Part 3; Chapter 10: Direct interventions against poverty - PowerPoint Presentation

1. Part 3; Chapter 10:Direct interventions against povertyMartin Ravallion Georgetown University course ECON 156: Poverty and InequalityLecture notes to accompany Ravallion’s The Economics of Poverty

2. Persistent shocks + chronic povertyContinuing threat of macro crises (food price shocks, Global Financial Crisis, Euro crisis)But regular crises from uninsured risk are a fact of life for the world’s poorest:Employment shocksHealth shocks (incl. epidemics)Agro-climatic shocksSo is chronic poverty a fact of life; even with the progress that has been made against extreme absolute poverty

3. Is it easy to eliminate poverty?It has often been noted that the world’s aggregate poverty gap is modest when one uses poverty lines typical of low-income countries. Recall from Part 3.1 =>Example: Annie Lowrie (NYT, Feb 2017): “…the global poverty gap is roughly what Americans spend on lottery tickets every year, and it is about half of what the world spends on foreign aid.”The implication drawn is that it should be relatively easy to eliminate global poverty. Is that right?3

4. Recall: Global poverty gapWorld (including the OECD countries) GDP per capita was $24.58 per day, implying that the global aggregate PG was 0.33% of global GDP using the $1.25 line and 1.28% using $2.4$670bn; $166bn for $1.25 a day (2005 PPP)

5. This lecture: The policy issues, debates and lessons for policy reformThe policy problem: Defining the role of direct interventions. The economic arguments for and against: constraints (information, incentives), trade-offs, targeting.Examples from actual policy experiences.We will see that eliminating poverty using transfers is a much bigger problem that the poverty gap calculation suggests.

6. Policy debates on social protection(EOP Chapter 10)The incentives debateThe targeting debatePolitical economy of targetingPolicies that try to promote as well as protect6

7. Background7

8. Chronic poverty and pervasive risksPoverty is pervasive, by both a common international line and by lines typical of the country of residence. So too is uninsured risk:Employment shocksHealth shocks (incl. epidemics)Agro-climatic shocks Absolutely poorRelatively poor8

9. Growth is not sufficient(Recap Part 3.2)Relative inequality is rising in some growing countries, though falling in others.Rising absolute inequality in most growing countries.Economic growth has come with lower absolute poverty, but it has had much less impact on relative poverty.Losers as well as gainers. “Churning.”New evidence that the poorest are left behind. It may well be harder to reach the poorest.Growth in market economies leaves continuing downside risk everywhere, at virtually all income levels.9

10. Historical role of Social Safety Net (SSN)As countries develop, they tend to rely more on social policies, esp. social safety nets, combining public insurance and current assistance for those in need.A number of possible reasons why:Harder to reach poorest through growth aloneDemocratization coming with developmentExternal demands to compensate losers from adjustmentIncome effect on the demand for SSNBetter administrative capabilities for SSN policies.10

11. Governments in the developing world are turning to direct interventionsSSNs were sparse in developing world prior to 1990. Since 2000, many developing countries have implemented SSNs. Today, about one billion people in developing countries receive some form of social assistance. Most developing countries now have at least one such program (however small). The percentage of the population receiving help from the SSN is growing at 3.5% points per annum! 11

12. One billion poor; one billion SSN recipientsLiving in povertyReceiving help from SSN12But mostly not the same people in poor countries!

13. Richer countries tend to be better at reaching their poor13

14. Cruel irony: Poorer countries are less effective in reaching their poorData from World Bank’s ASPIRE site: http://datatopics.worldbank.org/aspire/indicator_glance. 14

15. There is a variance in performanceSome poor countries do better than others in reaching their poor.Compared to today’s poor countries, today’s rich countries appear to have done better at reaching their poorest when those countries were poor. 15

16. Protection + promotion16

17. Protection + promotion Twin objectives of social policy: promotion and protection. How should we understand this distinction? 17

18. The roles for SSN policy depend on existing markets and institutionsSome argue against intervention in market outcomes—that the pie will be larger without intervention, allowing more scope for “post-market” redistribution. Against this view, the conditions for markets to be efficient in the absence of intervention do not hold in reality and deviations from efficiency have important implications for equity. The separation between efficiency and equity is hard to maintain with incomplete/imperfect markets.18

19. Recall the idea of a wealth poverty trap(Part 3.2)Three equilibria, A,B,C, but only A and C are stable.Wealth poverty trap at A.Positive consumption (=income) for those at A. And uninsured risk => transient income fluctuations.19

20. Two long-run classes in stable steady statesIn the long run, after repeated small shocks, the economy will settle in a state that can be thought of as having two main classes of people.One class has little or no wealth, given that its members are caught in a wealth poverty trap, at point A.There can be many reasons in practice why people are so trapped, including lack of any marketable skills, social exclusion, geographic isolation, debilitating disease, or environmental degradation. The second class comprises people who have settled at point C, at their respective steady-state levels of wealth.20

21. There can be steady-state poverty with or without a trapThere can still be inequality within each class. There can be inequality of labor earnings amongst the poorer class, and there can be wealth inequality amongst the “point C folk,” given different steady-state levels of wealth. There can be poverty even if nobody is caught in a poverty trap. The “poor” can be identified as two groups of people: those at point A and the poor amongst those at point C, i.e., those for whom their steady-state level of wealth turns out to be very low, even though they are not caught in a poverty trap.21

22. Two types of antipoverty policiesProtection policies provide short-term palliatives by assuring that current consumptions do not fall below some crucial level, even when some are trapped. Promotion policies either: Allow poor people to break out of the trap, by permitting a sufficiently large wealth gain, to put them on a path to reach their (higher and stable) steady state wealth, orRaise productivity for those not trapped.Protection has a long history (ancient Asia and Europe).Promotion is a modern idea (from late C18th). 22

23. Two types of promotion policies23Type 1: If destitute (at A), then a large enough gain in wealth will get you onto the path to point C.Type 2: Raising productivity at all levels of initial wealth: with sufficient gain in productivity the trap will vanish.Type 2Type 1

24. The incentives debate:A protection-promotion trade-off?(EOP Section 10.2)24Many policies combine aspects of both promotion and protection. But can we have more of both? Or is there a trade-off?

25. Protection limits promotion but how much?25While policy makers typically want SSN to assure a minimum standard of living, this may discourage personal efforts to escape poverty by other means.Incentive effects on work, fertility, savings.ProtectionPromotionProtection-Promotion Trade-offProtection-Promotion Tradeoff (PPT).The optimum is unlikely to be either at full protection or no protection but maximum promotion.

26. The longstanding debate on incentivesPolicy makers typically want the social safety net (SSN) to assure a minimum standard of living. One side of the debate: “This will discourage personal efforts to escape poverty by other means.” “Dependency.”This side of the debate points to behavioral responses through work effort, savings, fertility and family formation are often sited as adverse incentive effects of a SSN.26

27. The other side of the debate: “Trade-off is exaggerated. Incentives not an issue”In an under-employed economy: If there is excess capacity (unemployment), a fiscal stimulus concentrated on the poor is likely to bring a short-term gain to aggregate effective demand, and hence output. Poorer people have higher marginal propensity to consume from income gains.Keynes’s General Theory, Chapter 24 (EOP, Box 1.22). In a fully employed economy: The idea of an inevitable long-run tradeoff can also be questioned:Multiple equilibria, poverty trapsCredit market failures + diminishing marginal productsPolitical economy27

28. The debate on incentives for risk-takingMoral hazard in social protection?One side of the debate: Using public money to help those who took high risks, and lost out, can encourage excessively risky behavior in the future. (“Moral hazard”)The other side: Here too the trade-off is exaggerated. Uninsured risk can spill over into production and investment decisions of poor people in ways that can severely impede longer-term prospects of escaping poverty.Taking kids out of schoolForgoing investment in own enterprise Poverty trap: protection from large negative shocks my be crucial for sustained promotion.Lack of insurance for the poor is probably a more important reason for persistent poverty than too much insurance! 28

29. Incentives depend on program designWhile incentive issues have often been exaggerated, they should not be ignored.The incentive effects depend on the design of the program, esp., how finely targeted it is.Fine targeting can have adverse incentive effects. In an effort to better focus antipoverty efforts on poor people there have been many proposals for more finely targeted policies; transfer received falls rapidly with higher income.More inclusive, less targeted programs, tend to have better incentive effects.29

30. The Benefit Withdrawal RateIn any means-tested (“targeted”) program there will be some reduction in the transfer paid as pre-transfer income rises.The rate at which transfer received falls as income rises is the Benefit Withdrawal Rate or Marginal Tax Rate (MTR). (Think of the transfer as a negative tax.)Fine targeting can create a high MTR on poor families, with adverse incentive effects.When the MTR for a program (or set of programs) gets close to 100% then incentive effects become a major concern.At moderate MTRs (say around 50%), there is much less reason to worry about incentive effects.30

31. Example: Do transfers reduce work effort in South Africa?South Africa’s old-age pension: paid to all women over 60 and men over 65. In practice everyone who is eligible gets the transfer—about double the median income. With some degree of income pooling within households, the simple economics of work-leisure choice would imply that this transfer reduced work.That is not what happened! Panel data suggest that the pension helped families get around credit constraints on out-migration by younger adult family members (often leaving the pensioner to look after the kids).31

32. Other constraints on the policy problemIncentive effects have dominated economic analysis, but other constraints may well matter more in practice.Information/administration: “The poor” in developing countries are not so easily identified; means testing is rarely feasible. State capacity is often weak, leading to corruption/wastage.Measurement errors confound assessments of targeting.The appearance of “poor targeting” can stem from errors in assessing who is really poor!Proxy-means tests often have poor predictive ability; large targeting errors. Better social protection (incl. crisis preparedness) requires investments in better data.32

33. Information constraintsData constrain policy: incentives to miss-report; costs of data collection. Better social protection (incl. crisis preparedness) requires investments in better data.Huge improvement in survey data design and availability, though continuing concerns about data quality.Priors “on the ground” (field work) can contain useful clues.Sound social policies also requires thinking about incentives and program design, given information constraints and administrative capacity.33

34. Political economy constraintsPolitical economy: “Programs for the poor are poor programs” (Larry Summers)Recall median voter model. Even when inequality is high (high mean/median) if the median voter does not benefit sufficiently (since the money only goes to the poor) then there will be little support for redistribution. Transfer from rich to poor bypassing median voter34

35. Agency problems by levels of government35The weight given to promotion relative to protection may depend on the level of government.Moral hazard: Risks are not fully covariate. Local government can expect center to help in a crisis. So local implementing agents may well undervalue protection relative to the center.Political economy (staying in power) may also lead the center to put too high a weight on protection relative to promotion.CenterLocalProtectionPromotionProtection-Promotion takeoff

36. Challenges in making a pro-poor safety net politically sustainableState-contingent safety net programs that provide insurance will have a broader base of supporters than the direct beneficiaries. Unclear that the middle class will support safety net reform, especially when it takes the form of targeted programs for the poorest.Programs that impose conditions on recipients to change their behavior in ways that will reduce future poverty will invariably get broader public support.Though there may well be trade-offs here too; impacts on current poverty may be lower due to forgone labor earnings.36

37. The targeting debate: Universal provision vs. fine targeting(EOP Section 10.2, pp.560-2)37

38. Recall: Information constraints“The poor” in developing countries are not so easily identified; means testing is rarely feasible. State capacity is often weak. Corruption.Data constrain policy: incentives to miss-report; costs of data collection. Better social protection (incl. crisis preparedness) requires investments in better data.Huge improvement in survey data design and availability, though continuing concerns about data quality.Priors “on the ground” (field work) can contain useful clues.38

39. One possible solution: Basic IncomeEveryone receives the same transfer, poor or not Variously called universal basic income (UBI), basic income guarantee (BIG), “citizenship income”)Very little information is required. But we typically do have some information on who is poor and who is not.Few incentive effects of the transfer, good or bad (only income effect on demand for leisure)Nothing you can do to change the amount received!No built in mechanism for responding to shocks39

40. BIG tradeoffsA large uniform cash transfer financed by (say) progressive income tax => large gains to poor people. However:Why should we ignore the information we do have on who is likely to be poor and who is not?What is the cost to promotion from poverty through other means (health and schooling)?A better idea? Basic Full Income, incl. imputed values for in-kind spending on health and education.Forces the public awareness and articulation of the trade-offs. Public debate about values.40

41. Don’t forget about financing!41Suppose that the UBI/BIG is financed by progressive income tax (EOP: Box 10.3)

42. Some BIG myths“No incentive effect”: but don’t forget the income effect: people who don’t like work will work less (EOP Box 1.4). But maybe they work too much! Welfare losses + less investment in early childhood development.Although the information problem of identifying poor people no longer arises for the UBI/BIG, this advantage is likely to be lost once the scheme is financed. If one still wants to assure that only the poor receive a net gain, then the information/incentives problem returns. There will be a negative income tax scheme that can achieve the same final distribution of income as a BIG. In last slide: those with an income below z incur negative taxes while those above z pay positive taxes.42

43. Subsidies on normal goodsA more common form of untargeted transfer is the use of universal subsidies on normal goods Still widespread use of subsidies on food, fuel housing etc.Potentially large cost, which leaves fewer public resources for other things relevant to promotionAnd not much protection either: relatively little goes to the poor; unresponsive to shocksAlso environmental concerns about fuel subsidies; fossil fuel consumption should be taxed not subsidized.Current beneficiaries resist reform efforts Riots in Paris in Fall 2018 led to reversal.43

44. Recall the cruel irony: Poorer countries are less effective in reaching their poor44

45. For and against targetingOne side: By targeting poor people we can assure greater impact on poverty for the same aggregate outlay or spend less to obtain the same impact on poverty.Emphasis on inclusion errors (benefits to non-poor people)The other side: Concerns about incentive effects, though imperfect information dulls these concerns.Targeting is imperfect in practice, esp., high exclusion errors (leaving out poor people). “Targeting errors” include errors in measuring economic welfare. Targeting comes with hidden costs, and may undermine the broad political consensus for social protection45

46. Example: Targeting transfers in Kyrgyzstan using a proxy-means test 46Source: Development Pathways blog post.

47. “Targeting” can help, but it is not the objectiveThe most finely targeted policy need not have the most impact on poverty.Costs of fine targeting: administration; costs imposed on participantsInformation problems; measurement errorsMeasurement errors confound assessments of targeting.Proxy Means Tests (PMT): regression based using a survey to calibrate the PMT; but how good? The appearance of “poor targeting” can stem from errors in assessing who is really poor!Potential for adverse incentives: high marginal tax rates=>poverty traps. (EOP: Box 10.1)47

48. The $200 billion gapThe total “poverty gap”—the total sum of money that would bring everyone up to $1.25 a day at 2005 PPP—was $200bn in 2005.This is less than one quarter of the $800bn fiscal stimulus passed by the US government in 2009.Quantile function: y(p)However, the cost of eliminating poverty by transfers could well be far higher than $200bn, given incentive effects, information problems and political economy.The problem is a lot harder! H48

49. Advocates of finely targeted policies often observe that the aggregate “poverty gap” can be rather small.However, this understates the likely cost of perfectly targeted transfers given behavioral responses.High marginal tax rates reduce the incentive to escape poverty and increase the fiscal cost of the policy. “Perfect targeting” can create a poverty trap49Aggregate poverty gapIncome of pth percentileH

50. Advocates of finely targeted policies often observe that the aggregate “poverty gap” can be rather small.However, this understates the likely cost of perfectly targeted transfers given behavioral responses.High marginal tax rates reduce the incentive to escape poverty and increase the fiscal cost of the policy. Cost can rise to zH due to work diss-incentive“Perfect targeting” can create a poverty trap50Aggregate poverty gapH

51. Advocates of finely targeted policies often observe that the aggregate “poverty gap” can be rather small.However, this understates the likely cost of perfectly targeted transfers given behavioral responses.High marginal tax rates reduce the incentive to escape poverty and increase the fiscal cost of the policy. Cost rises further when some non-poor are attracted“Perfect targeting” can create a poverty trap51Aggregate poverty gapIncome of pth percentileQuestion: When might the cost rise beyond zH? H51

52. Assuring flexibility in responding to shocks has proved illusive in practiceTo provide protection, the social safety net must respond flexibly to changing needs, and not rely heavily on administrative discretion. This can create public fiscal stresses (sharp spikes in outlays).When we look at the “safety nets” found in practice, few provide effective insurance since they do not adapt readily to changing circumstances. Unless the public safety net is genuinely state-contingent it cannot help much in reducing the costs of insurance facing the poor. 52

53. Capacity for better safety nets Community-based targeting can sometimes help: Better information available locally, though also scope for contamination/capture.Community satisfaction is important to the acceptance/ sustainability of SSN reforms. But the administrative infrastructure must be in place for reporting and addressing grievances. Stronger local state, not weaker.Also scope for local capture = inflexibility.New technologies can also help: Identity cards; “smart” info systems; privacy concerns (e.g., India).53

54. New technologies can help: Aadhaar in IndiaAadhaar Act (2016) in India for targeted delivery of financial and other subsidies, benefits and services;12 digit unique-identity number issued to all Indian residents based on their biometric and demographic data. Collected by the Unique Identification Authority of IndiaAadhaar is the world's largest biometric ID system, with over 1.2 billion enrolled members.Privacy concerns; a trade-off?Mistakes happen; large welfare costs to a small number of people.54

55. Using incentives to improve information: self-targetingOne way to provide effective insurance—a genuine “safety net”—is to build in design features that: only encourage those in real need to seek help and encourage them to drop out of it when help is no longer needed given better options in the rest of the economy. Subsidies on the consumption of inferior goods (demand falls as incomes rise) are self-targeted to the poor. The problem is that not many goods are inferior, although there have been cases in which this was feasible. Tunisia in 1990s was able to make its food subsidies more cost-effective in reducing poverty by creating inferior food items through packaging. 55

56. Policy debates on social protection: England’s Poor Laws56

57. Recall from Part 1Debates on England’s Poor Laws in C19thPoor Laws had become a fiscal burden on the politically powerful landholding class. Reform push in early C19th.Adverse incentives claimed, esp., on work and fertility. Townsend (1786): “These laws, so beautiful in theory, promote the evils they mean to remedy, and aggravate the distress they were intended to relieve.” Ricardo (1817): “..it is quite in the natural order of things that the fund for the maintenance of the poor should progressively increase until it has absorbed all the net revenue of the country.”The extent of these effects is unclear. Potential positive benefits ignored (insurance and development). Exaggerated incentive effects to serve political economy?57

58. WorkhousesThese had first emerged in the late 16th century. The idea was that welfare recipients would need to agree to be incarcerated, and obliged to work for their upkeep. Intended for the poorest, and for the “deserving poor” in particular, not as a general remedy for poverty. Incentives for “self-targeting.”58A Bermondsey workhouse admission ticket, issued to people seeking relief.Men chopping wood in a workhouse

59. Targeting through workhousesCalls for better targeting to cut the cost of the poor laws. Influenced by Malthus and Ricardo, significant reforms to the Poor Laws were implemented in the 1834.Main change: greater use of workhouses.These were intended for the poorest, and for the “deserving poor” in particular, not as a general remedy for poverty. 59Sharp reduction in cost of poor laws; 2.5% GDP in 1830 fell to 1% in 1840.But staunch social criticism from the start. Dickens (esp., in Oliver Twist) and Disraeli.

60. Targeting fetishism?Workhouses were a means of getting around the information and incentive problems of targeting. But they do so by imposing costs on participants—notably the foregone earnings and the welfare costs of stigma and subjugation (as Oliver Twist experienced). A truly utilitarian assessment is likely to be ambiguous (taking account of all the welfare costs and benefits).England’s workhouses of the mid 19th century clearly went too far in imposing costs on participants to assure self-targeting. In short, the obsession with finer targeting undermined the Poor Laws, even as a protection policy. 60

61. The political economy of targeting61

62. “Programs for the poor are poor programs”Concentrating benefits on a small group of people can undermine the political support for social protection and antipoverty policy. This holds in both democratic and authoritarian regimes (though different non-poor groups may have political clout).62Recall the power of the median voter in a democracy. Redistribution from the “rich” to the “poor” may get little or no political support.

63. Political economy constraints:Will the bulging middle class support pro-poor reforms?The middle class can be an engine of growth, which will help reduce poverty:fostering entrepreneurship, shifting the composition of consumer demand, supporting provision of public goods.The middle class can also be a force for reform, especially when their economic opportunities do not accord with expectations. However, less clear that the middle class will support safety net reform, especially when it takes the form of targeted programs for the poorest. 63

64. => Look for ways to make a pro-poor safety net politically sustainableState-contingent safety net programs that provide insurance will have a broader base of supporters than the direct beneficiaries. Programs that impose conditions on recipients to change their behavior in ways that reduce future poverty will invariably get broader public support.Though there may well be trade-offs here too, esp., when the conditions come at a cost to participants.Example of workfare: current poverty may be lower due to forgone labor earnings of participants.64

65. Public information campaigns and timingPolitical sustainability depends in part on public information and perceptions, esp., on the credibility of reform efforts.The reasons for reform efforts need to be well understood by an often skeptical public. This will help assure broader political support.Credibility is greater if the new program is in place before subsidies are cutFor example, Indonesia’s unconditional cash transfer program, Bantuan Langsung Tunai (BLT), was put in place before cutting fuel subsidies in anticipation of adverse impacts and opposition. This helped.65

66. 66ProtectionPromotionProtection-Promotion Trade-offSocial policies that try to both protect and promoteTrying to improve the P-P trade-off through smarter social policies (“social investment”)

67. Efforts to improve the trade offUntargeted policies (incl. generalized subsidies on normal goods) can probably only achieve significant protection at high fiscal costs, which may jeopardize spending on other things needed for promotion.i.e., they may face a severe trade off between protection and promotion. A number of (old and new) schemes aim to achieve both protection and promotion => “social investment.”A key element is the use of incentive mechanisms through conditionalities. Two main policies: Conditional Cash TransfersWorkfare 67

68. 1. Conditional Cash Transfers(EOP: Section 10.3)68

69. Conditional Cash Transfers (CCT)CCT require the children of the recipient family to demonstrate adequate school attendance (and health care in some versions). Aim to strike a balance between reducing current poverty and reducing future poverty.Two objectives of CCT: promotion by increasing schooling (reducing future poverty) and protection by reducing current poverty through targeted transfers.69

70. Examples of CCTsEarly examples in developing countries:Mexico’s PROGRESA (Oportunidades), Bolsa Escola in Brazil and Food-for-Education Program in BangladeshAbout 50 countries now have CCT programs and the number is growing. Also in rich places (New York City).Other countries have formally similar policies, though not called CCTsFor example, in attempting to assure that poverty did not constrain schooling, since 2002 China has had a “two exemptions, one subsidy” policy for students from poor rural families; the exemptions are for tuition fees and textbooks and the subsidy is for living costs.70

71. Understanding CCTs 1These programs aim to breaking the intergenerational poverty trap stemming from the fact that kids from poor families are less likely to be in school. If the sole concern was with current income gains to participating households then a policy maker would not impose schooling requirements, which entail a cost to poor families by incentivizing them to withdraw children or teenagers from the labor force, thus reducing the (net) income gain to poor people. The idea of these programs is to strike a balance between protection and promotion, premised on the presumption that poor families cannot strike the socially optimal balance on their own. 71

72. Understanding CCTs 2The incentive effect on labor supply of the program (often seen as an adverse outcome of transfers) is now judged to be a benefit—to the extent that a well-targeted transfer allows poor families to keep the kids in school, rather than sending them to work. Concerns about distribution within households also underlie the motivation for such programs; the program’s conditions entail that relatively more of the gains accrue to women and children. Political economy: taxpayers and donors are more supportive when they know that recipients are compelled to do something to help themselves escape poverty in the future. 72

73. Evidence on CCTsEvidence that these schemes bring non-negligible benefits to poor households, in terms of both (i) current incomes and (ii) future incomes, through higher investments in child schooling and health care. The conditions are seen to change behavior in a positive way. In the UK, means-tested grants paid to secondary students have been found to be very effective in reducing the incidence of school drop outs from poor families. The various evaluations of Mexico’s PROGRESA/ Oportunidades program have been positive.73

74. Evidence on CCTs cont.Sizeable gain from the schooling conditions in a Malawi CCT. A study for Burkina Faso, found that the conditionality mattered more in encouraging the school enrollment of children who were initially less likely to go to school, including girls—children who are less likely to receive investments from their parents. A CCT program in Indonesia, Jaring Pengamanan Sosial, had greatest impact at the lower secondary school level where children are most susceptible to dropping out. 74

75. The design features are keyPROGRESA: Yes, an impact on schooling, but it could have had a larger impact. A budget-neutral switch of the enrolment subsidy from primary to secondary school would have delivered a net gain in school attainments, by increasing the proportion of children who continue onto secondary school. Trade off again: Refocusing the subsidies on secondary schooling would reduce the impact on current income poverty (by increasing the forgone income from children’s employment). 75

76. Critiques of CCTsConcerns about how responsive these programs are to changes in need. A previously ineligible household hit by (say) unemployment of the main breadwinner may not find it easy to get help. Proxy-means tests (using regressions on survey data) tend to be based on imperfect correlates of poverty.Efforts should be made to re-assess eligibility. Concerns about the conditionsDo they change behavior in a positive way? More kids in school but do they learn? Design issues (schooling level).Paternalistic? Maybe parents know more than government.Would unconditional transfers do a better job?Continuing research to answer this question.76

77. 2. Workfare(EOP: Section 10.4)77

78. WorkfareConditions again: work requirements for self-targeting, in that non-poor people will rarely want to participate.Widely used in crises at all stages of development Famously, workfare programs were a key element of the New Deal introduced by US President Franklin D. Roosevelt in 1933 in response to the Great Depression. They were also a key element of the Famine Codes introduced in British India around 1880 and have continued to play an important role to this day in the sub-continent. Relief work programs have helped in responding to, and preventing, famines in Sub-Saharan Africa. During the East Asian financial crisis of the late 1990s, both Indonesia and Korea introduced large workfare programs, as did Mexico in the 1995 “Peso crisis,” Peru during its recession of 1998-2001 and Argentina in the 2002 financial crisis. 78

79. Recall from Lecture 1:The origin of India’s workfare programsAround 300 BC, the Indian academic and advisor to Royalty, Chanakya (also known as Kautilya) recommended that when famine looms a good king should “..institute the building of forts or water-works with the grant of food, or share [his] provisions [with the people], or entrust the country [to another king]”. 79

80. Costs and benefits of workfareNon-poor people are unlikely to want to do unskilled manual labor at low wage rate.But there are costs to consider:Administrative and supervision costsNon-labor inputsForegone incomes of participants + disutility of workAlso benefits:Targeting the poor without dataAssets created can benefit poor peopleInsurance; empowermentGains in wages for similar private sector workAll the costs and benefits need to be considered.80

81. India’s National Rural Employment Guarantee Act (NREGA) NREGA is the most ambitious effort India has ever made to directly address absolute poverty. Introduced in May 2006, the scheme aims to:guarantee 100 days/ h’hold/year of unskilled work on public works projects in rural areasprovides work on demand after households obtain a job card;pay a piece-rate such that a normal worker can earn the state-specific minimum wage rate set for the scheme give women equal wages to men for the same work

82. Findings on forgone incomesWorkfare participants are not drawn solely from the pool of the unemployed. Poorest cannot afford to be idle. For India: research suggests that around one quarter to one third of the workfare wage is forgone. But the cost of participation varies greatly, with three distinct groups evident: those with roughly zero forgone income, those for whom the forgone income accounts for roughly around half their workfare wage and those for whom it is much higher, with only small net gain. Only for the latter group (the smallest) is the opportunity cost approximated by the wage for casual market labor.82

83. Findings on poverty impacts of NREGAA study for Bihar, India: Factoring in the household-specific opportunity costs and other costs (e.g., supervision), the extra earnings from NREGA alone probably have less impact on poverty than either a basic-income scheme, providing a uniform transfer of the same gross expenditure to everyone (whether poor or not), or a uniform transfer to all those holding a government-issued ration card intended for poor families. So, even in a poor labor-surplus rural economy, the self-targeting mechanism that is achieved by imposing work requirements is probably not enough to tilt the balance in favor of unproductive workfare over options using cash transfers with little or no targeting.83

84. Performance issues are limiting the potential benefits on NREGALarge potential impact on poverty if NREGA works as intended.However, actual impact on poverty is well below potential. Rationing is the main reason: workers cannot get NREGS work when they want it. This also makes it unlikely that there will be large insurance and empowerment benefits for poor people.The supply side will also need to be more responsive. Monitoring and auditing by both citizens and state are needed to assure that rationing is no longer feasible.Or try a simpler scheme? Even untargeted transfers!84

85. Can a workfare scheme be reformed to work better in practice?Forgone incomes are not easily controlled. Any gaps between the stipulated wage rates and wages received might be reduced. Workers must know.Pro-poor reform could also reduce any unmet demand for work on the scheme. Better public information and a more responsive supply side. These would enhance the impact on poverty though (of course) at a greater cost to the public budget. Cost effectiveness would need to be re-assessed at the implied higher level of funding.85

86. Make workfare more productive?A second direction for reforms is to assure that workfare is productive—that the assets created are of value to poor people (or that cost-recovery can be implemented for non-poor beneficiaries). The creation of durable assets has not had much attention from the scheme’s advocates and/or administrators. That may need to change. 86

87. Overview of the policy instruments

88. Summary88Objective:Policy:ProtectionPromotionBasic incomeLimited, unless expensiveNot much harm,unless expensiveSubsidies on normal goodsLimited; non-poor capture bulk of gainsHigh fiscal cost,distortions Unconditional transfersScope for addressing macro shocks; harder for idiosyncratic shocksMay help get around credit constraints.Conditional cash transfersScope for addressing macro shocks; harder for idiosyncratic shocksThe conditions may induce positive behavioral changeWorkfareYes, if work is available when neededYes, if induced investment or assets of value to poor people

89. Key things to aim for in SSN reformSSN should provide effective protection, which will require flexibility in responding to shocks.It should also be consistent with promotion; there need not be a long-term tradeoff with the right SSN policies, in the context of a broader strategy for fighting poverty.Reforms must be administratively feasible; need to invest in administrative capabilities incl., public data. Reforms must be fiscally sustainable including coping with variability in fiscal outlays in risk-prone settings.And they must be politically sustainable, which will require a reasonably broad base of support. Successful SSN reforms will be adaptive, changing in the light of careful monitoring and evaluation. 89

90. Six recommendations for better direct interventions90

91. Tailor policies to the realities of the settingTap local information + effective state supportFocus on poverty not finer “targeting” per seProtect and promoteMonitor and evaluateLearn from mistakes91

92. Recommendation 1: Policies must be tailored to the realities of the settingSuccessful policies respect local constraints on the information available, administrative capabilities and incentive constraints. A key role for analysts is to learn about these constraints and make them explicit. Too often policy making is done in the absence of a proper understanding of these constraints, which makes for bad policies.92

93. Recommendation 2: Tap local information but with effective state supportTapping local information can help identify those in need, and help in responding, but it must be combined with strong governments. We have seen greater use of participatory, community-based (governmental and non-governmental), institutions for income support and/or service provision. However, these should not be seen as substitutes for strong public administration, which will still be needed in guiding and monitoring local institutions, including addressing grievances. 93

94. Recommendation 3: Focus on poverty reduction not finer “targeting” per seExcessive emphasis on reducing inclusion errors, but leaving high exclusion errors. The most finely targeted policy (lowest inclusion errors) need not have the most impact on povertyInformation problems; measurement errorsProxy means tests are often poor means tests, esp., poorestHidden costs of participationAdverse incentives: high marginal tax rates => poverty trapsPolitical economy; concerns about undermining social support/political consensus94

95. Recommendation 4: Improve the protection-promotion trade-offYes, there can be a trade off, though it is often exaggerated. Transfers have a role in allowing markets to work better from the perspective of poor people.“Smart,” “Social investment,” approaches (CCT and productive workfare) show promise. But assessments must consider all the costs and benefits and avoid paternalism.Greater flexibility is needed in responding to shocks. Participant capture is a common problem. Also local moral hazard. Don’t be too ambitious: administrative capacity is a key constraint in practice.95

96. Recommendation 5: Monitoring and evaluation are crucialThere are persistent knowledge gaps about the effectiveness of this class of policies. In addressing those gaps, generalized preferences among the methodological options are rarely defensibly in the absence of knowledge about the setting, and (especially) the data that are available. There is a menu of defensible options.It is no less important that policy makers are active in identifying key knowledge gaps, and/or supporting the creation of relevant knowledge. 96

97. Recommendation 6: Learn from mistakesPolicy makers must also adapt to evidence of failure, admitting and learning from mistakes as well as scaling up successes. Too often, it seems, deficient programs survive well beyond their useful life. Bureaucratic inertia and participant capture appear to be common problems. The NGO GiveWell has a page on its website devoted to acknowledging its own mistakes (the first listed of which was not hiring a PhD economist, which the NGO is in the process of correcting at the time of writing). Citizens should demand that governments do the same. 97