Latin lessons

Experiments in cash transfer in Latin America

Published: Tuesday 15 February 2011

Latin lessons

imageLatin American countries were the first to flirt with the conditional cash transfer model. It evolved in response to the economic crisis of the 1990s. Many governments found that in the face of the crisis the poor were not availing themselves of education and health services. At the same time governments had to cut their social spending and subsidies. They wanted the poor to use social services but without expanding the budget for it. Conditional cash transfer programmes emerged as a response to this twin challenge; they put hard cash in the hands of the people but on conditions like they sent their children to school or for health check-ups.

Mexico was the first country to start such a programme called Progresa in 1997, the year it faced economic meltdown. Progresa is a poverty alleviation programme that transfers cash to the woman heads of the extremely poor rural families. The condition is that each of the children must attend school between Class III and VIII. With change in government in 2000 the scheme was renamed Oportunidades. It was also scaled up from BPL families in rural areas to all rural and urban families. Oportunidades replaced the country’s poorly targeted and ineffective consumption- based subsidies. By mid- 1990s the country was running 15 food subsidy schemes. Still about 60 per cent of the poor rural families received no support from the federal government.

In Brazil the much-talked-about family stipend programme Bolsa Família started in 2001. It evolved from a series of localised schemes introduced in urban areas during the 1990s. Luiz Inacio Lula da Silva, the former president, expanded it in 2003. This substantially contributed to his re-election in October 2006 (see ‘Cash swings votes’). The programme became a central part of Lula’s ‘zero hunger’ campaign. In 2010 it covered 12.4 million families, up from 11 million in 2006 (Brazil’s population is 193 million). In the recent presidential elections, every candidate promised to expand it.

Conditional cash transfer has had an impact on poverty and income inequality, according to the World Bank assessment. It attributes 21 per cent of the reduction in income inequality between 2000 and 2007 to conditional cash transfer schemes in Brazil and Mexico. Such programmes have been fairly successful in reducing acute distress and increasing consumption levels of the poor. For example, in Mexico and Brazil such schemes contributed 25 per cent and 50 per cent of the total income of the poorest families respectively. In Mexico the poverty gap declined by 12 per cent, severity of poverty by 19 per cent and the number of poor by five per cent, according to the World Bank review.

In Brazil, where the health and welfare ministry evaluated Bolsa Família between 1995 and 2004, over 82 per cent beneficiaries reported eating better and prevalence of stunting in children was 29 per cent lower compared to non- Bolsa families. In Mexico, Progresa participants reported a 16 per cent rise in me an growth rate a year (1 cm) for children who received treatment in the critical age of 12 to 36 months. A good part of the success owes to the size of the schemes.

Before long several countries began copying the conditional cash transfer model. The number of countries running such schemes swelled from three in 1997 to 40 in 2010. Another 30 countries have only recently adopted such schemes. African countries are the latest to adopt this model. Most of the bilateral and multilateral donor agencies are pushing for conditional cash transfer. The scope and size of such programmes have also gone up. Mexico’s Progresa started with about 0.3 million families in 1997, but now covers five million families. Brazil started with municipal Bolsa Escola scheme in Brasilia and the municipality of Campinas. Today the federal Bolsa Família programme serves 11 million families across the country. In Colombia, Famílias en Accion programme, similar to Progresa, benefited 0.4 million families initially; it has expanded to 1.5 million families by 2007.

  In Brazil over 82% people covered by Bolsa Família reported eating better. Stunting in children lowered  
Reasons for the model’s replication remain economic. Countries that have adopted it are going through structural changes in their economies. They have been looking for ways to reduce social spending and better deliver services. Conditional cash transfer programmes are politically feasible and economically affordable. Politically, the rise in human development index, like increase in school attendance, brings electoral dividends. Economically, it is considered a better option than a universal dole program me. Recent studies of the model in over 70 countries by the World Bank and UNDP show that the cash or coupon delivery mode can be more cost-effective provided there is social infrastructure and transparency. Unlike the dole programmes in countries like India where 85 per cent of allocated funds are devoured by the administrative machinery and corruption, in conditional cash transfer the cost of delivery is 6-12 per cent of the amount delivered. So the potential saving is immense, especially for India, which is among a dozen countries spending over two per cent of GDP on social security and subsidy schemes.

The cost of administering conditional cash transfer schemes as a proportion of GDP has been less than one per cent in the countries reviewed, except in the initial period when one has to factor in the cost of setting up the schemes. While governments save money it does not necessarily mean more funds would be available for the poor. In Brazil the spending on the poorest is constantly shrinking. The expansion of Brazil’s well-targeted Bolsa Família to cover the bottom quintile of the population will cost 0.4 per cent of GDP, while the government spends nearly 10 times that amount on covering the deficit in the main federal pension programmes, which deliver more than half of their benefits to the richest quintile.

Though cost-effective, cash transfer models are as prone to flawed targeting as any other. Progresa, for example, excluded a large number of poor people because it covered only those who had access to health and education services. Bolsa Escola, the precursor of Bolsa Família, excluded families who could not send children to school and people like migrant labourers and homeless. Poor targeting can also mean inclusion of people who are not the intended beneficiaries. Bolsa Escola faced widespread allegations of leakage of benefits and political patronage for inclusion of beneficiaries. The government is accused of deliberately keeping the target low due to financial constraints. It took the poverty line as the sole criterion.

The inclusion error in Bolsa Família was calculated to be 49 per cent as compared to 36 per cent in Oportunidades in Mexico in 2007-08. However, given that fluctuations in the incomes of families render identification of beneficiaries at any given time inappropriate at a later point in time, and the fact that the leakages were to those just above the poverty threshold, Bolsa Família focussed more on minimising exclusion errors. Brazil’s National Household Survey in 2004 found that Bolsa Família was highly targeted at the poor and exclusion errors minimised over time.

The conditional cash transfer model has scope for improvement. Global experience has taught three fundamental lessons in making it successful. One, there must be a robust mechanism to identify the poor. Two, services that are made compulsory for cash must be available to the targeted beneficiary. Three, a highly effective system must be in place to monitor the scheme.

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