Benefit Levels and Delivery Mechanisms

Transcription

1 CHAPTER 5 Benefit Levels and Delivery Mechanisms KEY MESSAGES To achieve its intended outcomes, a program s benefit level should be consistent with its objectives. However, budget constraints often make for hard trade-offs between coverage and benefit level. Programs with benefits that are too small will have little impact on beneficiaries and administrative costs will be high relative to the level of benefits. Programs with high benefits will have a larger impact on recipient households, but will have a higher fiscal burden, require more care in relation to design and targeting, and may induce greater work disincentives. In general in developing countries, programs with benefits that are too low are more frequent than programs with benefits that are too high. Benefits may be differentiated by household characteristics such as poverty level, size and composition, or specific needs or behaviors. Such customization will improve the poverty impact per unit of transfer, but will complicate administration and communication with the public and are thus more common in high-capacity settings. Participation in safety net programs has only small or moderate effects on employment or hours worked in developed countries and even smaller effects in developing countries. Moreover, policy makers have a variety of tools at their disposal to minimize work disincentives, such as limiting the program to those who are not expected to work; adopting a targeting mechanism that is not tied directly to earnings; setting benefit levels to maintain work incentives; ensuring that incentives to work remain in place by customizing benefit levels in line with earnings; and/or linking transfers to such program elements as job training or placement, education, microcredit, and social support services. Experience is emerging with linking transfer programs to other services voluntary or mandatory that are designed to help households become independent. This is a promising field for experimentation. Tentative lessons suggest that mandatory links should be limited to cases where the supply of required services is ample, the services will be useful to all, or most transfer recipients already use the services. In a wide range of other cases, voluntary links through information, referrals, one-stop shops, and the like may be applicable. Payment mechanisms should be affordable, safe, reliable, and accessible to all beneficiaries. A number of different payment instruments are available, including cash, checks, vouchers, and in-kind benefits, that can be delivered using banks, automated teller machines (ATMs), mobile pay points, private or public shops, and so on. The choice of appropriate delivery mechanisms depends on objectives, operational needs, administrative capabilities, and local infrastructure conditions. Investments in administrative systems and equipment related to payments can help increase service standards, reduce corruption and leakage, and reduce costs in the long run. 127

2 128 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS 5.1 Determining Benefit Levels in Theory and Practice This chapter takes up the one of the basics of transfer programs: paying people. This section looks at the theory concerning the size of transfers, discusses the criteria for adjusting benefit levels to household circumstances, and reviews the evidence on the generosity of safety net programs in practice. SIZE OF TRANSFERS A basic question in any safety net program is how generous the program should be, that is, how much to pay. No clear-cut answer to this question is available. Ultimately, the level of the benefit is one of the products of the iterative process of designing a program, that is, the program designers select a benefit level such that the overall program will fit within its budgetary, administrative, and political constraints, while maximizing its outcomes for beneficiaries. However, this summary is too general to be a useful guide for practitioners. This section tries to break down the decisions and highlight the key elements and tradeoffs that occur when selecting a program s benefit level. First and foremost, the benefit level depends on the objective of the program, and hence on the program type. The benefit level should be consistent with program theory, that is, the stylized model of how policy makers think the program s output will affect the outcomes they are trying to influence. A benefit level compatible with program theory will be the smallest transfer necessary to achieve the desired impact on intended outcomes (consumption, income, earnings, school enrollment, or use of nutritional or health services). Last resort programs aim to reduce poverty, hence the benefit level is set as a fraction of the income gap of expected beneficiaries. This is the case for programs that select beneficiaries using a proxy means test, such as in Armenia and Georgia. A number of variations on this principle are possible. In low-income countries, benefits are often set relative to the costs of an adequate food basket or the food poverty line. In guaranteed minimum income (GMI) programs, which are common in Europe and Central Asia and in countries of the Organisation for Economic Co-operation and Development (OECD), the level of benefit is the difference between the eligibility threshold and the income of each family. Programs that compensate poor consumers for one element of expenditure, so-called gap formulas, are used, for example, for family allowances that cover a portion of the cost of raising a child, heating allowances that cover the seasonal increase in heating costs during the winter, and food stamps that cover only the food poverty gap. Conditional cash transfer (CCT) programs encourage poor beneficiaries to invest in children s human capital by conditioning the benefit on the use of school, nutrition, and/ or health services. The level of benefit will thus reflect two objectives: reducing current poverty among beneficiaries and providing incentives for human capital accumulation. The principles for the first objective are similar to those for last resort programs. For the second objective, the level of benefits is set to compensate households for the opportunity cost of using the services. The total benefit to a household may include a few components. An education grant will compensate households for the opportunity cost of the time children spend in school and not working, plus for the direct costs of schooling. A health and/ or nutrition grant will compensate families for the cost of the time they spend taking their

3 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 129 children for health checks and/or attending nutritional education events. Some programs, like the Programa de Asignación Familiar II (Family Allowance Program) in Honduras and the Red de Protección Social (Social Protection Network) in Nicaragua, offered a supply grant to the service providers schools and health posts to cover the cost of improved service. The rationale of education, health, and nutrition grants is to increase the demand for education, health, and nutrition services as illustrated in box 5.1. Sometimes programs may offer unconditional grants to any poor household, with eligibility determined by the same principles as for last resort programs. In workfare programs, the benefit level is the wage rate. To ensure self-selection by the poor, the wage rate should be set somewhat below the wage level for unskilled workers. When other considerations, such as minimum wage laws, preclude setting such a low wage rate, programs have to ration demand by capping the total number of days of work to be BOX 5.1 The Value of a CCT Program s Education Grant: From Theory to Practice The Programa de Asignación Familiar II is a CCT program in Honduras that offers an education grant to poor children conditional on school attendance. To determine the value of the grant, the technical advice provided to the government by its consultant, the International Food Policy Research Institute, was based on both economic theory and microeconomic evidence. Economic theory suggests that each family demands a certain level of services, such as education, up to the point where the actual value of future educational benefits from sending a child to school is equal to the marginal cost of sending the child to school. The expected value of future benefits depends on, among other factors, the family s expectations about the child s future income and the relationship between education and income. The marginal costs of sending the child to school include the direct costs incurred when the child is sent to school as well as the opportunity cost of dedicating the child s time to learning instead of using it to generate income. Based on these expected costs and benefits, each family demands that level of service that will allow it to maximize its welfare over time. This maximization process leads to a demand curve that reflects the relationship between levels of service demand and price, assuming that consumers preferences and incomes and the prices of other products remain constant. The sum of all services sought by each family produces an aggregate demand curve that can be interpreted as the relationship between service price and the number of families willing to pay this price for its use. The designers of the Honduran CCT program used household survey data to estimate that children provided about 3 percent of labor hours and 2 percent of household income, or about L 326 (about US$22) per year per child (about nine days of work during coffee harvest time). The direct costs of schooling were estimated to be L 6 (about US$0.40) per year for matriculation and fees; L 241 (about US$16) per year for books, uniforms, and supplies; and L 25.5 (about US$1.70) per month for 10 months for lunch and transportation money. Thus the total cost (adding up the lost income per child plus the direct costs of schooling) is about L 828 (about US$56) per child per year. SOURCE: IFPRI 2000.

4 130 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS provided to individual workers. In Argentina s Trabajar workfare program, for example, the wage payment was set slightly below the legal minimum wage. As the economic crisis that began in Argentina in 1996 became more severe, unemployment and wages worsened and program wages were adjusted downward. Participation was capped at 90 days per worker. In Ethiopia s Productive Safety Net Program, the labor market is so thin in some areas that fixing a wage rate that is both below the prevailing wage and delivers sufficient value is difficult. Thus the total benefit package is designed to fill the food gap during the three months of the hungry season. In this case, the wage may be too high to induce adequate self-targeting, so the number of days of work allowed is capped at five days per person per month. In-kind transfers have diverse objectives. If the program s objective is to provide a feeding supplement to schoolchildren, then the benefit level will be the cost of the food bundle. If the in-kind transfer is a vehicle for transferring income to poor households, then the same principles in determining the appropriate size of the transfer apply as for a cash transfer, though with some complications. If the in-kind transfer provides less of an item than the household would normally consume (is inframarginal), economic theory suggests that the subsidy is equivalent to a cash transfer of equivalent size, albeit with administrative costs that may be substantially higher. If the in-kind transfer is larger than what the household would normally consume, then the household may raise its consumption of the target good and/or may sell some portion of it, often at a discount, which will lower the real value of the transfer. A second element that is taken into account in setting the level of benefits is the program s overall budget constraints. As an example, consider a transfer program whose objective is to reduce poverty. The process will likely start with an assessment of the poverty level in the country and then the selection of a subgroup of poor households that the program will serve (those who are deserving according to the values of the particular society). The first question to address is the affordability of bringing the consumption of the poor to the poverty line. Combining information on the number of poor and their income gap, 1 policy makers can estimate the overall resource deficit among the poor. Knowing the magnitude of the overall resource deficit of the poor will inform policy makers whether measures to cover this deficit are affordable or not. Suppose that 16 percent of the population lives in poverty, the average consumption of the poor falls 25 percent short of the poverty line, and the poverty line represents 70 percent of gross domestic product (GDP) per capita. In this case, the overall resource deficit of the poor is 2.8 percent of GDP (the product of 16 percent 25 percent 70 percent), a crude, lower-bound estimate. The analysts should factor in that certain leakages of funds to the nonpoor are unavoidable. If the program s institutional capacity is low and income-based eligibility is not feasible, the use of more leaky mechanisms should be considered. For example, assuming that only 66 percent of the benefits will reach the poor, the overall financing required to bring the poor to the poverty line will rise to 4 percent of GDP (2.8 percent divided by 0.66). Estimating the financial effort required to eliminate poverty, measured either in absolute or relative terms, is rarely the end of the story. This initial estimate is often larger than the budget available for the program. Consider that the maximum budget that can be provided for a new program is 1 percent of GDP, not 4 percent. Dealing with this imbalance will typically involve an iterative process as illustrated in figure 5.1.

5 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 131 FIGURE 5.1 Reconciling Needs with Budget Constraints SOURCE: Authors. 16% of the population is poor Reconsider benefit level and coverage The social safety net budget envelope is only 1% of GDP Their average consumption is 25% below the poverty line 4% of GDP is needed to cover this consumption gap One option is to reconsider a program s generosity. Few safety net programs attempt to top up the consumption of their beneficiaries to the poverty line. Many programs provide benefits to bring beneficiaries up to a fraction of the poverty line or to some arbitrary level lower than the poverty line, but the utility of this approach is limited. Extremely low benefits do not protect beneficiaries from poverty that is, they are not cost-effective and may not justify their administrative costs that is, they are inefficient. Peru used such a model in 2004, covering a large fraction of the population with a food-based transfer with low transfers per beneficiary unit. Lindert, Skoufias, and Shapiro (2006, p. 26), in their review of the redistributive power of social protection programs in Latin America, characterized the Peruvian safety net model as giving peanuts to the masses. Not surprisingly, country-specific studies summarized in World Bank (2007m) find that such programs have had almost no impact on extreme poverty or nutritional status. Another option is to restrict coverage of the program or eligibility for the program. If program designers choose to restrict coverage, they may attempt to cover as many of the poorest beneficiaries that can be reached with an adequate level of the benefit given the budget constraint. If only 1 percent of GDP can be allocated for such a program, then the program may target only a quarter of the poor, that is, the poorest 4 percent of the population. Economic theory suggests that under the circumstances, directing the available resources toward the poorest is the best welfare-enhancing solution, as the marginal value of a monetary unit is higher for the poorest. A variant of this rationing process is to focus on specific vulnerable groups (see chapter 8), or on households deprived in a number of areas, for example, poor and living in substandard housing. If program designers choose to restrict eligibility, they may choose to restrict it to a subset of the poor considered to be deserving. As mentioned in chapter 2, section 4, the notion of deserving poor varies from society to society, but the most common definition is households or individuals who cannot support themselves through work. Thus, some programs may restrict eligibility to families with more than three children and/or elderly people, who together represent about 50 percent of the poor in many countries. Many programs would combine these two options, restricting both the generosity and the coverage of the program typically to the poorest and most destitute.

6 132 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS In the end, defining the appropriate benefit level is a balancing act: finding a level that is neither too high to generate dependency nor too low to lack impact. If the benefit is too small, the program fails to achieve its objective. If the program is too generous, it may have adverse consequences, such as reducing work incentives or crowding out private transfers, which would diminish or even outweigh its positive impact. Worldwide, programs with benefits that are too low occur more frequently than program with benefits that are too high. OTHER ELEMENTS OF BENEFIT FORMULAS In addition to determining the average size of the benefit, program designers need to decide whether they would like to tailor the benefit level to the characteristics of the household, that is, to use a benefit formula. Deciding on Flat versus Variable Benefit Formulas Benefit formulas may be flat that is, all beneficiaries receive the same benefit or they may vary according to the characteristics of the beneficiary household in a number of ways. Some of the main variations include the following: Benefits vary by family poverty level, with larger benefits for poorer families. Benefits vary by family size or composition, with benefits determined by the total number of family members or of the number of family members not expected to work. Benefits vary by the age of family members, for example, benefits tied to education may be larger for older children in recognition of the higher opportunity costs of their time or to cover the greater number of inputs they need such as textbooks. Benefits vary by gender, for example, benefits tied to education may be higher for girls in countries with a marked gender gap in schooling. Benefits vary over time, being higher during the hungry season or the heating season or at the beginning of the school year to cover enrollment fees, uniforms, and shoes. Benefits vary by region to reflect differences in the cost of living in different areas. Benefits vary with longevity in the program, tapering down after a certain period as a way to encourage families to leave the program. Benefits differ in ways that promote certain behaviors even beyond a program s basic conditions. For instance, a CCT program might require school attendance all year to receive the base benefit, but provide a small bonus for good test scores at the end of the year. In general, variable benefit formulas will make a program more efficient, that is better able to deliver the level of transfer needed to raise most families toward the poverty line and/or induce the desired behavioral changes at minimum transfer cost. However, differentiating implies both obvious administrative costs and some less obvious costs because of the complexity involved. Much more effort will be needed to explain the formulas to cli-

7 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 133 ent families, to the public, and to program monitors and additional effort will be devoted to quality control procedures around the level of benefit determination. Private costs for applicants may also rise. Box 5.2 illustrates how Brazil s Bolsa Familia (Family Grant) program reconciled these conflicting objectives by choosing a relatively complex formula. Determining the Recipient of the Benefits Most programs around the world and over time have paid either the head of household or whichever member of the household carried out the transactions associated with registering for a program. Recently, however, program designers are putting much more thought into who within a household should receive payments. This reflects the growing recognition in the economics literature that households contain members with different needs, preferences, and power and that various members may allocate the funds received differently. The literature generally concurs that women will spend at least as much as men on children s welfare, in many cases more, and are less likely to favor boys over girls in doing so. The strength of this effect varies from place to place and study to study (Haddad, Hoddinott, and Alderman 1997; Quisumbing and Maluccio 2000), but the policy implication is that transfers placed in the hands of women will help children s welfare at least as much, and sometimes much more, than transfers placed in the hands of men. Based on these findings, many new programs, especially CCT programs, explicitly deliver the benefit into the hands of the mother or a proxy for her. 2 This is done in the belief that women are more likely to invest additional monies in the well-being of their children than men and the recognition that, on average, in most countries and households, women will be the ones bearing the implicit time costs of obtaining the required health and health education services and likely shouldering a large share of the household chores children would have done had they not been attending school. A smaller number of programs, most often scholarship programs, transfer money directly to students. This is done to help motivate the students to study and ensure that they have as much influence over the money as if they had earned it themselves. Handling Inflation Benefits need to be increased from time to time to protect households from inflation. Many programs only do this in an ad hoc manner every few years and require special legislation or a decree each time. In such cases, the real value of the benefits and the program s impact usually plummet for a time before recovering. A more desirable procedure is to have a regular, perhaps annual, review of benefit levels as part of the budget cycle, or even an automatic indexing of benefits. In either case, program managers should consider not just how price levels have changed, but also how wages in low-skill occupations have changed. BENEFIT LEVELS IN PRACTICE The question of how generous safety net programs are in practice can be answered in many ways, and probably because of this, little comparative evidence is available. Some of the most common ways to express the generosity of a program are as follows: By reporting the level of the benefit in local currency. This is not always simple, however, as programs often offer different benefits to individuals or households

8 134 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS in different circumstances. In such cases, information about the levels of benefits can be presented as a table as shown in box 5.2. By reporting the level of the benefit in comparable purchasing power (in purchasing parity power dollars, for instance). The intent is to facilitate comparisons across countries, but such information is difficult to compare, because the same type of benefit may be assigned to different assistance units (individuals, families, households) in different countries. Moreover, the adjustments for differences in purchasing power may be insufficient to characterize a benefit as generous or not across countries, as generosity is a relative concept. For instance, in the United States, a benefit of US$10 per person per month would be considered ungenerous, but in a poor country where a large fraction of the population lives on less than US$1 per day, it may be considered quite generous. By reporting the level of the benefit as a share of the poverty line or other type of indicator, such as the minimum wage, the average wage, the minimum BOX 5.2 The Benefit Formula for Brazil s Bolsa Familia Program Policy makers debated many options for setting the level of benefits prior to launching the Bolsa Familia program in October 2003 (see, for instance, Camargo and Ferreira 2001; Ferreira and Lindert 2003; Lindert and others 2007). Some advocated higher benefit values for families with older children to reflect the higher opportunity costs of their staying in school and the greater risk of older children dropping out of school. Others supported benefits differentiated by gender. Still others suggested that benefit amounts vary by region to reflect regional differences in the cost of living. In the end, the program designers opted for a pragmatic set of benefits that (1) was simple to administer; (2) favored the extreme poor; (3) favored families with children, but with limits to avoid promoting fertility; and (4) prevented beneficiaries eligible to receive benefits from previous programs that were being replaced from losing as a result of the reform. This latter consideration was viewed as particularly important politically. Most families actually gained from the introduction of the new Bolsa Familia program range of benefits, as their average value was significantly higher than under the prior programs. For those beneficiaries who received more under Bolsa Familia s predecessor programs because of multiple benefits, the excess amount was maintained under the new program as a so-called extraordinary variable benefit. This extraordinary benefit is to be maintained until those families who receive it no longer qualify for the program benefit. No new beneficiaries will receive the extraordinary benefit. Only 411,579 out of a total of 11.1 million families received the extraordinary benefit. Bolsa Familia provides two types of benefits: a base benefit provided to all families in extreme poverty, regardless of their demographic composition, and a variable benefit that depends on family composition and income. For both extremely poor and moderately poor families, this variable benefit is set according to the number of children in the family (capped at three) and/or whether the mother is pregnant or breastfeeding. As the table shows, income transfers range from R$15 to R$95 (US$7 to US$45) per family per month. The average value of benefits paid during January May 2006 was about R$62 (US$30).

9 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 135 pension, the social pension, or the level of unemployment benefits. For example, in the OECD, the generosity of safety net programs is expressed as a share of the wage of the average production worker in the manufacturing sector (see annex). Such comparisons are useful for comparing a program s generosity with the generosity of other programs or types of earnings within a country, for instance, to ascertain whether the benefit level is likely to create disincentives for work. It is less useful for cross-country comparisons. Our preference for comparing generosity is the ratio of benefits to the total consumption of beneficiary households. This measure can be estimated using household surveys that collect information on household consumption and the value of safety net benefits received during a certain period. This measure is preferable, as it takes into account many of the complexities of the provision of safety net benefits and transforms them into a single index comparable across households and countries: benefits are implicitly aggregated at the household level, the unit where they are shared and used to finance consumption. 3 Poverty level No. of children aged 0 15 and/or pregnant or breastfeeding women Quantity/type of benefit Monthly Benefit Poor (monthly per capita family income = R$60 120) Extremely poor (monthly per capita family income > R$60) 1 1 variable R$ variable R$30 3 or more 3 variable R$45 0 Base benefi t R$50 1 Base + 1 variable R$65 SOURCES: Law of January 2004 and Decree of April 11, Base + 2 variable R$80 3 or more Base + 3 variable R$95 The average value of benefit transfers has fallen from its initial level of R$75 (US$25) at the end of 2003 because the program progressed from initially covering just the extremely poor and then gradually the more moderately poor. Unlike some other safety nets in Brazil, Bolsa Familia s benefits are not automatically indexed to inflation or minimum wage increases. The nominal benefit was held constant from 2003 until July 2007, despite a 16.7 percent increase in the cost of living. In July 2007, Decree increased benefit amounts by 17 to 20 percent (depending on the category), thereby restoring their initial value. SOURCES: Lindert and others 2007;

10 136 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS This measure, however, does not adjust for one element of program generosity: the duration for which benefits are provided to eligible applicants. We used householdlevel information for 55 cash transfer programs from 27 middle-income countries to illustrate how the generosity of these programs varies by program type (figure 5.2). Figure 5.3 looks at 7 CCT programs in 7 countries in Latin America and the Caribbean, and table 5.1 presents program-specific information on 49 programs in 20 countries in Europe and Central Asia. Figure 5.2 shows key values of the distribution of generosity statistics as well as maximum and minimum values. The median value of benefits as a share of the consumption of recipient households for the programs in Europe and Central Asia is 13.0 percent for family allowances, 13.5 percent for last resort programs, 9.0 percent for CCT programs, and 19.5 percent for social pensions. While the generosity of family allowance and CCT programs is concentrated in a narrow interval, the values are more dispersed for other types of programs. The higher generosity of social pensions is not surprising: these are the programs meant to sustain households not expected to work. FIGURE 5.2 Generosity of Selected Safety Net Programs, Europe and Central Asia and Latin America and the Caribbean, Selected Years, Family allowances (n = 15) Last resort programs (n = 20) CCT programs (n = 8) Social pensions (n = 14) Transfer as percentage of pretransfer household consumption SOURCES: Tesliuc and others forthcoming; World Bank forthcoming. NOTE: n = number of programs. The median value is the line inside the shaded rectangle, the 25th percentile is the lower value of the shaded rectangle, and the 75th percentile is the upper value of the shaded rectangle. Programs whose generosity is 1.5 times more than, or less than, the median were excluded. FIGURE 5.3 Generosity of Selected CCT Programs in Selected Latin American and Caribbean Countries, Various Years Nicaragua, Red de Protección Social (2000) Mexico, Oportunidades (2004) Colombia, Familias en Acción (2002) Jamaica, PATH (2004) Honduras, Programa de Asignación Familiar (2000) Ecuador, Bono de Desarrollo Humano (2006) Brazil, Bolsa Familia (2004) Transfer as percentage of household income SOURCE: Based on World Bank forthcoming. NOTE: The unit used for Brazil is the transfer as a percentage of pretransfer household income.

11 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 137 TABLE 5.1 Generosity of Selected Cash Transfer Programs in Selected East European and Central Asian Countries, Selected Years Social pension programs Family allowance programs Last resort programs Other programs Country and year Poorest quintile Total Poorest quintile Total Poorest quintile Total Poorest quintile Total Transfer as a percentage of pretransfer household consumption Albania, n.a. n.a Armenia, 2003 n.a. n.a Azerbaijan, Belarus, Bosnia & Herzegovina, n.a. n.a Bulgaria, Estonia, 2004 n.a. n.a Georgia, n.a. n.a Hungary, Kazakhstan, 2003 n.a. n.a. n.a. n.a Kyrgyz Republic, 2003 n.a. n.a. n.a. n.a Lithuania, Macedonia, FYR, 2003 n.a. n.a Moldova, Poland, Romania, Russian Fed., Serbia & Montenegro, Tajikistan, Uzbekistan, 2003 n.a. n.a Median SOURCE: Based on Tesliuc and others forthcoming. NOTE: n.a. = not applicable. Generosity is defined as the ratio of a transfer to household consumption. Consumption is current consumption (less expenditures on durables, housing, and health. 5.2 Managing Work Disincentives One of the most common stumbling blocks to receiving political support for transfer programs is concern about work disincentives or welfare dependency. Specifically, the

12 138 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS concerns are that beneficiaries will work less because transfers will reduce the pressure on them to work and will also reduce the rewards from working if benefits are reduced when household income increases. The theoretical arguments behind labor disincentives are intuitive (Ellwood 1988). First, any transfer provides unearned income, and thus inherently will reduce the pressure to work. The typical model assumes that beneficiaries will trade some of the extra income for more leisure. 4 Beneficiaries will feel less urgency about taking a job or having all able-bodied household members working. As a result, people will not be as likely to work as they would be in the absence of the transfer program. This is sometimes referred to as the income effect. Second, when the amount of the benefit depends on the recipient s income (the poorer a household, the more money it gets), transfers may change the rewards from working. This situation arises for verified means-tested programs where the benefit level is reduced by a fraction of a currency unit for each additional currency unit in earnings. The implicit tax on earnings is known as the program s marginal tax rate and is sometimes referred to as the price effect. In the hypothetical naïve GMI program where the size of the benefit tops household earnings up to a minimum living standard and is reduced as income rises, the recipient whose initial income is below the guaranteed income has no incentive to work. Thus the theoretical model predicts that the reduction in work effort will be proportional to the size of the benefit (the income effect) and the implicit marginal tax rate on earnings (the price effect). The price effect will be manifest only for means-tested programs with accurate and frequent verification of household income. The theoretical model outlined applies in particular to a class of programs and beneficiaries in developed countries: verified means-tested GMI programs serving able-bodied households. For these programs and country settings, beneficiaries face 100 percent marginal tax rates, and households that earn less than the guaranteed income in the absence of the program have no rewards for working. To operate according to their theoretical design, GMI programs should be able to perform an accurate means test when someone applies to the program and then monitor the household s income continuously or at regular intervals to adjust the benefit level to changes in earnings. This is feasible only in countries where the informal economy is small and household incomes are monetized, documented, and verifiable. Few programs in developing countries operate under such conditions. The concerns about work disincentives should not be applied indiscriminately to all types of safety net programs and beneficiaries. First, the concern is less pertinent for programs targeted to beneficiaries who are not expected to work, such as social pensions, disability allowances, and, sometimes, allowances for single parents. Second, the model does not fit the typical beneficiary from a low-income country well, that is, a poor, creditconstrained entrepreneur. 5 For this type of beneficiary, an injection of cash at zero interest rate may provide the additional liquidity required for a small investment, which may result in an increase in work effort. Furthermore, the model does not apply to a whole class of transfer programs such as workfare, where benefits accrue only if beneficiaries work. EVIDENCE FROM DEVELOPED COUNTRIES Concerns about work disincentives have traditionally been strongest in wealthy countries with generous safety nets and high unemployment rates. However, while the concerns are

13 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 139 common in most developed countries, most of the research and evidence is limited to the United States. Some evidence of labor disincentives is apparent for generous social assistance transfers with finely tuned eligibility based on verified means testing in the case of two programs: the Aid for Families with Dependent Children (AFDC) and the negative income tax experiments. The AFDC program (box 5.3) was a relatively generous program that provided income replacement for single mothers. It contained specific features that made it especially susceptible to labor disincentives, such as reducing benefits dollar for dollar. BOX 5.3 Lack of Applicability of High Labor Disincentives in the AFDC to Safety Nets in Middle- and Low-Income Countries The AFDC program operated in the United States from 1935 to A number of nonexperimental studies reviewed in Moffitt (2002a) suggest that single mothers benefiting from the AFDC reduced their work effort by 10 to 50 percent. The AFDC had a number of design features that encouraged reduced work effort, namely (1) it was an income-replacement program that provided relatively generous benefits; (2) it imposed a 100 percent marginal tax rate on beneficiaries earnings; and (3) its target group was single mothers, a group that was expected, at least during the program s early days, not to work but to care for their children. In 1996, Temporary Assistance for Needy Families, a program that incorporated many design elements that encouraged beneficiaries to work, replaced the AFDC. Care should be exercised in extrapolating these results to other safety net programs in developed or developing countries where strictly enforced means-tested programs with positive tax rates on extra earnings are rare and programs are less generous. SOURCES: Moffitt 1992, 2002a. The negative income tax experiments implemented between 1968 and 1979 supplemented the incomes of poor working families by bringing them up to a fraction of the poverty line while allowing beneficiaries to keep a fraction of their extra earnings that took them above the poverty line. 6 Evaluations found that the negative income tax approach moderately reduced participant work efforts. Male beneficiaries reduced their employment and earnings by 7 percent on average. Among female beneficiaries, only 17 percent of whom were employed, employment and earnings dropped by 17 percent (Burtless 1986). Except for these two programs, the U.S. evidence shows that participation in safety net programs has only small or moderate effects on employment or hours worked. In the United States, most studies have found no evidence of reduced work effort for a host of programs with relatively smaller benefits, such as the Food Stamp Program, nutrition programs, or child care subsidies (Blau 2003; Currie 2003). Studies obtained similar results for in-kind programs, such as housing programs or Medicaid, a program that provides health insurance coverage for the poor (Gruber 2003; Olsen 2003). Outside the United States, the evidence on disincentives to work resulting from safety net programs is extremely scarce. In continental Europe, for example, research has focused on the impact of generous unemployment programs on the work effort of the

14 140 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS unemployed (LaLonde 2003), not on safety net programs. This relative lack of interest is probably because GMI programs the main culprit in terms of work disincentives are small (in the European Union, most of them account for 0.2 to 0.4 percent of GDP and cover only 1 to 3 percent of the total population), while other programs use categorical criteria to cover population groups not expected to work (the elderly, the disabled, children) (OECD 2004a). Another robust evaluation of the work disincentives of income-tested cash transfers comes from Ontario, Canada. There the beneficiaries of a rather generous safety net program during the 1990s reduced their work effort by 3 to 5 percent when benefits tripled from Can$185 to Can$507 (Lemieux and Milligan 2008). EVIDENCE FROM DEVELOPING COUNTRIES As concerns developing countries, the theory supports the view that the impact of safety net programs on work disincentives should be smaller in developing countries than in developed countries for the following four reasons: Many developing countries target their programs only to households without able-bodied adults, and in such cases the arguments are not relevant, for example, the direct support component of the Productive Safety Net Program in Ethiopia and the Kalomo District Pilot Social Cash Transfer Scheme in Zambia, or require able-bodied beneficiaries to work in return for benefits as is the case for all workfare programs and some cash transfer programs. Programs are less generous in developing countries. Most safety net programs complement rather than substitute for the earnings of able-bodied beneficiaries (box 5.4). Verified means-tested programs are rare in developing countries. Few programs use and are able to effectively enforce benefit formulas with marginal tax rates and frequent recertification of household income. The static model does not take into account that transfers help households make productive investments in their futures. Relatively less empirical research on potential labor-market disincentives associated with transfer programs is available for developing countries. However, as shown in the following list, the few studies that have investigated the effect of safety net programs on adult work effort suggest limited labor disincentive impacts: In Armenia, Posarac, Tesliuc, and Angel-Urdinola (forthcoming) do not find that the beneficiaries of the Family Poverty Benefits Program work less because of the program. The authors compare the employment rate and the hours worked by adults in two equivalent groups, applicants accepted versus applicants denied, with a proxy means test score close to the eligibility threshold using a regression discontinuity design. In Brazil, Leite (2006b) simulates the potential impact of the Bolsa Escola (School Grant) program on adult work effort and finds that the transfer amounts have little impact. Even a 10-fold increase in the size of unit transfers under Bolsa Escola would result in negligible impacts on adult work effort.

15 5. BENEFIT LEVELS AND DELIVERY MECHANISMS 141 BOX 5.4 Labor Disincentives in Very Low-Income Countries: The Kalomo District Pilot Social Cash Transfer Scheme, Zambia In the Kalomo district of Zambia, a cash transfer scheme supported by the U.K. Department for International Development and the German Agency for Technical Cooperation provides about US$10 per month to destitute households. The US$10 amount is based on the price of a 50-kilogram bag of maize, which enables beneficiary households to have a second daily meal. The assistance has to be meaningful, but not so large as to engender jealousy among those not receiving the support or compromise the scheme s financial sustainability once it is extended nationwide. Households with children get a bonus of US$2.50, reflecting the higher expenses of households with children. For simplicity, the amount is irrespective of the number of children. Evaluations of the scheme have not found that it created any disincentives for households. According to one evaluation (GTZ 2008): The amount that households receive per month is only enough to permit them to have a second meal per day. It thus supplements the little that households can obtain on their own with their limited capacities and is certainly not an incentive to refrain from productive work. Most of the beneficiary households have invested part of their transfers in livestock or agricultural supplies at some point of time, showing that households have a strong interest in generating extra income and engaging in small productive activities. Social transfers of this type should therefore always complement other sources of income but help to avoid negative coping strategies. The level of transfers is a question needing careful consideration and testing. SOURCE: GTZ In rural Ethiopia, Abdulai, Barrett, and Hoddinott (2005) find that the receipt of food aid is not associated with lower work effort in agriculture, wage work, or selfemployment. The negative correlation between food aid and various measures of labor supply that may appear to suggest the existence of work disincentives because of food aid actually reflects the placement effect, that is, that food aid is targeted to the poorest communities and to the less able-bodied members of the community. Once these characteristics are controlled for, the data suggest that food aid leads to increases in the labor supply. In Mexico, evidence from three studies suggests insignificant labor disincentives for the adults participating in PROGRESA. First, empirical evaluations show that the conditional transfers from PROGRESA did have a significant impact on reducing child labor, but had no measurable impact on the work efforts of adults. Specifically, Parker and Skoufias (2000) estimate that PROGRESA increased beneficiary families average income by 22 percent and decreased children s labor force participation by 15 to 25 percent. They find no evidence of a reduction in labor force participation rates or work efforts by adults. Skoufias and di Maro (2006) find that PROGRESA did not affect the work incentives of adults from ineligible households in villages covered by the program. Finally, Freije, Bando, and Arce (2006) simulate behavioral responses and find that the Oportunidades program, the successor to PROGRESA, does not seem to affect adult labor sup-

16 142 FOR PROTECTION AND PROMOTION: THE DESIGN AND IMPLEMENTATION OF EFFECTIVE SAFETY NETS ply. Their simulations show that such transfers would have to be far higher (more than double) before any labor disincentive effects would emerge. In Romania, a qualitative review of the Guaranteed Minimum Income Program (Birks Sinclair & Associates 2004) finds little evidence of an adverse impact on labor force participation. Two design elements are suspected to have mitigated the work disincentives. One is the work requirements applied to all able-bodied beneficiaries. The other is an exit threshold that is set higher than the eligibility threshold. The evaluator considered that because there is a small bonus for employment, there may be a small positive impact on participation compared with more traditional systems of aid (Birks Sinclair & Associates 2004, p. 27). In Sri Lanka, Sahn and Alderman (1996) study a rice subsidy program that induces labor disincentives through income effects. They find labor reductions of approximately 10 percent. OPTIONS FOR MINIMIZING LABOR DISINCENTIVES Policy makers and administrators have a variety of tools at their disposal to minimize labor disincentives as discussed in chapter 2, section 3. We summarize five of them here, focusing on how to minimize labor disincentives generated by the transfer formula (the fourth and fifth options). However, reduced work effort is not unambiguously a good or bad outcome (box 5.5). One option is to limit programs to those who traditionally are not expected to work anyway, that is, the very young, the very old, the disabled, and so on, often referred to as the deserving poor. This is fairly common, but results in only a partial safety net (see chapters 8 and 9). One way to ensure the coverage of all the poor is to complement such programs with a workfare program. Ethiopia s Productive Safety Net Program provides an example. It covers all the extremely poor and combines a workfare program serving those who can work with cash transfers for households without labor resources. A second option is to choose a targeting mechanism that is not tied directly to earnings, which leaves the rewards to working intact. Indeed, few developing countries use a means tests or minimum income guarantee, although many transition countries do. Infrequent recertification will also minimize the labor disincentives. Most programs outside Europe recertify beneficiaries only once every two or three years or less often (see chapter 4, section 4). A third option is to condition benefits for able-bodied beneficiaries on a work test, which is, in essence, what a workfare program does. The application of this principle is not limited to a stand-alone workfare program. Most last resort cash transfer programs in transition economies require economically inactive applicants to register with the unemployment office and actively seek work. Some last resort programs, such as Albania s Ndihme Ekonomika (Economic Assistance) program and Romania s GMI Program, take this principle further by requiring able-bodied beneficiaries to work a certain number of days per month in exchange for benefits (one day per week in Albania and one week per month in Romania). Refusal to work results in stopped payments. In Bulgaria in , when a large percentage of GMI Program beneficiaries were long-term participants in the program, the country implemented a temporary public works program, From Social As-