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Targeted Transfers in Poor Countries: Revisiting the Trade-Offs and Policy Options

Author: M Ravallion
Date: 2003
Size: 30 pages (129 KB)

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Summary

The conventional wisdom in mainstream development policy is that income transfers to the poor, and safety net policies more generally, are at best a short-term palliative and at worst a waste of money. Can income transfers represent a core element of effective long-term poverty reduction? Compiled for The World Bank Social Protection Unit, this paper revisits targeted transfers. It suggests there is scope for using social protection policies to compensate for market failings that help to perpetuate poverty.

The extent of poverty and the resource limitations faced in the poorest countries has forced many to conclude that safety net policies, specifically income transfers, are a non-starter. Further critiques include leakage to non-targeted groups and serious trade-offs between the labour supply and savings of recipients and efficiency and growth. Evidence from assessments of some programmes, however, is quite positive and appears to debunk these claims.

New theories on the social costs of uninsured risks and unmitigated inequalities is starting to contest mainstream thinking, suggesting that there is scope for using social protection policies to compensate for the market failings that help to perpetuate poverty.

• Recent literature has pointed to various ways that uninsured risk can actually be a cause of chronic poverty, implying that there will be long-term benefits from policies that protect people from transient shocks by providing effective safety nets for the poorest.
• Results of panel-data studies suggest that people tend to bounce back from transient shocks, but that the speed of income adjustment to a shock is lower for the poor than those with low steady-state income.
• The benefits of indicator targeting are often underestimated in terms of poverty traps arising from market failures, particularly poor areas or minority ethnic groups that would otherwise be excluded from economic opportunities.
• Conditional transfers aimed at combining indicator targeting with explicit attempts to enhance capital accumulation of the poor, for example by linking transfers with schooling requirements, has produced significant gains in some programmes.
• The informational constraints on redistributive policies in poor countries have strengthened arguments for using self-targeting mechanisms.

There is no obvious alternative to targeted transfers for some anti-poverty policies, barring unacceptable neglect. It is time for a pragmatic and open-minded approach which recognises the important role that targeted transfers can play, but uses careful design and evaluation to assure their potential is realised. A number of caveats must be acknowledged:

• Recent evidence on the heterogeneity in the performance of the same programme across different settings and the homogeneity in the performance of different programmes in the same setting points to the importance of context in programme design.
• Whilst targeting is a potential instrument for enhancing a programmes impact on poverty, the most targeted programmes need not be the ones with the greatest impact on poverty.
• While poverty reduction may be the underlying objective, there is still the issue of how the impact on poverty today should be weighed against poverty in the future.
• Given the lack of resources in underdeveloped economies, the scope for effective redistribution and insurance is constrained by the information available and administrative capabilities for acting on that information.

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Source: Ravallion, M., 2003, ‘Targeted Transfers in Poor Countries: Revisiting the Trade-Offs and Policy Options’, Social Protection Discussion Paper no. 0314, World Bank, Washington