20-May-2010

OECD Conference, Paris, May 19th 2010 Session 3: Improving income support and redistribution

Ian Walker – Lead Economist, Social Protection, LAC , The World Bank

www.oecd.org/els/social/inequality/emergingeconomies

 Conceptual framework: anti poverty programs in the context of SP systems  The use of targeted subsidies to complement limited contributory social insurance coverage  Typology of programs and targeting approaches  Targeting and poverty reduction outcomes  Downsides and limitations: program quality differentiation, savings effects and labor market behavioral effects  Future challenges: ◦ Strengthening work opportunities ◦ Incentivizing savings ◦ Strengthening safety nets and human capital development

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Social Protection Objectives CONSUMPTION POVERTY HUMAN CAPITAL SMOOTHING PREVENTION DEVELOPMENT

FINANCING INSTRUMENTS INSTITUTIONS ARRANGEMENTS

Savings/risk pooling Workers’ Governance contributions Transfers / Monitoring and redistribution Payroll taxes evaluation General revenues Active policies Public/private sector Earmarked taxes

INDIVIDUALS’ FIRMS’ PROVIDERS’ PUBLIC BEHAVIOR BEHAVIOR BEHAVIOR SPENDING

Formal / informal Formal / informal Service quality Fiscal Job search effort Job creation Service costs sustainability Retirement Job destruction Service Allocative efficiency Job switching coordination

Coverage (active members / labor force) 0 to 25 25 to 50 50 to 75 75 to 100

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Worldwide Comparison of Social Assistance and Social Insurance Spending

13.2 14 12 10 8 8 SA 6 SI 3.1 3.8 3.6 4 2.6 3 2.5 1.5 2 1.3 1.4 2 0.9 0.9 0 Sub- East Easter Latin Middle South Asia OECD Saharan and Pasific and America East and Central and North Africa Asia

Source: Weigand and Grosh (2008)

 Social pensions  Subsidised health insurance  Conditional Cash Transfers  Unconditional Cash Transfers  In-kind transfers (mostly food-based programs)  Public works programs / employment guarantees  Social investment funds

Common goal: provide cash or in-kind support to the poorest households to alleviate poverty

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Types of targeting

Cash transfers and targeted In kind social insurance transfers

Cate- Poverty gorical Com- Food targeted Self targeting: munity programs Food for CCT, CT, targeted (child targeted (school, work health workfare support, (eg SIFs) other) insurance social pensions)

 Many MIC programs combine geographic and household targeting to determine eligibility

 Priority areas selected using geographic targeting (micro-area poverty maps) often based on censal data

CHIAPAS. ZONAS DE OPERACION

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S #

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 Selecting households in qualified areas  Some programs select all demographically qualified h/holds (eg with children under 15)  Others also apply poverty or means tests  Proxy means-testing (most LAC countries, Turkey, etc.):  Eligibility based on a weighted index of characteristics (score) that are easily observed and hard to manipulate  Multi-dimensional notion of poverty  Fewer labor disincentives  But requires agency credibility and can be gamed  Means-testing (eg Brazil)  More transparent for the beneficiaries  But verification of income is a challenge  Incentive problems: labor supply / informality effects

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 Larger role given to communities (Bangladesh, Cambodia, Kenya, etc.) ◦ In many places communities are asked to gather the information used ◦ Often quite specific guidelines given so that it is something of a loose PMT ◦ Occasionally more latitude given to communities to decide own critieria

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 Demographic: eg children move out of age category  CCTs: Non-compliance with conditions  Poverty status: ◦ Recertification cycle to verify continued poverty (PMT or declared income ◦ Links to social insurance and other databases: informality  Workfare: time limits on individual and on program

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 World’s largest CCT: > 12 million families, 25% of population, operates nationwide, 0.4% of GDP  All municipalities participate, Social Assistance office (CRAS) registers families’ self-declared per-capita income in cadaster  Social Development Ministry (MDS) administers national cadaster and determines program admission and exclusion  2 cut-offs for benefit entitlement: extreme poor:

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90%

80%

70%

60% Bolsa Familia Chile Solidario Chile SUF 50% Ecuador BDH PRAF Oportunidades 40% Jamaica PATH Cambodia: JFPR

30% Bangladesh FSSP Proportion of total benefits received received benefits total of Proportion

20%

10%

0% 1 2 3 4 5 6 7 8 9 10 Deciles of per capita consumption minus transfer

Pension Coverage by Income quintiles Chile Bolivia

100 100

80 80

60 60

40 40

20 20

0 0 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5

Costa Rica

100 Non-contributory pensions 80

60 Both contributory and non-

40 contributory pensions

20 Contributory pensions

0 Q1 Q2 Q3 Q4 Q5

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Health Insurance Coverage by Income Decile

Colombia Peru 100 100 80 80

60 60

40 40

20 20

0 0 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Chile

100 Non-contributory Health

80 Insurance 60 Both Contributory and Non- 40 contributory Health Insurance 20 0 Contributory Health Insurance D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

CCT impacts on consumption and poverty Mexico Nicaragua Colombia Cambodia (1999) (2002) (2006) (2007) Median per capita 0.66 0.52 1.19 0.75 consumption (US $) Average transfer (% 20% 30% 13% 3% of per capita consumption) Impact on per capita 8% 21% 10% -- consumption (%) Impact: headcount 1.3** 5.3** 2.9** -- index (% points) Impact: sqd. poverty 3.4** 8.6** 2.2** -- gap (% points)

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 Health: ◦ Targeting success sometimes depends on quality differentiation, creating two classes of system ◦ Differentiated mandates of subsidized social health insurance or national health systems ◦ Often subsidized services have poor quality and severe queuing  Pensions: ◦ Social pensions have to be small to avoid undermining savings incentives and limit the fiscal cost (eg Bolivia’s Renta Dignidad)

 Programs targeted with Proxy Means Tests have modest or no reductions in adult labor market participation / work effort for (eg CCTs in Mexico, Ecuador, Cambodia).  Universal entitlements (for given demographic groups such as children or old people) will not normally affect work incentives but have higher costs for a given reduction in poverty or inequality, unless the targeted demographic group is uniformly poor.  CT programs that are targeted based on declared income, without work requirements, are likely to have informality effects undermining job quality and possibly, growth (the Levy hypothesis)  Workfare programs where benefits are set too high – which they often are - can displace private employment and have very high per capita program costs, limiting coverage.

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 Urban areas / moderate poor / some savings capacity: ◦ Incentivize secondary education, training, work search ◦ Subsidize employment ◦ Use subsidy to promote savings and social insurance participation by informal sector workers ◦ Tapered withdrawal of subsidy to avoid poverty traps ◦ Packages (such as free health plus access to subsidized pensions savings) are an attractive option  Rural areas / extreme poor / no savings capacity: ◦ Strengthen targeted safety nets with significant benefits ◦ Income effects can be more important than price effects even in CCTs ◦ Human capital accumulation for the poor depends on service quality and access, not just on stimulating demand ◦ Strengthen links from income support to other systems (education, health and nutrition; other SP programs)

 Priorities, intervention mixes and implementation speed will differ across countries and

 What can be done depends on what exists

 Make sure that each step fits within a long-term vision for the SP system:  Universal  Integrated and coherent  Where redistribution is transparent and progressive  Where incentives and opportunities to save and to work and human capital accumulation are systematically reinforced, not undermined

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