Best to give cash to the poor

Best to give cash to the poor
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First Published: Wed, Feb 27 2008. 10 48 PM IST

(Photo / AFP)
(Photo / AFP)
Updated: Wed, Feb 27 2008. 10 48 PM IST
Sixty years after independence, the quest for the Holy Grail of “poverty eradication” continues. In the midst of this dismal landscape, an anti-poverty programme by the Brazilian government, “Bolsa familia” (family fund), strives to let in a shaft of hopeful light.
Launched in 2003, it has grown to be the largest single anti-poverty scheme in the world, covering some 11 million families or a quarter of Brazil’s population, and costing just 0.8% of the GDP (gross domestic product). Under this scheme, mothers of families which earn less than $68 per head per month are paid a benefit of up to $54, on condition that their children go to school and take part in government vaccination programmes.
Each beneficiary receives a debit card which is charged up every month, unless the recipient has not met the necessary conditions, in which case the payment is suspended. The involvement of women and the use of debit card ensure that the cash transferred is likely to be well spent and cash pilferages are minimized. Its success raises questions about our traditional models of anti-poverty programmes.
(Photo / AFP)
Traditional anti-poverty programmes have adopted a one-size-fits-all approach, which fails to take into account the differential needs and requirements of the target beneficiaries. Such top-down schemes open up ample opportunities for incentive distortions that, in turn, manifest as poor targeting and numerous delivery leakages. Such problems include black market in public distribution system (PDS) foodgrain and kerosene, poor quality education and health care, pilferage of subsidized housing, ineligible welfare pension beneficiaries and distortions in the prices of agricultural commodities and fertilizers.
In contrast, “conditional cash transfer” (CCT) schemes take into account the fact that each family knows what is best for them, what are their needs and wants and how the money can be most effectively spent. This constitutes a paradigm shift in administering poverty eradication schemes, making them more effective and with fewer incentive distortions. By insisting on bank accounts, such programmes will go a long way in enabling access to formal channels of credit and bringing transparency to the administration of such schemes.
Further, such schemes seek to incentivize individual families by making the cash transfers conditional to achieving certain important social goals. These social goals can include sending children to school; immunizing them; participation in adult literacy programmes; undergoing family planning operations; forming self-help groups (SHGs), etc.
Here is an illustration of how regular government welfare and development programmes can be redesigned to make it similar to a CCT scheme.
PDS is one of the largest sources of welfare subsidies. It can be revamped by directly transferring the subsidy share into the bank account of the beneficiary. This money can be used to purchase foodgrain and other PDS items from any regular shop. The subsidy may be transferred, subject to achieving certain specified social goals such as sending children to school or being part of a good SHG.
Poor children can be given school vouchers to get admission in schools of their choice. Similarly, instead of giving ownership of houses, poor people, especially in urban areas, can be allotted rent vouchers to lease accommodation. In both cases, the subsidy can be in the form of a voucher for a minimum amount, which can be topped up by the beneficiary to choose between different schools and housing estates. In much the same way, beneficiaries selected for self- and wage-employment training can be given training vouchers to access good private training centres of their choice.
A universal health insurance system can be put in place that provides for all tertiary and even some secondary care, with the insurance benefits being conditional to fulfilling certain social desirables. The insurance subsidy can be transferred to the account of the individual or SHG, of which the individual is a member, as an insurance credit. The individual will have the choice of either joining a basic health insurance scheme, which becomes available with the subsidy, or purchasing another policy from the market by topping up the subsidy.
The agriculture subsidies given for fertilizers, seeds and as price support generate significant distortions in the market incentive structure, and results in misallocation of resources. As in many developed countries, it is more efficient to provide the subsidy support as a direct cash transfer. This assistance should be confined to farmers below the poverty line and having small landholdings. Poor farmers can be encouraged to form “farmers groups” and subsidy transferred to members of good groups. Cash can also be transferred to the kisan credit card, thereby bringing more farmers into the orbit of organized credit.
Such a paradigm shift will need to be implemented carefully—not as shock therapies, but with appropriate area-specific phasing and sequencing of activities, so as to ensure a smooth transition. Issues of beneficiary selection, specifying social goals, finalizing subsidy amounts and identifying the appropriate channel for transferring cash will need to be addressed in great detail. The success or otherwise of such programmes will depend on the ability to monitor the fulfilment of the conditions and check pilferage in the cash transfer. An integrated database that links the individual database of different departments , with appropriate technology, can go the extra mile in addressing many operational problems.
With many flagship poverty eradication programmes in progress or on the anvil, it is only appropriate that the forthcoming Budget discard failed models and embrace strategies that will deliver the full bang for the buck!
(Gulzar Natarajan is a civil servant. These are his personal views. A longer version of this article is available at Comments are welcome at
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First Published: Wed, Feb 27 2008. 10 48 PM IST
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