1.2.2 Geographical Targeting of Poverty Alleviation Programs 1 MEASUREMENT AND POVERTY MAPPING UPA Package 1, Module 2

1.2.2 Geographical Targeting of Poverty Alleviation Programs 2 POVERTY: Theory, Measurement, Policy and Administration - Geographical Targeting of Poverty Alleviation Programs -

1.2.2 Geographical Targeting of Poverty Alleviation Programs 3 Background Geographical targeting of welfare programs is common in developing countries and is often used in conjunction with additional targeting criteria to narrow the beneficiary population and thus reduce costs The challenge for policymakers is to use the available resources to provide the greatest possible assistance to those who need it most In the absence of reliable information on personal income, the first best solution of identifying the poor and directing all benefits only to them is not feasible

1.2.2 Geographical Targeting of Poverty Alleviation Programs 4 Background Even in industrial countries that have the necessary data, it is not possible to ascertain whether targeted programs do indeed reach all of the poor and do not leak to the nonpoor In the past, since most developing countries did not have reliable information on individual income, many chose programs with universal coverage However, governments had to drastically reduce or even terminate these programs due to growing budget constraints Some countries replaced universal coverage with means testing

1.2.2 Geographical Targeting of Poverty Alleviation Programs 5 Background Targeting by the use of indirect indicators The absence of reliable information for identifying the poor, on the one hand, and the mounting constraints on public resources, on the other, made targeting by means of indirect indicators the only viable alternative for most developing countries The indicators used to determine eligibility could include the household’s size, the number of children in the household, the size of the household’s landholdings or other assets, and the region in which the household was located

1.2.2 Geographical Targeting of Poverty Alleviation Programs 6 Geographical Targeting The optimum solution in welfare programs, from a theoretical point of view, is to identify the target population and design the most effective program for this group In most cases, however, it is not possible to identify the target population since this requires information that is not observable and thus difficult to verify In poverty alleviation programs, the target population is the group of households with incomes below a certain minimum level necessary to provide basic needs. Household income is often difficult to observe, however, and efforts to assess its value and thus identify the target group may involve prohibitive costs

1.2.2 Geographical Targeting of Poverty Alleviation Programs 7 Geographical Targeting These costs consist not only of direct administrative expenses for collecting the necessary information on income, but also of indirect costs due to incentives that the program may give individuals either to modify their behavior or to falsify information on their income in order to qualify for the program’s benefits Poverty alleviation programs such as income transfers or food subsidies to the poor, for example, may provide incentives to work less, cut earnings, or underreport income in order to qualify

1.2.2 Geographical Targeting of Poverty Alleviation Programs 8 Geographical Targeting Even in countries that have an accurate income reporting system, frequent means testing is necessary to verify that only households that meet the criteria remain on the eligibility lists The difficulties and expenses involved in identifying eligible households leave two options: either to implement universal programs that cover the entire population, or to use observable indicators that are highly correlated with the relevant unobserved variables, such as income, in order to determine eligibility

1.2.2 Geographical Targeting of Poverty Alleviation Programs 9 Geographical Targeting Universal programs are too expensive for most developing countries, and even many industrial countries find the rising welfare costs daunting The only viable option, therefore, is to use some form of targeting This, however, requires a careful choice of the targeting criteria, the observable indicators that will determine eligibility, and the programs that be fit the specific conditions of the country or locality

1.2.2 Geographical Targeting of Poverty Alleviation Programs 10 Geographical Targeting Aside from geographic targeting, there are other targeting options available to developing countries These options fall into three categories, namely, self-targeted programs, programs targeted on the basis of household characteristics and programs targeted on the household’s place of residence

1.2.2 Geographical Targeting of Poverty Alleviation Programs 11 Effectiveness of Targeted Programs The effectiveness of a targeted program depends on the share of the target population – that is, the percentage of the total poor population – that is actually covered by the program This, in turn, depends on the accuracy with which the observable indicators predict the unobserved variables that are the basis for determining eligibility For poverty alleviation programs, the desired indicators are those that are highly correlated with income

1.2.2 Geographical Targeting of Poverty Alleviation Programs 12 Effectiveness of Targeted Programs The effectiveness of the set of indicators depends on the probability expressed as where is the household’s level of the k th indicator (for example, the number of children) and is the critical value of the indicator that determines eligibility, y i is the unobservable income the i th household, and z is the poverty-line income, below which the household is considered poor and therefore eligible for the program

1.2.2 Geographical Targeting of Poverty Alleviation Programs 13 Effectiveness of Targeted Programs In practice, a data set containing complete information on both income and the indicators that are highly correlated with income is used and the reduced form of the analysis is where P i is either the level of consumption expenditures or a dummy variable which indicates whether the household is considered poor or not, are household or personal indicators and are dummies that identify the place of residence

1.2.2 Geographical Targeting of Poverty Alleviation Programs 14 Effectiveness of Targeted Programs When the dependent variable is itself a dummy variable, the econometric analysis is transformed into a logit analysis, and the equation then estimates the probability of a person being poor, assuming his personal indicators are within a given range and his place of residence is in a given area

1.2.2 Geographical Targeting of Poverty Alleviation Programs 15 Costs of Targeted Programs The overall costs of the program have the following there components: (1) the direct (administrative) costs of obtaining the information on these indicators; (2) the indirect costs dues to incentives that eligibility for the program may provide; and (3) the costs of providing the benefits to the population covered by the program