Sunday, February 24, 2008

Conditional cash transfers in poverty alleviation

The Brazilian government have been running an experiment with anti-poverty programs since 2003, called Bolsa familia (Family Fund). It has grown to be the largest single anti-poverty scheme in the world, covering some 11 m families or a quarter of Brazil's population. At just 0.8% of GDP, the Bolsa program delivers good bang for the buck. Its success raises questions about the traditional models of anti-poverty programs.

Traditionally anti-poverty programs have focussed on providing either skill training, or self-employment assistance, or subsidies for food and other essential items, or welfare payments to the old, disabled and some specific groups. Apart from the welfare payments, all the others are usually large programs that seeks to deliver a standard benefit(s) to a defined set of beneficiaries.

This commoditized and uni-dimensional approach to poverty eradication has many pitfalls. Besides being inflexible, it fails to take into account the differential needs and requirements of the target beneficiaries. Such top-down schemes open up ample opportunities for incentive distortions, that in turn manifests in poor targetting and numerous delivery channel leakages.

These traditional prescriptions to poverty alleviation manifests with many problems - black market in PDS foodgrains and kerosene, poor quality schools and hospitals, lack of choice for parents and patients, sales and illegal capture of government weaker section housing units, ineligible welfare pension beneficiaries, artificially depressed low prices for agriculture commodities, distortions in fertilizer production etc. In some ways atleast, the total long-term damage inflicted by way of market incentive distortions and eliminating choice may be much more than the expenditure itself.

In contrast, "conditional cash transfer" schemes like the Bolsa Familia seeks to incentivize individual families towards achieving certain important social goals, by making direct cash tansfers which are conditional on achieving those social goals. The fungibility of the cash transferred leaves the spending discretion to the beneficiary. This is in keeping with the by now widely acknowledged fact that each family knows what is best for them, what are their needs and wants, and how the money can be most effectively spent. The success or otherwise of such programs depend on the ability to monitor the fulfillment of the conditions and check any pilferage in the cash transfer.

Under the Brazilian Bolsa scheme, the mothers of a family which earns less than 120 reais ($68) per head per month, are paid a benefit of up to 95 reais on condition that their children go to school and take part in government vaccination programmes. Municipal governments do much of the collection of data on eligibility and compliance, but payments are made by the federal government. Each beneficiary receives a debit card which is charged up every month, unless the recipient has not met the necessary conditions, in which case (and after a couple of warnings) the payment is suspended. The involvement of women and the use of debit card ensures that the cash transferred is likely to be well spent and cash pilferages are minimized.

Another popular example of direct cash transfer is micro-credit financing. Here too women hold the accounts and receive the loans from banks and other micro-finance insitutions and they utilize the loan amount for their consumption and other requirements. It may be a good idea to make these loan transfers conditional to the group members striving to achieving certain social goals like sending children to school; immunizing their children; keeping their premises clean; undergoing family planning operations after say, two children etc. The self help groups can also be incentivized by way of interest subsidies on the loans, which can be transferred directly to the group account.

Other government anti-poverty schemes, like subsidies, self-employment assistance, welfare transfers can all be modelled as cash transfer schemes. Such schemes, by virtue of the fungibility of the benefit and the discretion given to the beneficiary, is likely to be more effective and have fewer incentive distortions. Besides, given the relative ease of transferring cash instead of various other benefits, it reduces the scope for pilferage and other leakages. Further, by imposing suitable conditions, it becomes possible to achieve important social goals.

Here is a list of how the most important government welfare and development programs can be redesigned to make it similar to a conditional cash transfer program.

1. Public Distribution Scheme (PDS)
The subsidy for the foodgrains distributed to the poor can be transferred directly as cash. They can purchase the foodgrain at the market price from any regular shop. The subsidy component can be variable, depending on the market price for the particular type of foodgrain. The eligible benenficiaries may be given the subsidy as a cash transfer into their accounts, subject to their achieving certain specified social goals. These goals may include sending children to school (in which case the subsidy can be transferred to an account on producing the attendance particulars) or being part of a good Self Help Group (the money can be transferred to the SHG account). For all those with social security pensions, the subsidy can be transferred into their pension accounts.

2. School Vouchers
Poor children can use school vouchers to get admission in private schools. The subsidy can be in the form of a voucher for a minimum amount, which can be topped up by the beneficiary to select any school of choice. Government run schools will also run, but in competition with the private schools.

3. Housing vouchers
Instead of giving ownership of houses, poor people, especially in urban areas, can be allotted rent vouchers which can be used to get accomodation in government housing estates or private houses. The rent vouchers, for a specified subsidy amount, can be topped up by the beneficiary to get an accommodation of their choice.

4. Health Care and Insurance
Basic health care can be delivered though Primary Health Centers (PHCs). A universal health insurance system should be put in place that provides for all tertiary and even some secondary care. The insurance benefits should be conditional again to certain social desirables like sending children to school, universal immunization, participation in adult literacy programs, and getting family planning operations done. The insurance subsidy can be transferred to the account of the individual or the SHG of which the individual is a member, as an insurance credit. The individual may be given the option of either joining a basic health insurance scheme which becomes available with the subsidy or purchasing a different scheme from the market by topping up the subsidy. Group insurance schemes with the SHG as the unit, can also be explored.

5. Agriculture subsidies
The major agriculture subsidies are for fertilizers, seeds, and as price support. Instead of artificially keeping the market prices of these items low, thereby distorting the market incentive structure, it is more efficient to provide the subsidy support as a cash transfer. The amount of subsidy can be pre-determined. The challenge with this approach would be in correctly targetting the beneficiaries. This assistance should be confined to farmers below the poverty line and having small landholdings. The subsidy support can be delivered directly to their accounts. Poor farmers can be encouraged to form Farmers Groups and members of good groups can be transferred the subsidy amounts. Another way of targetting is to transfer the subsidy to the kisan credit card, thereby incentivize farmers to take the same. All this will also go a long way into bringing farmers into the organized sector. The money can also be transferred to the wife's SHG account.

6. Employment Training assistance
The individuals wanting wage and self employment training and eligible for government assistance can be identified. They can then be given training vouchers, of a specified amount, which can be used to access training in private institutes. The individual can top up the voucher amount and go to an inistitute with a higher training cost, but perceived to offer him better prospects.

Apart from improving the effectiveness of these programs, the aforementioned methods will also reduce the incentive distortions inherent in government welfare programs. By insisting on bank accounts, such programs will go a long way in enabling access to formal channels of credit and bringing transparency to the administration of such schemes. The SHG based transfers can be made mandatory especially in the southern states, and others where the SHG movement is strong.

Administering such programs poses a major challenge in terms of managing databases and close co-odination between different government agencies. An integrated database, that links the individual databases of the different departments, can go a long way in addressing many operational problems. In any case, such a database is a necessary condition for effectively administering any large program. It is worth spending both the effort and the resources to achieving it. That this is achievable is borne out by the fact that both the NREG wages and now the Social Security Pensions are being delivered to the beenficiaries through bank (and post office) accounts in many places.

All these are only some illustrative examples of how we should look at re-modelling our anti-poverty programs. They will need to be implemented carefully, not as shock therapies, but with appropriate area-specific phasing and sequencing of activities, so as to ensure that the transition is trouble free. They attempt to address some of the major deficiencies associated with the traditional programs, and in the process achieve some critical social goals by incentivizing the beneficiaries. These strategies will give choice and discretion in decision making to the beneficiary, remove all market distortions and re-align incentives, minimize delivery channel leakages and pilferages, and also achieve important social goals. In other words, it seeks to achieve the full-bang for the development-buck!

The proposed introduction of smart cards for PDS will considerably help in administering cash transfer programs.


gaddeswarup said...

What is fungibility?

Urbanomics said...

A fungible item is freely exchangeable. In this case, the reference is to the universal, in kind assistance by way of access to particular school or hospital or training program or insurance scheme, or one type of foodgrains through the PDS etc, which are the mark of traditional anti-poverty programs. The beneficiary is stuck with the type of assistance delivered, whether he wants it or not. This approach does not address the differential needs and wants of individual beneficiaries.

For example, a farm laborer with a ration card (PDS card) may not need the PDS rations during his harvest months and may need more PDS goodgrains during other times. Providing him cash, instead of the foodgrains, eliminates such preference problems and delivers assistance in the most appropriate form. The beneficiary is given the spending choice.

gaddeswarup said...

Thanks. Google gave a lot of different meanings and I wanted to make sure of your use, From the context it did seem that some flexibility is involved. Thanks again.