Social Rate of Return: A New Tool for Evaluating Social Programs Hyun H. Son

Transcription

1 Social Rate of Return: A New Tool for Evaluating Social Programs Hyun H. Son Principal Evaluation Specialist Independent Evaluation Department Asian Development Bank

2 Introduction Government social welfare programs aim to enhance welfare of the population. In evaluating these programs, the cost of programs is critical. Impact of programs should be judged on the basis of how much social welfare they generate with respect to their operational costs.

3 Introduction (cont d) The social rate of return is one methodology for evaluating social programs. This new methodology is applied to the 14 Philippine social welfare programs using the Annual Poverty Indicators Survey conducted in 2011.

4 What is Social Welfare? The main purpose of social welfare functions is to evaluate economic allocations to determine which policies are working or which are not. Different policies have different social objectives; some individuals will lose and others will gain. Social welfare functions explicitly specify normative judgments about weights given to different individuals.

5 What is Social Welfare? (cont d) A social welfare function has a rule that provides a way to aggregate utilities enjoyed by different individuals in the society. Suppose there are n individuals in the society whose incomes (or expenditures) are x 1, x 2,,x n then a general social welfare is defined by a function: W = W(x 1, x 2, x n )

6 Social Rate of Return (SRR) W is the society s average social welfare prior to receiving transfers. W * is the average social welfare after transfers. Given this, the program has generated the social welfare equal to W = W W

7 Social Rate of Return (cont d) The total costs of the program (C) are the sum of actual transfers to households and administrative costs. The administrative costs vary from one program to another. Administration costs are around 5%-10% of the total transfers reaching the beneficiaries.

8 Social Rate of Return (cont d) The social rate of return (SRR) can be defined by φ = W C which is a simple ratio of the social welfare generated by the program to the total program costs. The higher is the social rate of return, the greater is the effectiveness of the program in maximizing social welfare. Any program that gives a value of φ less than 1 should be carefully assessed whether it is worthwhile continuing to be implemented. In such case, the social rate of return for the program is negative.

9 Operationalizing SRR To implement SRR, a money-metric social welfare function (i.e., measured in terms of monetary units) is needed. To this end, we have used the two social welfare functions: 1. The Gini social welfare function proposed by Sen (1974) W = μ(1 G) where μ is the mean income (or expenditure) of the population and G is the Gini index.

10 Operationalizing SRR (cont d) 2. The social welfare function accounting for the idea of shared prosperity, recently proposed by World Bank W = μ(1 I) where I = 1 μ 0.4 and μ μ 0.4 is the mean income (or expenditure) of the bottom 40% of the population. These social welfare functions incorporate both the mean income of the population and inequality.

11 Calculating SRR The SRR can be calculated for a particular welfare program or a group of welfare programs. SRR (Gini welfare function) = 100 (1 C i) (1+φ i ) 1 where c i is the concentration index of the transfers from the ith program and φ i is the administrative costs expressed as the percentage of total transfers to individuals. SRR (Shared prosperity) = 100 μ 0.4i 2.5μ i 1 where μ i are the mean transfers of the ith program going to the whole population and μ 0.4i is the mean transfers going to the bottom 40% of the population.

12 Calculating SRR (cont d) In principle, the SSR defined for both social welfare functions lies between 100 and The negative value suggests that the program generates less welfare than the resources invested in the program while the positive value indicates greater gains in welfare than the resources put in. Therefore, the value of +100 indicates that the program is perfectly targeted. A program should be regarded as efficient if the SSR is greater than 50 and highly efficient if the SRR is greater than 70. A program with a negative value of SRR should be reformed or discontinued so that the resources could be channeled toward more efficient and effective programs.

13 Table 1: Social Rates of Return for welfare programs in the Philippines: Without administrative costs Programs Gini Welfare Shared Prosperity Government pensions Survival Benefits Ps Philhealth Disability Benefits Government Scholarship Benefits Disaster Relief Sickness/injury compensation Maternity Benefits Community based employment Program Agrarian Reform Community Development Program Training for work scholarship Supplementary food program Food for work

14 Table 2: Social Rates of Return for welfare programs in the Philippines: With administrative costs Gini Welfare Shared prosperity Government pensions Survival Benefits Ps Philhealth Disability Benefits Government Scholarship Benefits Disaster Relief Sickness/injury compensation Maternity Benefits Community based employment Program Agrarian Reform Community Development Program Training for work scholarship Supplementary food program Food for work