Equity issues in non-contributory transfer programs PEAM course May 2006, Washington DC Emil Tesliuc Sr Economist, HDNSP

Focus on programs with explicit poverty alleviation role (i) Transfer programs for poor, low-income households: a. Cash and in-kind transfer programs  Cash transfers: Family allowances; Non-contributory pensions and disability transfers  Food transfers: Food stamps and food rations, Maternal-child supplements, School feeding and transfers b. Subsidies on basic goods  Food, Housing, Energy and Utilities c. Income generations programs  Labor-intensive public works programs in which the poor work for food or cash d. Protection of human capital  Conditional Transfers (cash and food)  Fee waivers  School vouchers, scholarships, fee waivers for health care services or for heating in cold climates

Focus on programs with explicit poverty alleviation role (II) Typical spending on these programs: 1%-2% of GDP When well targeted, can have important role in reducing the depth of poverty among the poorest 5-20% of the population

What these programs have in common? Explicit objective:  Redistribution = transfer of public resources to the poorest member of the society They transfer a private good (cash or in-kind) to beneficiaries:  No concerns about externalities (health / immunizations, education, pollution) or public goods (defense). To be cost-effective, SSN transfers should reach the poor(est) and exclude the rest

Who gets the benefits? Average Benefit Incidence Analysis (BIA) In its most basic form, BIA estimates what share of benefits is captured by the poorest x% of the population Data requirements:  (representative) household survey with information on household welfare (income, consumption); recipiency status; and/or the value of the transfer received  Useful to have administrative data on caseload and spending Three steps:  Construct a welfare measure  Divide the population into quintiles or deciles  Estimate the share of benefits captured by each quintile / decile

Typical example: Targeting accuracy of two programs for low-income households

More sophisticated versions of BIA Accounting versus Behavioral BIA  Accounting BIA assumes that household welfare does not change with the receipt of the transfer  Behavioral BIA models the household welfare in the absence of the transfer Ex-post versus Ex-ante BIA Taken into account the time dimension:  Average BIA: How are the program benefits distributed across quintiles?  Marginal BIA: Was the expansion of the program pro-poor?  Dynamic BIA: Does the transfer program protect households against shocks?

Estimating the marginal propensity to consumer out of transfers – Vietnam & Argentina

Average versus marginal BIA

Use of the BIA analysis Benchmarking:  compare with other similar programs within country, of from similar countries Assessment of targeting accuracy (for transfer programs with income-based eligibility rules):  estimate leakage rates Starting point for in-depth sector studies  Example: Armenia PFB Program

Benchmarking: LAC Redistribution Study Lindert, Skoufias and Shapiro, 2006

Benchmarking: ECA Study on Targeting Tesliuc, Grosh, Coady, Pop (forthcoming)

Example Poverty Family Benefit Program, Armenia

Common mistakes in BIA Poorly defined welfare aggregate Use of household, and not population quintiles Use of group-specific quintiles instead of national quintiles Misspecification of counterfactual Watch for:  Differences between survey estimates and administrative data  Poorly specified survey questions use = recipiency * frequency of use * unit subsidy payment arrears?

Limitations of the BIA Targeting accuracy only on criteria to judge the success of a transfer program Does not tell whether the intended final outcomes are achieved or not Not always the cost of provision reflects the benefit to the user (food aid in areas with poor supply) Unable to assess important public goods or services (safe water, sanitation, physical infrastructure) Ignores general equilibrium & indirect effects on the poor (e.g. indirect effects of tertiary education)

References Lionel Demery (2000), Benefit incidence: a practitioner’s guide Dominique van de Walle (2003), Behavioral Incidence Analysis of Public Spending and Social Programs in Evaluating the Poverty and Distributional Impact of Economic Policies Bourguignon, da Silva (2003) Ex-Ante Marginal Incidence Analysis of Transfer Programs in Evaluating the Poverty and Distributional Impact of Economic Policies Coady, Grosh, Hoddinott (2005), Targeting of transfers in developing countries Grosh (2005) PER Toolkit, Social protection chapter Lindert, Skoufias, Shapiro (2006), How effectively do public transfers in Latin America redistribute income?