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Key Text Conditional Cash transfers and the Equity-Efficiency Debate

Author: J Das and Quy-Toan Do
Date: 2004
Size: 23 pages (248 KB)

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Summary

What are the rationales, problems and trade-offs associated with Conditional Cash Transfers (CCTs)? How can the tension between efficiency and equity be addressed? This working paper, published by the World Bank, urges policymakers to address these issues holistically in a comprehensive framework for the design of CCT programmes. It argues that equity and efficiency motivations, whilst theoretically distinct, are simultaneously present in CCT programmes and suggests how tensions between them can be overcome.

Over the past decade there has been a growth in the use of CCTs to increase investment in human capital and improve outcomes in health, education and child labour. They have become popular in part because there is evidence to show that they can alter household consumption patterns.

There are two principal justifications for cash transfer schemes: efficiency and equity. In terms of efficiency, CCT schemes can be justified as a way to alleviate market failures. By conditioning or forcing individuals to consume more of a “good” (e.g. education) than they would otherwise have done, CCT schemes aim to reconcile societal preferences with individual choices. In terms of equity, CCTs can be used to target resources and contribute to pro-poor redistribution.

Major concerns for CCTs are low participation and fungibility (the interchangeability of goods). There are also tensions between equity and efficiency. In relation to this:

If individuals do not participate in the CCT program it will not be successful. Even where program uptake is high, behavioural responses such as the consumption of close substitutes can lessen the overall positive effects.
Tensions between equity and efficiency do exist where programs are used to increase investment in human capital but this has adverse redistributive effects, or where CCTs are used for targeting or redistributive measures but they decrease efficiency. An example of the first is cash transfers conditional on girls attending secondary school. While these programs may increase enrollments, in the absence of a means-test the bulk of the stipends will go to richer families who are more likely to enroll their girls in secondary schools.
The problem of fungibility differs depending on the rationale behind the program. Where CCTs are used for efficiency, the conditioned good needs to not be fungible. When CCTs are used for equity, the more fungible the conditioned good, the greater the efficiency.

Policy-makers seem to be aware of this tension and the contradictory roles that CCTs are sometimes required to fulfill. Whilst equity and efficiency have traditionally been addressed as separate issues, they need to adopt a more holistic view by incorporating a number of different factors into a comprehensive framework for optimal CCTs. Tensions can be addressed through the conditionality requirement, the amount of cash being transferred, and the refinement and enforcement of eligibility criteria.

The trade-off between equity and efficiency need not arise in all cases. In cases where CCT schemes have been used to increase efficiency, the trade-off has been addressed by imposing additional eligibility criteria.
The use of eligibility criteria and means-testing can minimise adverse redistributive effects but it requires additional expenditure and the careful collection of household data. Governments may be unwilling to invest in such expensive efforts.
Where trade-offs between equity and efficiency need to be considered, policymakers should devise a framework for examining the overall costs and benefits.

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Source: Das, J., Do, Q. and Özler, B., 2004, 'Conditional Cash Transfers and the Equity-Efficiency Debate', Working Paper Series 3280, The World Bank, Washington