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Jishnu and Shanta Talk Transfers

Shanta Devarajan's picture

Shanta:  Jishnu, your blog post and mine on cash transfers generated a lot of comments.  Some people argued that giving poor people cash will not “work” because they will spend it on consumption rather than on their children’s education, which is something we care about.  What do you have to say to that?

Jishnu:  I don’t think the question “does giving cash to poor people work?” is well-defined.  It can only be answered in the negative if we (the donors who give the cash) impose our preferences and judge what poor people spend on relative to those preferences.  But if we give poor people cash so they will be better off, then—by definition—they are better off, regardless of how they choose to spend the extra money.

Shanta:  Before you get too philosophical, let’s discuss the concrete issue of education.  Everyone agrees that education is one of the best routes out of poverty.  But if people spend the cash on other things, they deny their children the chance to learn and escape poverty.  Wouldn’t it have been better to cut down on the transfer and use the savings to either subsidize education or give scholarships?  Isn’t this what conditional cash transfers try to do?

Jishnu:  I think the problem of thinking about it in this way ignores the fact that people may spend the money in other ways that could help them get out of poverty, even for a little while. What do we make, for instance, of the person who used the money to get bail for the main breadwinner in the family? So, let’s get even more concrete.  Here are four potential reasons why people don’t send their children to school:

  1. The benefits are not worth the costs. For instance, the school may be too far (especially for girls) or the children who do go to school don’t learn anything once they get there.
  2. The benefits are high, but the costs are borne by people who may not be able to share in the benefits. This is a failure of contracting. For instance, parents believe that if children get educated, they will move to the city and not care for them in their old age.
  3. People are credit constrained. The benefits are high, they will be shared, but at the moment I can’t borrow the money to pay for schooling. This may be particularly salient in the face of bad shocks:
  4. When there is an illness in the family, kids are pulled out of school to save money, and perhaps to engage in income-earning opportunities.

In the first case, if the costs are too high, the better option would be to provide transport, or build schools that are closer to home, as was done in Afghanistan with stunning results. That the benefits may be too low was demonstrated in Cambodia: Conditional cash brought children to school, but they did not learn anything. In the second case, I would subsidize education because there is an externality: the inability of households to contract for future transfers. In the third case, a smooth cash flow through direct cash transfers may work better than conditional cash transfers because the family is not penalized when illness strikes as they fail to meet the condition  without understanding the nature of the underlying problem, I find it very hard to advocate for one type of transfer over the other.

Shanta:  I think you’re saying something more than the old cliché “tailor the solution to the problem.”  We’ve known since Samuelson’s 1954 paper that there are two rationales for public expenditure—market failure and redistribution.  Too often, in practice, governments use the same instrument to address both.  For instance, there is some evidence that there are externalities associated with primary education (the benefits to society are over and above those to the individual student).  Even if there were no externality (all the benefits were private), we would still want poor people to have access to education, since it’s a way out of poverty.  So we provide free education for all.  But this combines the two rationales with one instrument.  For the externality, we should subsidize education to the amount of the difference between the social and private benefit—for everybody.  For redistribution, we should make sure poor people become less poor through targeted redistribution. 

I wonder if there is a more general point here.  When the rationale for government intervention is redistribution, the default instrument should be cash transfers (because these have the greatest potential to improve the poor’s welfare).  Any deviation from this should be justified on grounds that it achieves the redistribution motive better.  When the rationale is market failure, then the instrument should be a tax, subsidy or regulation. 

Jishnu: With one wrinkle. When the motive is redistribution, moving away from direct transfers to the poor requires somebody (the government) who represents the poor to decide on how they should spend the money. But what if the government is insufficiently attentive to the needs of the poor? This has been a constant sticking point in aid debates, to the point that it is argued that aid sustains unresponsive governments far beyond their past-due dates.

In my own work I often wear two very different hats. One strand of my work highlights, for instance, the very poor quality of health care available to Indians—particularly those who live in poverty. I have argued that this, in part, reflects a failure of the government to ensure basic accountability over service providers—to the extent that 40 percent of Indian doctors are absent on any given day; and when nurses’ wages are tied to attendance (you don’t get paid if you don’t show up to work), they break the time-stamp machines. In this line of inquiry, I am not working with the government; I am working to demonstrate a failure in their ability to attain their own stated goals.

My second hat is the one I wear when working on specific World Bank or government programs. For instance, I have helped design cash transfers after an earthquake in Pakistan and worked in the initial days of India’s health insurance program. I have also researched these programs, but that is long after my implementation hat has worn out. When working on these programs, I am trying  to ensure that they function well and that some systems are being put in place to ensure their sustainability. What I am not doing is asking whether these programs make sense in the first place (did those cash transfers keep a government in place longer than it should have, should insurance be provided through private companies, financed by the government) and what the broader implications are for the overall organization of state-citizen relationships.

At least for me, it is difficult to separate out these two tasks sufficiently to ensure both that I am fully committed to improving a program and, at the same time, ask whether that program makes sense from a broader societal perspective. If the answer was “no”, would I still keep at it the same way? What if the answer was “Yes, but only if everyone believes that it would work”? I give this example to highlight a conundrum we face every day at The World Bank. We see non-functioning institutions. We work with them every day. But it is hard to both work on improving programs and simultaneously question whether those programs make sense.

Shanta:  Sure, but some of us don’t have the luxury of wearing two hats (or having enough heads to accommodate them).  As chief economist, my view is that there is only one client—the poor in my countries.  The government is the intermediary to reach the poor.  If the government is a functioning intermediary, then I work with them (and I have pretty low standards for what “functioning” means).  But if the government does not seem to represent the interests of the poor (and there is evidence, often derived from your work, to that effect), then I work directly with the public, informing them of the evidence, so that they can bring pressure to bear on government to give them what they are due.  Sometimes, this makes governments (not to mention my managers) uncomfortable, but if we are serious about ending poverty, I’m convinced that this is how we should operate.
 
 

Comments

Submitted by William Stebbins on

It is a simple yet radical observation that the poor are the Bank's single client. This should embolden the Bank to be more disruptive when confronted with systems and institutions that create and maintain social inequality - rather than making the best of a bad situation. The one catch is that we're answerable to the board of executive directors, where the governments invested in those systems and institutions are far better represented than the poor.

Submitted by Shanta on

Will, thanks for the comment. If the governments that are represented on the Executive Board do not represent the interests of the poor in their countries, then we should be working even harder to promote the interests of the poor (otherwise, who will?) If on the other hand they do have the poor's interest in mind when they embrace the World Bank's goal of ending poverty, then we can work with them in developing the best instruments for reaching this goal, which was the subject of this post. Shanta

Submitted by Shaheena Nisar on

Signaling out the Poor as the only client is to negate the complexity of systems that hold responsible actors. Rarely, do we see Government's in developing countries playing the role of effective intermediaries. Are we supposed to forget about holistic and integrated approaches (both for policies and implementation) to strengthen the roles of development partners (including the government) in bringing about poverty reduction. All this, without forgetting the responsibility for promoting the prospects for sustainable growth for sustainable solutions for poverty reduction.

Submitted by Shanta on

Shaheena, thanks for your question and comments. I fully agree that the solution has to be holistic and integrated, and that we should strengthen the role of development partners, including the government. But the problem is that sometimes the government is not being effective (as you suggest) because of misaligned incentives within government: service providers don't have an incentive to provide services (teachers and doctors are absent), or politicians don't have an incentive to allocate resources to poor people (because of elite capture of the political system). In this setting, the holistic and integrated approach involves empowering poor people to better hold governments and service providers accountable. This is how we can make governments more effective at serving the poor.

Submitted by Junaid Ahmad on

Shanta and Jishnu -- the dialogue format is an excellent way of debating and discussing complex issues. Both of you have done a wonderful job of leaving us with many issues to dissect and assess. Many thanks. Let me pick up one of the issues -- Shanta's idea that often our responsibility is to provide information that citizens can use to hold their governments to account. Economists have done a wonderful job of showing how improving the way information flows can make markets work better. But, the linkage between public service delivery, accountability of governments and the availability of information is not so straight forward. In a particular, without ensuring that systems of voice and client power -- to borrow concepts from the 2004 WDR framework -- which link citizens to governments and clients to service providers -- the simple availability of information will not be sufficient to trigger the type of accountability that Shanta hopes to see emerge. I have worked on benchmarking of utilities and municipalities in many regions. We found, not surprisingly, that information about performance about utilities and local governments had much greater impact in a context where service beneficiaries and citizens had effective mechanisms of holding providers and the state accountable. Information plays a key role, for sure, but outside the context of shifts in the way institutions function -- a point Jishnu makes -- information alone cannot deliver to poor people. I fear that in a world of dysfunctional institutions only a chief economist has the luxury of bypassing the state!!

Submitted by Jishnu on

Dear Junaid

Thanks for the comment. I think you are absolutely right: Information in and of itself has a direct impact only when people either have options or can act on the basis of that information in other ways. The emerging research on this is converging quite rapidly to that idea. For instance, our experiment of providing report cards on schools and children in Pakistan reduced prices in private schools and increased test-scores in both public and private schools. At the same time, it's worth emphasizing that the effect of providing new information depends on the extent of information that was already available in the system, and there are few systems where the baseline was such that no information at all was available. Again, in the Pakistan report cards experiment, we are able to show that the new information increased the precision with which people were able to assess schools--but even in the baseline, their perceptions were quite accurate.

I am sure Shanta will have more to say about this, but its worth emphasizing that information also plays the key role of bringing something on to the legislative agenda. I don't think that everything that is backed up with hard information gains legislative attention, but hopefully, the likelihood that it does increases. I think absenteeism and the lack of incentives among public sector workers gained increasing acceptance as a problem after the work on the WDR, and we have seen some really innovative programs come up to deal with these.

So, my take is

1. Exactly as you say, more information leads to better outcomes where people can take actions on the basis of the information
2. New information also provides a means to move away from discussion based on experience towards an agreed upon set of facts. This in turn could--and has--created a platform for policy change in some cases.

Thanks again!

Submitted by Shanta on

Junaid: I'm glad you like the dialogue format--we should do one with you. I fully agree that information alone may not be sufficient for poor people to hold policymakers and service providers accountable. The question is what else can be done to help strengthen voice and client power. The answer is, as you say, to strengthen institutions that permit poor people to exercise their voice. But remember that any institution that strengthens the voice of poor people is weakening the power of someone else (think about decentralization shifting power from central to local governments). If these people are powerful enough, they can resist or undermine such institutional changes. This is why we have to be careful in proposing "pro-poor" institutional changes without watching out for the unintended consequences, most of which stem from those whose rents are being diminished managing to scuttle the reform. Incidentally, what I am proposing is not "bypassing government" but helping to make government more effective by improving poor people's ability to hold government accountable. Shanta

Submitted by Phyllis Pomerantz on

Just wanted to say thank you to Shanta, Jishnu, and Junaid. This blog is just excellent. This exchange is a critical one for the students in my governance class. There seems to be an overemphasis on transparency these days as if it alone will solve the problem of ineffective government. I am amused that whether it's cash transfers, education, information or ______[fill in the blank], and despite all evidence to the contrary, people are still looking for the "silver bullet". Jishnu's comments on when you use what are so useful as a counterpoint to that.

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