Understanding Poverty and Direct Interventions in Economics

 
Part 3; Chapter 10:
Direct interventions against
poverty
 
Martin Ravallion
 
 
Georgetown University course ECON 156: Poverty and Inequality
Lecture notes to accompany Ravallion’s 
The Economics of Poverty
 
 
Persistent shocks + chronic poverty
 
Continuing 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 shocks
Health shocks (incl. epidemics)
Agro-climatic shocks
So is chronic poverty a fact of life; even with the
progress that has been made against extreme absolute
poverty
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
 
Recall: Global poverty gap
 
World (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)
 
This lecture: The policy issues, debates
and lessons for policy reform
 
The 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.
 
Policy debates on social protection
(EOP Chapter 10)
The incentives debate
The targeting debate
Political economy of targeting
Policies that try to promote as well as protect
 
6
 
Background
 
7
Chronic poverty and pervasive risks
Poverty is pervasive,
by both a common
international line and
by lines typical of
the country of
residence.
 
So too is 
uninsured risk
:
Employment shocks
Health shocks (incl. epidemics)
Agro-climatic shocks
Absolutely poor
Relatively poor
8
 
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
 
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 alone
Democratization coming with development
External demands to compensate losers from adjustment
Income effect on the demand for SSN
Better administrative capabilities for SSN policies.
 
10
 
Governments in the developing world
are turning to direct interventions
 
SSNs 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
One billion poor;
one billion SSN recipients
Living in poverty
 
Receiving help
from SSN
12
 
But mostly not the same people in poor countries!
 
Richer countries tend to be better at
reaching their poor
 
13
 
Cruel irony: Poorer countries are less
effective in reaching their poor
 
Data from World Bank’s ASPIRE site: 
http://datatopics.worldbank.org/aspire/indicator_glance
.
 
14
There is a variance in performance
Some 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
 
Protection + promotion
 
16
 
Protection + promotion
 
 
   Twin objectives of social policy: 
promotion
 and 
protection
.
 
 
     
How should we understand this distinction?
 
 
 
17
 
The roles for SSN policy depend on
existing markets and institutions
 
Some 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
 
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
 
Two long-run classes in stable steady
states
 
In 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
 
There can be steady-state poverty with
or without a trap
 
There 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
 
Two types of antipoverty policies
 
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:
(i)
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, or
(ii)
Raise productivity for those not trapped.
 
Protection has a long history (ancient Asia and Europe).
Promotion is a modern idea (from late C18
th
).
 
22
Two types of promotion policies
23
 
 
 
 
Type 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 2
 
Type 1
 
The incentives debate:
A protection-promotion trade-off?
(EOP Section 10.2)
 
24
 
Many policies combine aspects of both
promotion and protection.
But can we have more of both?
Or is there a trade-off?
Protection limits
promotion but how much?
25
While 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.
Protection
Promotion
Protection-
Promotion 
Trade-off
Protection-Promotion Tradeoff 
(PPT).
 
The optimum is unlikely to be either at full protection or no
protection but maximum promotion.
 
The 
longstanding 
debate on incentives
 
Policy 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
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 traps
Credit market failures + diminishing marginal products
Political economy
27
The debate on incentives for risk-taking
Moral 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 school
Forgoing 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
 
Incentives depend on program design
 
While 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
 
The Benefit Withdrawal Rate
 
In 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
 
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
 
Other constraints on the policy problem
 
Incentive 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
 
Information constraints
 
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.
 
Sound social policies also requires thinking about 
incentives
and program design
, given 
information constraints and
administrative capacity
.
 
33
Political economy constraints
Political 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 voter
34
 
Agency problems by
levels of government
 
35
 
The 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.
 
 
Center
 
Local
 
Protection
 
Promotion
 
Protection-
Promotion
takeoff
 
Challenges in making a pro-poor safety
net politically sustainable
 
State-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
 
The targeting debate:
Universal provision vs. fine targeting
(EOP Section 10.2, pp.560-2)
 
37
 
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
 
One possible solution: Basic Income
 
Everyone 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 
shocks
 
39
 
BIG tradeoffs
 
A 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
 
Don’t forget about 
financing
!
 
41
 
Suppose that the UBI/BIG is financed by
progressive income tax 
(EOP: Box 10.3)
 
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
 
Subsidies on normal goods
 
A 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 promotion
And not much protection either: relatively little goes to
the poor; unresponsive to shocks
Also 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
 
Recall the cruel irony: Poorer countries
are less effective in reaching their poor
 
44
For and against targeting
 
One 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 protection
45
 
Example: Targeting transfers in
Kyrgyzstan using a proxy-means test
 
46
 
Source: 
Development Pathways
 blog post.
 
“Targeting” can help, but it is not the
objective
 
The most finely targeted policy need not have the most
impact on poverty.
Costs of fine targeting: administration; costs imposed on
participants
Information problems; measurement errors
Measurement 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
The $200 billion gap
The 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!
H
48
 
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 trap
 
49
 
Aggregate
poverty gap
 
Income of 
p
th
percentile
 
H
 
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 trap
 
50
 
Aggregate
poverty gap
 
H
 
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 trap
 
51
 
Aggregate
poverty gap
 
Income of 
p
th
percentile
 
Question: When might the cost rise beyond 
zH
?
 
H
 
51
 
Assuring flexibility in responding to
shocks has proved illusive in practice
 
To 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
 
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
 
New technologies can help:
Aadhaar in India
 
Aadhaar 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
India
Aadhaar 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
 
Using incentives to improve information:
self-targeting
 
One 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
 
Policy debates on social protection:
England’s Poor Laws
 
56
 
Recall from Part 1
Debates on England’s Poor Laws in C19
th
 
Poor 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
 
Workhouses
 
These had first emerged in
the late 16
th
 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.”
 
 
58
 
A Bermondsey workhouse admission ticket,
issued to people seeking relief.
 
Men chopping wood in a workhouse
Targeting through workhouses
Calls 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.
59
Sharp 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.
 
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 19
th
 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
 
The political economy of targeting
 
61
“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).
62
Recall the power of the
median voter in a democracy.
Redistribution from the “rich”
to the “poor” may get little or
no political support.
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
 
=> Look for ways to make a pro-poor
safety net politically sustainable
 
State-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
 
Public information campaigns and timing
 
Political 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 cut
For 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
Protection
Promotion
Protection-
Promotion 
Trade-off
Social policies that
try to both protect
and promote
Trying to improve the P-P 
trade-off through smarter 
social policies 
(“social investment”)
Efforts to improve the trade off
 
Untargeted 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:
1.
Conditional Cash Transfers
2.
Workfare
67
 
1. Conditional Cash Transfers
(EOP: Section 10.3)
 
68
 
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
 
Examples of CCTs
 
Early examples in developing countries:
Mexico’s 
PROGRESA
 (
Oportunidades
),
Bolsa
 
Escola
 in Brazil and
Food-for-Education
 
Program
 in Bangladesh
About 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 CCTs
For 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
 
Understanding CCTs 1
 
These 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
 
Understanding CCTs 2
 
The 
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
 
Evidence on CCTs
 
Evidence 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
 
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
 
The design features are key
 
PROGRESA: 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
 
Critiques of CCTs
 
Concerns 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 conditions
Do 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
 
2. Workfare
(EOP: Section 10.4)
 
77
 
Workfare
 
Conditions 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
 
Recall from Lecture 1:
The origin of India’s workfare programs
 
Around 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
 
Costs and benefits of workfare
 
Non-poor people are unlikely to want to do unskilled
manual labor at low wage rate.
But there are costs to consider:
Administrative and supervision costs
Non-labor inputs
Foregone incomes of participants + disutility of work
Also benefits:
Targeting the poor without data
Assets created can benefit poor people
Insurance; empowerment
Gains in wages for similar private sector work
All the costs and benefits need to be considered.
 
80
 
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 areas
provides 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
 
Findings on forgone incomes
 
Workfare 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
 
Findings on poverty impacts of NREGA
 
A 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
 
Performance issues are limiting the
potential benefits on NREGA
 
Large 
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
 
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
 
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
 
Overview of the policy instruments
 
Summary
 
 
88
 
 
 
Key things to aim for in SSN reform
 
SSN 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
 
Six 
recommendations for better
direct interventions
 
90
 
1.
Tailor policies to the realities of the setting
2.
Tap local information + effective state support
3.
Focus on poverty 
not
 finer “targeting” 
per se
4.
Protect 
and
 promote
5.
Monitor 
and
 evaluate
6.
Learn from mistakes
 
91
 
Recommendation 1: Policies must be
tailored to the realities of the setting
 
Successful 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
 
Recommendation 2: Tap local information
but with effective state support
 
Tapping 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
 
Recommendation 3: Focus on poverty
reduction not finer “targeting” 
per se
 
Excessive 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 poverty
o
Information problems; measurement errors
o
Proxy means tests are often poor means tests, esp.,
poorest
o
Hidden costs of participation
o
Adverse incentives: high marginal tax rates => poverty
traps
o
Political economy; concerns about undermining social
support/political consensus
 
 
 
94
 
Recommendation 4: Improve the
protection-promotion trade-off
 
Yes, 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
 
Recommendation 5: Monitoring and
evaluation are crucial
 
There 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
 
Recommendation 6: Learn from
mistakes
 
Policy 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
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The lecture notes explore the issues of persistent poverty due to various shocks and the challenges in eliminating global poverty. It discusses the policy debates surrounding direct interventions, economic arguments, constraints, and targeting strategies. The complexity of poverty eradication through transfers is highlighted, emphasizing the need for effective policy reforms.


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  1. Georgetown University course ECON 156: Poverty and Inequality Lecture notes to accompany Ravallion sThe Economics of Poverty Part 3; Chapter 10: Direct interventions against poverty Martin Ravallion

  2. Persistent shocks + chronic poverty Continuing 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 shocks Health shocks (incl. epidemics) Agro-climatic shocks So 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 gap World (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. $670bn; $166bn for $1.25 a day (2005 PPP) Poverty gap ($2) The rest of world GDP 4

  5. This lecture: The policy issues, debates and lessons for policy reform The 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 debate The targeting debate Political economy of targeting Policies that try to promote as well as protect 6

  7. Background 7

  8. Chronic poverty and pervasive risks Number of poor in millions Poverty is pervasive, by both a common international line and by lines typical of the country of residence. 3000 2500 Relatively poor 2000 1500 1000 Absolutely poor 500 0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 So too is uninsured risk: Employment shocks Health shocks (incl. epidemics) Agro-climatic shocks 8

  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 alone Democratization coming with development External demands to compensate losers from adjustment Income effect on the demand for SSN Better administrative capabilities for SSN policies. 10

  11. Governments in the developing world are turning to direct interventions SSNs 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 recipients Living in poverty Receiving help from SSN But mostly not the same people in poor countries! 12

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

  14. Cruel irony: Poorer countries are less effective in reaching their poor Safety net coverage for poorest quintile (%) Safety net coverage for whole population (%) 100 Poorest quintile 80 Population 60 40 20 0 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 GDP per capita at PPP for year of survey 14 Data from World Bank s ASPIRE site: http://datatopics.worldbank.org/aspire/indicator_glance.

  15. There is a variance in performance Safety net coverage for poorest quintile (%) Safety net coverage for whole population (%) 100 Some poor countries do better than others in reaching their poor. Poorest quintile 80 Population 60 40 20 0 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 GDP per capita at PPP for year of survey 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 + promotion 16

  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 institutions Some 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. t w + 1 = ( ) w w C + 1 t t B t w A min k ) 1 + * /( k 19

  20. Two long-run classes in stable steady states In 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 trap There 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 policies 1. Protection policies provide short-term palliatives by assuring that current consumptions do not fall below some crucial level, even when some are trapped. 2. Promotion policies either: (i) 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, or (ii) Raise 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 policies t w Type 2 Type 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. + 1 = ( ) w w C + 1 t t B t w A min k ) 1 + * /( k Type 1 23

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

  25. Promotion Protection limits promotion but how much? Protection- Promotion Trade-off While 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. Protection-Promotion Tradeoff (PPT). Protection The optimum is unlikely to be either at full protection or no protection but maximum promotion. 25

  26. The longstanding debate on incentives Policy 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 traps Credit market failures + diminishing marginal products Political economy 27

  28. The debate on incentives for risk-taking Moral 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 school Forgoing 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 design While 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 Rate In 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 problem Incentive 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 constraints 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. Sound social policies also requires thinking about incentives and program design, given information constraints and administrative capacity. 33

  34. Political economy constraints Political 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 voter 34

  35. Agency problems by levels of government Promotion Local The 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. Protection- Promotion takeoff Center Protection 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. 35

  36. Challenges in making a pro-poor safety net politically sustainable State-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 Income Everyone 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 shocks 39

  40. BIG tradeoffs A 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. Dont forget about financing! Suppose that the UBI/BIG is financed by progressive income tax (EOP: Box 10.3) A BIG is introduced, giving a transfer b to everyone, financed by a tax at the rate t on all incomes. The scheme is configured such that the net benefits are greatest for the poorest but remain positive up to the poverty line, after which there is a net loss. Initial income distribution (y(p)) Final post-benefit incomes (b+(1-t)y(p)) Income (y) Quantile functiony(p) Incomes after taxation but before the basic income is added ((1-t)y(p)) Poverty line (z) A b Percentile of the population ranked by income (p) Headcount index of poverty (H) 41

  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 goods A 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 promotion And not much protection either: relatively little goes to the poor; unresponsive to shocks Also 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 poor Safety net coverage for poorest quintile (%) Safety net coverage for whole population (%) 100 Poorest quintile 80 Population 60 40 20 0 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 GDP per capita at PPP for year of survey 44

  45. For and against targeting One 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 protection 45

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

  47. Targeting can help, but it is not the objective The most finely targeted policy need not have the most impact on poverty. Costs of fine targeting: administration; costs imposed on participants Information problems; measurement errors Measurement 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 gap The 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. 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! Quantile function: y(p) H 48

  49. Perfect targeting can create a poverty trap 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. Income of pth percentile Aggregate poverty gap H 49

  50. Perfect targeting can create a poverty trap 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 Aggregate poverty gap H 50

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