyclical instrument and also as a transfer.

• International experience suggests that the best way to reach the poor is to maintain the program wage no higher than the ruling market wage for unskilled labor.

Table 1: Public Works: Program Wage (PW), Minimum Wage (MNW)

and Market Wage (MW) in Selected Countries

Country/Program PW in Relation to MNW and/or MW

1. Bangladesh: Cash For Work, 1991-92 PW<MW

2. India: (a) Cash For Work, JRY, 1991-92

(b1) MEGS: up to 1988

(b2) After 1988

PW=MNW>MW

PW=MNW<MW

PW=MNW>MW

3. Pakistan: IGPRA* III, 1992 PW<MW

4. Philippines: Cash For Work 1990

Food For Work 1987

PW>MW

PW**>MW

5. Botswana: Cash For Work PW<MNW, but >MW

6. Kenya: Cash For Work, 1992-93 PW=MNW>MW

7. Chile: Cash For Work 1987 PW<MNW=MW

Public works continued…..

• In Tanzania, Botswana, and Kenya, program wage was higher than the rural market wage: jobs were rationed, and targeting suffered.

• In Chile, India’s Maharastra Employment Guarantee Scheme (MEGS), Sri Lanka, Burkina Faso and Senegal, program wage was lower than the rural market wage enabling high participation of the ultrapoor.

Public works continued…..

• Careful timing of the program by synchronizing intensive operations with agricultural slack seasons proved helpful but this did not happen in many countries (Tanzania, Bangladesh, Kenya got their timing wrong thereby lowering consumption-smoothing benefits of the program.) -- MEGS slide

MEGS Labour Attendance

0

1000

2000

3000

4000

5000

6000

7000

8000

80/81 81/82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91

Seasonality in labor attendance

0%2%4%6%8%

10%12%14%16%

Ap

ril

Ma

y

Ju

ne

Ju

ly

Au

g.

Sep

t.

Octo

.

No

v.

Dec.

Ja

n.

Feb

.

Ma

rch

1980-811990-91

Public works continued…..

• In most countries the share of wages in total program costs varied between 30 to 60 percent. In road construction, it ranged between 40 to 50%.

• Problem areas in public works: • (a) program wage rate (b) maintenance of

assets, and (c) gender parity.

Problem areas in all programs...Incentive costs….

• People do respond to transfer programs … Incentive costs and behavioral responses can be problematic.. (cite examples from Jamaica and Sri Lanka)

• Fine targeting may escalate administrative costs, political support may vanish, and incentive costs may increase..cite example of costs of operation in India.

Incentive Costs — Rice Subsidy, Sri Lanka, 1980

Before After1. Labor Supply: Male 25.9 23.4

Female 23.9 21.1

2. Income Transfer/HouseholdGross 91.0Net change inincome

59.0

(Source: Sahn and Alderman, 1995)

Jamaica: Impact of Food stamps on household consumption with and withoutincorporating behavioral responses.

Percent change in household consumptionfor the poorest groups

YearIgnoring behavioralresponses

Factoring inbehavioral responses

1989 6.0 4.3

1990 2.2 1.5

1991 9.2 5.3

Source: K. Ezemanari and K. Subbarao (1998)

Five broad lessons……..

• Universal food subsidies have proven fiscally unsustainable and distortionary, with gains accruing largely for the nonpoor,

• In all programs, self-targeted approaches have proven more workable and cost-effective than administered targeting,

• The design and delivery of a program can alter outcomes in favor of the poor,

Lessons continued…….

• Cash transfers are particularly prone to poverty traps and abuse especially in countries with poor information base.

• In countries where “everyone is regarded as poor”, low-wage public works can be very effective to screen the needy, provide a transfer, build socially useful infrastructure, and complement the growth process.

Lessons continued….

• All transfers generate incentive costs. The best way to minimize incentive costs is to (a) keep the transfer low and self-targeted,(b) avoid multiplicity of programs, and (c) maintain transparency at every level.

• Given fiscal constraint, some degree of targeting is desirable.

Lessons cotninued...

• But how to target, and how much targeting is desirable, is an empirical question and depends on the country situation.

• Is there ever going likely to be a simple, single solution?

• Almost certainly not! The poor are heterogeneous in key respects:

Lessons continued...

• Some are credit-worthy, but credit-constrained;

• Some are able to work, but enemployed; and

• Some are unlikely to ever make it on their own.

Lessons continued...

• Countries differ not only with respect to the extent and severity of poverty, but with respect to key constraints:

• information• administrative capacity, and• budgetary resources.