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Who really benefits from poverty-targeting in social protection: the poor or the rich?

19/09/2018

Luanda

Stephen Kidd

Asking whether the poor or the rich are the main beneficiaries of poverty-targeting in social protection probably seems like a strange question to many people.  On the face of it, the answer appears obvious: surely logic dictates that it must be the poor? Furthermore, it is often assumed that universal provision delivers no particular advantage for the poor as they only receive the same level of benefit as the rich.

But, as so often happens in social protection, the seemingly obvious answer is the wrong answer. In reality, when comparing the two options of poverty-targeting and universal provision, the main beneficiaries of poverty-targeting are the rich while the poor are the main beneficiaries of universal provision.

How can this be? Well, the answer is found in the magic of taxation. Most national social protection schemes financed from general government revenues are paid from taxes. So, when assessing who benefits from social protection we need to take into account both the transfer itself and the tax that is used to finance the benefit.

A simple thought-experiment can demonstrate why the rich lose out economically much less from poverty-targeted social protection when compared to universal provision.

Imagine a country in which the population comprises five citizens. As in most countries, our imaginary country is highly unequal. The total income of all citizens is 10,000 units and Figure 1 shows the relative incomes of each of our five citizens: while the richest citizen has an income of 7,000 units, the poorest has an income of only 200 units.

Figure 1: Distribution of wealth across the five citizens of our imaginary country

Now, imagine two scenarios:

  • In the first, the country establishes a poor relief (poverty-targeted) programme – let’s call it a conditional cash transfer – for the poorest citizen, so only s/he benefits.
  • In the second scenario, the country establishes a universal scheme offering a transfer of equal value to all citizens.

Obviously, there is a significant difference in the level of investment required for the two scenarios. The poverty-targeted programme is, in our experiment, by far the cheaper of the two, at 0.5 per cent of GDP (i.e. a slightly higher cost than most poor relief schemes currently found in low- and middle-income countries, such as Brazil’s Bolsa Familia, Mexico’s Prospera and the Philippines’ Pantawid programme). The universal scheme, as would be expected, is much more expensive, at five per cent of GDP (a little lower than the cost of Iran’s universal transfer for households – a form of basic income grant – when it was first introduced, and slightly higher than Georgia’s universal old age pension). The higher cost reflects the reality of the political economy of social protection: that universal schemes not only have higher coverage levels but, since everyone benefits, are more popular than poverty-targeted programmes. As a result, they generate both higher expenditures and, very often, higher value transfers.

The analysis makes two simple assumptions: i) everyone in the population is taxed at the same rate; and, ii) the poverty-targeting is perfect, ensuring no leakage to those outside the poorest quintile. Given that perfect targeting is an illusion – since even the most effective poverty-targeted schemes have exclusion errors of around 50 per cent of their intended recipients – we bias the results towards making poverty-targeting more attractive.

Figure 2 shows the change in the incomes of the country’s citizens after both scenarios are implemented. While the poorest citizen does better than all other citizens under the poverty programme, s/he is, in fact, much better off under the universal programme, with an increase in income of 90 units rather than the 49 units received under the poverty-targeted scheme. Further, while, under the poverty programme, citizens 2, 3 and 4 lose out slightly, they are net beneficiaries under the universal programme. This is important in the context of low- and middle-income countries since it is common for over 80 per cent of the population to be living on low incomes (in most countries, the vast majority of the population lives under US$5.00 per day, in purchasing power parity terms, a very low amount).

Figure 2: Net income gains and losses under the poverty-targeted and universal schemes

However, when we examine the richest citizen, it is clear that s/he does best under the poverty-targeted programme. While s/he loses some income under poverty-targeting, it is minimal since the tax paid to finance this relatively small programme is also minimal. His/her net loss under the universal scheme is much larger, despite receiving the same transfer as the other citizens. In fact, the losses of the richest citizen are equal to the gains of the other four citizens.

While this is only a thought-experiment, it mimics real life. It explains why we often find poverty-targeted schemes dominating in countries where democracies are weak: in such contexts, social protection schemes are often designed to respond to the interests of the rich, who want low taxes, rather than the interests of the majority of citizens. A key aim of poverty-targeting is to minimise taxation, which disproportionately hits the wealthy (even when taxation is not progressive): that’s why Trump’s tax cuts in the USA have been strongly advocated – and welcomed – by elites. Austerity measures in Europe have similarly been designed to cut the budgets of welfare programmes for the poor while lowering the overall tax burden. Indeed, as the World Bank (2015) itself has admitted (albeit in a paper it didn’t publish): “The historical … evidence suggests that the forces pushing for better [in other words, poverty] targeting are more regularly motivated by cutting entitlement bills and ensuring financial sustainability than by helping the poor.” By ‘financial sustainability,’ we should understand ‘lower costs and taxes’ since, in reality, universal schemes, despite their higher costs, are more financially sustainable than poverty-targeted programmes, due to their popularity which, as noted above, is derived from the fact that everyone benefits.

Since the recipients of poverty-targeted schemes are politically weak, the programmes themselves tend to be of low quality, with high exclusion errors and low-value transfers. Consequently, as our thought experiment showed, the impacts of poverty-targeted programmes on poverty are much lower than universal schemes (for example, the impacts of Brazil’s Bolsa Familia scheme on poverty and inequality are a fraction of the impacts of the country’s almost universal pension scheme). Further, they often include conditions and sanctions – the so-called conditional cash transfers – with elites using poverty-targeted transfers as a means of controlling the behaviour of the poor. Sometimes, they are delivered as workfare, often with negative consequences for poor families who are obliged to work long hours for little pay (for example, the Young Lives project has demonstrated that Ethiopia’s Productive Safety Net Scheme has actually made recipients poorer).

Paradoxically, therefore, poverty-targeting has to be understood as pro-rich rather than pro-poor. If progressive social protection policies are to be implemented, it is important that those working on social protection understand that it is universal schemes that are the most pro-poor, a result of their lower exclusion of the poor and higher impacts on the well-being of those living in poverty.

In reality, however, even though the rich lose out economically from universal schemes, they benefit in many other ways. The universal provision of services delivers more equal, happier, peaceful and more prosperous societies. In such societies, the rich don’t have to hide behind high walls and armed guards but can fully benefit from living in safer and more cohesive societies. It’s no coincidence that the countries most committed to universal provision – the Nordic countries – are among the most prosperous, equal and happiest societies. In effect, therefore, universal provision is neither pro-poor nor pro-rich but pro-all.

Does this simple thought-experiment explain why some institutions – such as the World Bank and IMF – promote poverty-targeting while opposing universal schemes? (Of course, they are not alone: bilateral donors usually support and finance poverty-targeted programmes across Africa and Asia, although there are notable exceptions such as the United Kingdom’s and Ireland’s financing of a universal pension in Uganda and the European Union’s financing – through UNICEF – of a pilot universal child benefit in Angola). An interesting question is whether the support for poverty-targeting within these institutions is the result of an ongoing allegiance to a pro-rich neoliberal ideology or because their staff actually do not understand who are the true beneficiaries of poverty-targeting? I suspect that it is a mix of both.

If pro-all inclusive social protection systems are to be established in low- and middle-income countries, it will be necessary for the voices of the majority of the population to be heard, in particular during elections. Developing countries need progressive politicians who can see through the myth that targeting the poor is pro-poor and, instead, outline a vision of an inclusive social protection system benefitting all citizens – including those living in extreme poverty – through the effective and fair redistribution of wealth. Such politicians will be richly rewarded at the polls.

The author Stephen Kidd is a Senior Social Policy Specialist at Development Pathways and has more than 30 years of experience working on social development and social protection across Africa, Asia, the Pacific and Latin America. Prior to joining Pathways, he was Director of Policy and Communications at HelpAge International, a Senior Social Development Adviser at DFID (where he led the Social Protection Policy Team), a lecturer in Social Anthropology at the University of Edinburgh and worked for over 10 years in Paraguay on indigenous land rights.

COMMENTS 8

  • Nice. Make it personal and assume/accuse me of being a rich brat who only thinks about his money. I cannot sign the post because I work for one of those places defending targeting, and I don’t want my views to be mistaken for those of my workplace. I do not come from the top 10 percent of my national population. Not even close. But that is completely besides the point. Although to be expected – when the technical arguments are weak, one resorts to personal attacks.

    – A pre-transfer and pre-tax Gini of 60 percent cannot be found in many countries in the world. So no, you did not pick a normal countries. Simply stating a fact does not make it true. Pre-transfer and pre-taxes gini coefficients are almost impossible to find for all countries in the world, but the OECD compiles them for quite a few countries, and I see one (South Africa) in their list with a 70% gini coefficient. The UK and the US are at 50. https://stats.oecd.org/Index.aspx?DataSetCode=IDD#
    – An extreme poverty rate of 40 percent (actually your example has a 60 percent) is not normal. The international extreme poverty line is 1.90. 5$ per day PPP is an arbitrary figure and has nothing to do with extreme poverty. What “most people would argue” has no technical bearing in this debate. And by the way, the official poverty line (federal) in the US is 12,000U$ per year for one individuals, 16,000 for 2, and 25,000 for 4. I am not familiar with the food poverty line in the US that you mention, and I could not find a reference for it. The US Department of Agriculture defines food security, not food poverty, and it is more a measure of deprivation. I cannot see any link to monetary figures. Would be glad to see where you find a reference to the 5$ a day being food poverty in the US. Again – facts please, not statements.
    https://www.ers.usda.gov/webdocs/publications/90023/err-256.pdf?v=0
    – I happen to know the Tanzania PSSN very well. It has some of the best targeting in the world. Check the baseline report in case you missed it. And maybe pick your examples better because if that is what you call random, you need to take a second look at the definition of random. http://documents.worldbank.org/curated/en/273011479390056768/pdf/110255-WP-P124045-OUO-9-PSSN-IE-Baseline-Report-FINAL-FOR-PUBLISHING.pdf
    – Here we go again and we start confusing people. You were talking about a UBI, and now of course you want to compare it to non-universal benefits to show that they cost roughly the same. So you bring up the Mongolian CMP, which is NOT universal of course, and it is a categorical benefit (it is reserved for families with children). In practice it did reach 90 percent of the population, but have some intellectual clarity and honesty when you argue for a UBI. Compare apples to apples, poverty programs to poverty programs. The objective of the CMP is NOT poverty reduction, which is what you were arguing for when advocating for a UBI. Its objective is fertility. Likewise – nice try on the universal pensions, which of course is for people above a certain age (and hence categorical by definition). So you are saying that a pension which covers, say, 20 percent of the population (see Georgia) and cost 5 percent of GDP is comparable in cost to UBI which would cover 100 percent. I would check that math. When I mentioned Mongolia, I was referring to the actual UBI they had in 2011 and 2012, which cost over 8 percent of GDP, and lasted a year before they had to get the IMF in. At the very least, I would expect this example to be known, as it is one of the very very very few examples in which a universal unconditional benefit to all citizens was tested.
    – Nice speculation on the public. The only example we have where they asked the public about targeting vs universal is Switzerland, where a referendum told the politicians that “the public” did not favor spending 10 percent of GDP on giving away money to all. So, yeah, “the public really only opposes poverty targeting”.
    Anyway – I am kind of glad you attacked me on a personal level and assuming that I am a rich person defending my interests. The counter technical you raise are easily dismissed. So you make assumptions and attack me personally. And you know what you say about he who assumes…..




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    • Thanks for getting back to me on this. Hopefully, my response was not personal: I was just pointing out that you’re defending the cause that you’d be expected to defend given your likely financial situation. However, I am concerned to hear about your wage: if you really work for one of those organisations promoting poverty targeting and you’re not in the top 10% of your national population, I suggest you should be arguing for a pay rise since most of your colleagues will be at the top of the income distribution! Talk to your Trade Union, urgently.

      I think you’ve misunderstood the point of a thought experiment. It is a simple method of explaining a more complex point so it’s a bit of a red herring to argue that the thought experiment did not exactly mimic real life. How could it? Nonetheless, I could have done much more complex analysis which would still point to the simple fact that the rich, when acting purely in their own economic self-interest, will prefer poverty targeting over universal schemes (just think about it, it’s obvious – their taxes will be much less when a scheme is targeted at the poor). Let’s look at the UK. Who do you think benefits from austerity and the increase in targeting of welfare benefits? It’s certainly not the poor who have been hit very hard. In reality, the accompanying reduction in taxes disproportionately benefited the rich. If you want to understand the situation better, please read here.

      On your other comments and questions:

      • You can find the cost of an individual obtaining sufficient food in the USA here. So, as Reddy and Lahoti argues, this could legitimately be taken as the international food poverty line.

      • On the targeting of Tanzania’s PSSN, thanks for the paper but I’d already used this as evidence for the point I was making. Please look at Figure 44 and the bottom left-hand graph: you’ll see that recipients and non-recipients in rural areas are very similar in terms of their consumption, suggesting that targeting is little better than random selection.

      • You say that Mongolia’s universal Child Money Programme is not universal. That’s strange, since 99% of children were receiving it before the World Bank, IMF and Asian Development Bank forced the government to target it. Every citizen gets the Child Money programme when they’re a child just as every citizen can access a universal pension when they reach the age of eligibility: how is that not universal? And, if the Child Money is really only there to promote fertility, why did the Government of Mongolia, in July 2017, argue – in a message to the IMF – that it was a necessary programme to help families deal with financial pressures? Please send information on the UBI in Mongolia: I’m sure that we’d all be interested to see the evidence.

      • As I’m not arguing about a UBI but universal schemes in general, the referendum in Switzerland on the UBI is another red herring. In election after election, politicians supporting universal schemes get elected and it is very dangerous politically to go into an election to promote the targeting of a universal benefit (look at what happened in Mauritius when the government targeted its universal pension – they got kicked out in the 2005 election). By the way, I guess you’ve heard about the referendum in New Zealand on its universal pension: a resounding vote in favour of keeping it universal. And, God help any politician in the UK who decides to go into an election to remove the universality of the National Health Service: it remains free to all at the point of delivery despite the best efforts of the right to destroy it.

      Rather than getting upset about a thought experiment, may I suggest that you direct your ire at those who deliberately undertake dodgy analysis to promote their ideology. For example:

      • Did you see the analysis by Acosta, Leite and Rigolini of the World Bank that used a very strange methodology to promote poverty targeting?
      • What about the dodgy assumption of perfect targeting used by the World Bank to undermine Thailand’s universal pension?
      • Or, the magical use of evidence in the recent World Bank State of World’s Safety Nets report to promote poverty-targeting of pensions in Africa?
      • And, the classic changing of methodology by Baird, McIntosh and Ozler to promote the use of conditions?

      We’d be happy to publish a blog with your critique of these papers (and many others of a similar ilk).

      Best,

      Stephen




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