I have argued earlier here and here that conditional cash transfer (CCT) is a more economically efficient way of transferring welfare benefits to the poor. The latest post of Gary Becker and Richard Posner debate on paying children to attend school.
As Prof Posner writes, Milton Friedman was one of the earliest proponents of direct cash transfers to replace welfare programs. His contention being that people have a better sense of their needs than government bureaucrats, so that if the government simply gave poor people money they would allocate it more efficiently than the welfare bureaucracy would do. This is the philosophy underlying the US Government's program of Earned Income Tax Credit. Any moral hazard concerns can be taken care by making the cash transfers conditional to the recipients achieving certain pre-specified outcomes.
The Mexican Government's Progressa (and Oportunidades) program of mid-nineties sought to reduce child labour and improve school enrollment rates by paying poor parents to keep their children in school and to take them for regular health check-ups. It was argued that if the children remain in school and performs well instead of going to work, the families could be compensated for the loss in their children's earnings by direct cash transfers. Studies by economists in the United States and elsewhere clearly show that Progressa has succeeded in inducing the mainly rural parents in the program to keep their children in school longer than they would have.
Taking cue from the Progressa experience, private foundations and individuals have started experimental programs in New York (New York City Opportunity program) and few other American cities that directly pay poorly-performing, older children (and not parents) to incentivize them to remain in school and improve their performance.
As Prof Becker writes, "Rewarding these poor students for better performance is similar to the tuition scholarships and stipends that colleges award to students with good grades. To earn the "pay" offered, students involved will skip school less often. They will also pay closer attention to their teachers during classes and do more homework, so that they can do better on the standardized tests that are being used to judge their performance."
The moral hazard concern with such conditional cash transfer programs is that it will encourage some children who have been doing well to lower their school performance, so that they can qualify for the program. The program therefore ends up rewarding even those children who would have achieved good performance even without the cash incentive. Therefore the challenge with administering such programs would be to identify the right target group of children.
Prof Posner sees significant incentive distortions, in both parents and children, arising from such cash transfer schemes. He claims that such programs will continue the neglect of public schools, which may be the cause of the poor performance and drop-outs. He also foresees substantial transaction costs associated with implementing and monitoring such programs. Further, such programs do not mandate any sunset clauses which will end the cash support to the child.
However, these cash transfer programs can be more effective in promoting education in socio-economic contexts like in many Indian states, without stoking off incentive distortions. In many parts of the country, especially among specific communities, girl children drop out from schools very early. Further, during the harvest season, the parents have an incentive to take their children out of school so as to work in the fields. It is also true that many of these practices and trends cover the major portion of children in such areas that it may not be worth the transaction costs to target and exclude the small minority who attend school.
In such circumstances, it is important that the incentives be structured appropriately to meet the objectives. There are many different ways in which the cash transfers can be structured. The amount of cash transferred can increase with every class, and can culminate as a scholarship to attend professional courses. The cash transfer can be graded into a few categories, so as to incentivize children to perform well. Therefore while the best performers get the maximum cash transefr, the worst get the least. It may also be worth increasing the cash incentives for the worst performers in each class, so as to incentivize them to perform better in the next higher class. Further, in many backward areas of certain states, the enrollment rates are so low that merely keeping children at school is itself a challenge.
The transaction costs associated with such programs can be minimized by involving the women Self Help Groups (SHGs). Apart from the child attending school and performing well, such cash transfer can also be made conditional to the mother being a member of an active SHG. The cash transfer can then be made to the bank account of the SHG. This transfer can be made quarterly, based on the attendance and test results of the child. In order to avoid incentive distortions like grade inflation, there should be relative grading of the performance of children.
Such policies will have to be formulated by carefully analyzing the statistics available and tailoring programs to suit the specific local requirements. For example, the cash transfer can kick in at those classes where girl children normally drop out or for those months when children drop out for harvest. But given the different social context, unlike the New York program, all the cash transfers should be made to the parents.