Th ld
p l
P
8
notes p t
L d t t
P
oor people fall into three cate- is crucial—safety nets designed to comple-
gories: those who are able to work ment growth must include the poor in pro-
but have low incomes arising from ductive activity.
low productivity, those who are unable to In addition, safety nets can be combined t t d
work (the elderly, the handicapped), and with long-term programs that build human
those who are forced into temporary capital and transfer assets to the poor, rais- t pl t
poverty by drought, recession, structural ing growth potential. For example, public
adjustment, or political transition. works programs can create growth-enhanc- th t
Most poor people are members of the ing infrastructure, including irrigation
first group, and are best helped by growth- (which increases productivity and reduces l d th p
enhancing policies that foster labor absorp- the impact of future droughts). The poor
tion and raise productivity. Although safety typically suffer the most from shocks like p d t
nets are important components of such drought or transition because they have few
policies, they should never be conceived as insurance mechanisms and limited savings. t t
solutions to poverty. Rather, they are impor- As a result they tend to avoid risk rather than
tant palliatives for the destitute and those in maximize productivity—they simply cannot
transient poverty. They also can help work- afford to be entrepreneurial. By providing
ers in slack seasons when jobs are scarce. an insurance mechanism, safety nets help
the poor become entrepreneurial, enhanc-
ing productivity and growth.
Several issues must be considered when Private transfers within families and
designing safety nets. Are they tailored to communities are traditional mechanisms
local needs? Are they financially and polit- for alleviating distress. Safety nets should
ically sustainable? What are the costs and try not to displace these. Rather, publicly
benefits of different safety nets? And how funded safety nets should, where possible,
can they be targeted at needy groups? strengthen informal and traditional
A recent World Bank book, Safety Net arrangements.
Programs and Poverty Reduction: Lessons All assistance affects the behavior of
from Cross-Country Experience, answers recipients. High-wage public works pro-
these questions by distilling best practice grams will lead to employment diversion
from global experience. The book argues from private jobs rather than employment
that good design can help ease the bud- creation. Cash transfers and subsidized food
getary conflict between safety nets and may make recipients work less. Transfers are
growth-enhancing spending. One feature fungible, so subsidies to feed schoolchild-
th d l p t p d d p t d t d t t
ren may cause parents to cut back on house- h th pp h
hold meals. Such responses may increase Turning from general principles to
real economic costs, and so must be kept in specifics, the book provides a framework for
mind in designing safety nets. choosing among four types of safety nets:
Targeting focuses scarce funds on the cash transfers, in-kind transfers, public
needy, but it also has costs. Administrative works programs, and credit programs.
mechanisms to screen out the nonpoor— Country circumstances—including institu-
for example, ration cards—may unwittingly tional capacity, the nature of poverty and
screen out the poorest, who often are external shocks, and fiscal and delivery con-
unaware of their rights and unable to afford straints—will determine which approach is
T t t the transactions costs of securing benefits. most appropriate (figure 1).
Subsidies that focus on too narrow a portion
ll of the population may lose political support Cash transfers
(as in Sri Lanka’s food subsidy). Moreover, Cash transfers are effective if programs are
d dt targeting has significant administrative relatively small and the poor are easily iden-
costs. And it can distort incentives, inducing tifiable—as in countries where poverty is
d less work and reduced output. Thus target- strongly correlated with family size or female-
ing must be carefully designed to ensure a headed households. But in cases where iden-
t d t good tradeoff between costs and benefits. tifying poor families is difficult and costly,
The best schemes are often self-targeted, other mechanisms (such as geographical tar-
t d like public works programs at wages attrac- geting) may prove superior. Self-selection
tive only to the poor, or subsidies for foods can be tried by linking cash transfers to a
t l consumed mainly by the poor. The worst work requirement or to child nutrition pro-
schemes are those that fail to reach the poor. grams. Alternatively, identifying and exclud-
t t ing the nonpoor (based on ownership of, say,
D d l land or automobiles) may be more effective
t th Cross-country experience highlights seven than trying to identify the poor.
lessons for good safety net design: One advantage of cash transfers is that
t pp h • Avoid open, general subsidies, which they do not distort commodity markets.
are unsustainable, distortionary, and But all cash transfers create problems.
mainly benefit the nonpoor. Poverty traps develop for people living just
• Limit program costs to a small percent- below the poverty line. Traditional safety
age of the total budget, ensuring sus- nets (private transfers) may be displaced.
tainability. And beneficiaries may work less. Program
• Use innovative designs and delivery design should recognize and attempt to
mechanisms (like village-level non- minimize such behavioral responses.
governmental organizations) to reach
groups that standard safety nets often In-kind transfers
miss (poor women, indigenous groups). In-kind transfers include food stamps,
• Keep transactions costs low to avoid nutritional supplements, and food, hous-
eroding the real cost of benefits. ing, and energy subsidies. Experience in
• Ensure that safety nets are broad many countries provides four lessons. First,
enough to maintain political support— universal subsidies are fiscally unsustain-
very fine targeting can undermine such able, so targeting is essential. Second, the
support. nonpoor can be screened out by attaching
• Avoid excessive fine-tuning in targeting, obligations (such as a work requirement)
since it may end up excluding the poor to recipients. These obligations should not
along with the nonpoor. raise transactions costs significantly, how-
• Keep assistance modest to minimize ever, or the poor will be screened out.
changes in incentives and behavior, Third, like cash transfers, in-kind trans-
which can erode real benefits. fers can generate incentive costs, and are
open to abuse and political rent seeking. There are, however, tradeoffs between
Self-selection can lower such costs. employment intensity and the durability of
Subsidies for lower-quality foods or for such works. Unpaved roads provide imme-
foods consumed mainly by the poor can be diate employment but will soon be washed
a useful form of self-selection that is also away. Paved roads are durable but provide
politically acceptable. Fourth, food trans- fewer jobs.
fers to schoolchildren or lactating moth- The wage rate is the most important
ers can be effective but require design element in public works programs. If
well-developed administrative and deliv- wages are at or below the market rate, only
ery systems. the poor are likely to participate. If wages are
higher than the market rate, the nonpoor
Public works programs will be drawn away from productive work in
Public works programs can be important the private sector, and excess demand will
countercyclical mechanisms during times lead to job rationing in public works pro-
of temporary distress (droughts, reces- grams (as in Botswana, Kenya, and Tanzania
sions), can smooth incomes by providing and in India’s Maharashtra Employment
work in slack agricultural seasons, and can Guarantee Scheme after 1988). Paying a sig-
help countries undergoing transition or nificant portion of wages in kind can attract
emerging from civil conflict. These pro- more female workers (as in Lesotho and
grams are flexible and can be expanded or Zambia). India’s Maharashtra Employment
cut according to need. Moreover, they can Guarantee Scheme obliges the administra-
be used to build infrastructure—village tion to provide work within 5 kilometers of
water tanks, rural roads, social forestry— where five or more people demand employ-
and so increase growth potential. ment. This program has helped reduce the
severity (as distinct from the incidence) of have subsidized interest rates—yet experi-
poverty and eroded gender barriers in ence has shown that the poor are good credit
employment. risks, and are often better served by a line of
Public works programs are costly to credit at market rates than by a one-time loan
administer and have high nonwage costs. at subsidized rates. Credit programs also run
So while they are a good means of target- the risk of leakages to the nonpoor, especially
ing the needy, they should be wound up when interest rates are subsidized and pro-
when times of need end. They must not be grams are administered without local partic-
viewed as permanent solutions to poverty. ipation and community oversight. Because
of these and other challenges, even the most
Th p Credit programs successful credit programs have a modest
Credit programs improve the poor’s access record in reaching the poor.
t tt to credit. Credit increases self-employment, Government-run credit programs have
and can be important where underemploy- the worst track record, and NGOs and other
d l ment and unemployment are widespread. local groups (such as women’s microcredit
Credit also helps alleviate the inefficiencies groups) provide better delivery. To ensure
dt t created by market failure in financial mar- that credit-based work programs benefit the
kets (banks are normally reluctant to lend to poor, rules should be clear and simple, and
t t t the productive poor because of information paperwork minimized to cut transactions
problems). Moreover, credit raises the costs. Moreover, savings should be pro-
t th poor’s productivity and so aids economic moted as an integral part of these programs
growth. Finally, credit programs have been (women’s microcredit groups are typically
h tl t extremely successful in breaking down tra- thrift-and-loan societies). Finally, the risks
ditional gender barriers, especially when credit programs pose to borrowers and
d d t administered by nongovernmental organi- lenders can be reduced through group
zations (NGOs). Women account for only 25 lending and small loans that are repeated
percent of beneficiaries in India’s govern- for those who repay on schedule.
ment-administered credit program, the —Swaminathan S.A. Aiyar
Integrated Rural Development Program. In
NGO credit programs, by contrast, women This brief, an earlier version of which appeared
account for much larger shares of benefi- in Poverty Lines, was written by Swaminathan S.A.
ciaries—60 percent in India’s Mysore Aiyar under the supervision of K. Sarwar Lateef
Resettlement and Development Agency and and Kalanidhi Subbarao for the Poverty
90 percent in Bangladesh’s Grameen Bank. Reduction and Economic Management (PREM)
Credit programs have drawbacks, how- network. It is based on:
ever. They require specialized skills that are
often scarce in developing countries. Subbarao, Kalanidhi. 1996. “Best Practice on
Political pressures for writeoffs can lead to Social Assistance and Poverty-Targeted
high levels of default—often willful default. Programs.” World Bank, Poverty and Social
The poorest are often excluded because they Policy Department, Washington, D.C.
are illiterate and cannot handle the required Subbarao, Kalanidhi, and others. 1997. Safety
paperwork or other transactions costs. Net Programs and Poverty Reduction: Lessons
Money is fungible, so credit for production from Cross-Country Experience. A Directions in
may be diverted to consumption. To lower Development book. Washington, D.C.:
the cost of borrowing, many governments World Bank.
This note series is intended to summarize good practice and key policy findings on
PREM-related topics. PREMnotes are distributed widely to Bank staff and will also
be available on the PREM website (http:/ /prem). If you are interested in writing a
PREMnote, email your idea to Kim Murrell. For additional copies of this
PREMnote please contact the PREM Advisory Service at extension 87736.
Prepared for World Bank staff