Helping reduce poverty in the short- and long-term: The experience of Conditional Cash Transfers

1. Helping reduce poverty in the short- and long-term: The experience of Conditional Cash Transfers Norbert Schady The World Bank September, 2007

2. Motivation • What are conditional cash transfer (CCT) programs? • CCTs transfer cash to poor households, but impose conditions on recipients • To date, these conditions have generally been related to investments in child human capital: • Regular preventive health check-ups for children 0-5 • School enrollment and attendance for children age 6-17

3. Motivation • Conditional cash transfer (CCT) programs have become very popular: first in Latin America and now across the world • Very attractive tool as they address twin objectives: • Reduce current consumption poverty • Promote accumulation of human capital, helping break a vicious cycle whereby poverty is transmitted across generations • The success of the initial programs (documented through rigorous impact evaluations) created strong demand… • But many questions remain: time for a thorough stocktaking • The Bank is preparing a Policy Research Report on CCTs

6. Conceptual basis for CCTs 1. Why transfers? • Equity as a social goal, although generally some efficiency costs 2. Why cash? • Unless markets are missing, cash transfers are more efficient than in-kind transfers or subsidies for consumption of a particular good

7. Conceptual basis for CCTs 3. Why conditions? • In general, if markets are perfect (and in the absence of political economy considerations), conditional transfers will be less efficient than unconditional transfers. However, there may be: • Imperfect private information or misguided beliefs • Intra-household principal-agent problems • Externalities across households • Political economy considerations: “compact” between the state and recipients (rather than “entitlement”)

8. Structure of presentation Evidence from existing CCTs—mostly in lower-income or lower middle-income countries in Latin America and South Asia • Consumption poverty • Education outcomes • Health outcomes Is this evidence relevant for Eastern Europe and Central Asia? (some very brief thoughts) • Marginal populations with high levels of poverty and under-investment in human capital? • Using cash and conditions to change other behaviors?

9. Targeting and consumption poverty The impact of CCTs on consumption poverty depends on: 1. Targeting • CCTs have generally targeted their resources to the poor through some combination of geographic targeting and individual means-testing • The targeting of CCTs has been decidedly pro-poor—in particular in comparison with other social assistance expenditures 2. Magnitude of benefits • 20 % of mean household consumption in PROGRESA in Mexico • 4 % of mean household consumption in PRAF in Honduras • Programs that make larger transfers have larger impacts on consumption poverty • Whether there are offsetting adjustments by households • Reductions in remittances and in adult labor market participation are minimal • In some countries, transfers have resulted in large reductions in child labor 4. Whether households productively invest transfers

10. CCT benefits are decidedly progressive…

11. Programs that make larger transfers have bigger effects on consumption and poverty… Nicaragua (RPS) Honduras (PRAF) (transfer: 17%) (transfer: 4%)

12. The crowding out effects of transfers are modest, and may be positive… • Remittances: No crowding out of remittances in Nicaragua, Honduras, and Mexico • Minimal reductions in adult labor supply in Mexico and Nicaragua • Large reductions in child labor as a result of transfers in some countries—in part, because schooling and child labor can be substitutes • Nicaragua: RPS transfers led to 2.5-4.9% point reduction in child labor • Reductions in child labor generally larger for boys than girls

13. In most cases, CCTs appear to have increased consumption and reduced poverty…

14. Short-term comparisons may understate long-term CCT impact on consumption poverty… Long-term CCT effects on consumption poverty • In Mexico, households appear to invest about 25 cents out of every peso transferred by Oportunidades in productive assets in micro-enterprises and agricultural production • By investing transfers, beneficiary households increased consumption by about 24 % after six years on the program • Short-term, “static” comparisons of consumption poverty between CCT beneficiary and comparison households may underestimate the returns to transfers • Evidence from Nicaragua that the RPS provided a stable stream of income that could be used as collateral for loans or to protect households during income fluctuations

15. Conclusions: Targeting and consumption poverty Conclusion 1: • CCTs have generally been well targeted • Disincentive effects have been small • CCTs have had an important effect on consumption poverty Policy implication 1: • CCTs can help reduce consumption poverty • However, if the main objective of the program is the reduction of (short-term) consumption poverty, UCTs are likely to be more effective unless there are political economy reasons to impose conditions

16. CCTs have large, significant effects on school enrollment in a number of countries… Examples from Latin America: • Nicaragua—RPS: 17.7% points • Honduras—PRAF: 3.3% points • Mexico—Oportunidades (urban areas): 3% points Examples from “stipends” for girls in secondary school in Asia: • Cambodia: 22-33% points • Bangladesh: 12% points • Pakistan: 9% points

17. The impact of CCT on enrollment is largest in countries which had low baseline enrollment rates…

18. CCT effects on enrollment are largest among children with low propensities to enroll in school… • Comparisons across countries: Larger program effects in countries with lower baseline enrollment levels • Impact of CCT on transition from primary to secondary is 2-3 times larger in Cambodia than in Mexico • Comparisons across grades within countries: Larger program effects in transition grades with high dropout rates • Impact of PROGRESA-Oportunidades in Mexico is ~ 4 times as large for children in 6th grade at baseline as children in other grades in primary school • Comparisons of households by socioeconomic status: Larger program effects among poorer households • In Nicaragua, program effect on enrollment is 26 % points among extremely poor households, 12 % points among poor, and 5 % points among non-poor

19. Evidence on effect of CCTs on educational attainment of adults and learning outcomes is limited… 1. In Mexico, Children who were randomly assigned to receive two more years of CCT have approximately 0.2 more years of schooling • Results hold for children who were 13-15 at baseline, and who are therefore likely to have completed their schooling • If rate of return to schooling is ~ 10 percent, this means that, on average, these children will earn approximately 2 percent higher wages as adults 2. However, in Mexico, Ecuador, and Cambodiano effect of CCT program on test scores—either in the short run, or the long run • Are CCTs bringing into school children who are so disadvantaged in other ways that the amount of learning that takes place is limited? • Is the quality of the supply so low that children are learning very little—in spite of the additional years of schooling attained?

20. Cross-cutting issues and conclusions: Education Conclusion 2 • CCTs significantly increase school enrollment in a variety of settings, especially among population groups with the lowest counterfactual enrollment • Impact of conditional transfers on enrollment is larger than that of unconditional transfers (Ecuador, Mexico) • CCT program effects on final outcomes, in particular learning, is somewhat disappointing: • Quality of supply • Other household constraints to learning

21. Cross-cutting issues and conclusions: Education Policy implication 2 • Clarify objectives: What is the relative importance of increases in enrollment relative to redistribution? • If enrollment is important, target intervention to low-enrollment populations or to transition years with high school drop-out • Do we have the right conditions? Is there scope for a program that targets poor children with the highest academic potential? • Cash transfers and enrollment incentives are unlikely to be sufficient to improve learning outcomes on their own • Identify other supply or household constraints and design policies to address them

22. Consistent evidence that CCTs result in increases in utilization of public health facilities… • Evidence from Mexico, Nicaragua, Honduras, Colombia, and Turkey: CCTs increase coverage of some preventive services for children (growth monitoring, immunization rates) • Colombia: 23-33 % point increase in growth monitoring • Turkey: 14 % point increase in preschool vaccination rates • Mexico: Increase in use of preventive health care by adults as well as children (preventive visits; check-ups for diabetes and hypertension) • 18 % point increase in the preventive health visits • Increase in use of public providers may result in decrease in visits to private providers

23. CCT programs have had some positive effects on child health and nutrition… • Chronic malnutrition: Decreases in stunting in Mexico and Colombia (among the poorest children in rural areas, especially younger children) but not in Brazil or Honduras • Infant mortality: A municipality with full coverage of Oportunidades has 11% lower infant mortality rate than it would have had without the program • Anemia prevalence: Children who received Oportunidades transfers had 10 percentage point lower anemia (54.9%, compared to 44.3%) • No differences after control group had been folded into treatment for one year • Incidence of illness: After 2 years of program exposure, children in Oportunidades treatment area were 40% less likely to be reported to have been ill by parents than those in control area

24. CCT program had positive effects on some measures of adult health, but evidence draws only on Mexico… • Subjective measures of health status: CCT program reduced number of days adults 50+ had difficulty performing daily tasks, reduced number of days incapacitated due to illness, increased their ability to walk longer distances • Objective measures of health status: PROGRESA-Oportunidades reduced incidence of obesity (by 6.4 % points) hypertension (7.2 % points) and diabetes (4.2 % points)

25. Cross-cutting issues and conclusions: Health and nutritional status Conclusion 3: • CCTs have resulted in increases in utilization of preventive health check-ups by children and (for Mexico) adults • There is some evidence of CCT program effects on child nutritional status and child cognitive development, but… • Positive program effects in some countries and population groups and not others • Unconditional transfers seem to have positive effects of roughly similar magnitude, if well targeted • CCTs may also reduce child morbidity and mortality and improve adult health status, but evidence draws on only one country (Mexico)

26. Cross-cutting issues and conclusions: Health and nutritional status Policy implication 3: • Clarify objectives: What is the relative importance of improvements in health status relative to redistribution? • If health status is important, target intervention to population groups who are poor and have poor health status • Do we have the right conditions? Provision of information, social worker campaigns to improve parenting habits may have higher returns than visits to health centers

27. What role for CCTs in Eastern Europe and Central Asia? • Overall, inadequate investment in the quantity of human capital does not seem to be a problem • Safety nets are important but redistributive concerns do not in and of themselves justify imposing conditions on transfers • So… is there a role for CCTs in countries in Eastern Europe and Central Asia? • “Niche” programs: targeted at populations that are socially excluded or under-invest in human capital • Different conditions: Use the basic CCT insight—cash transfers can be paired with conditions to change behaviors—to address other problems

28. What role for CCTs in Eastern Europe and Central Asia? • “Niche” programs: not the main safety net program: The example of Chile Solidario • Targeted at the extremely poor and excluded, as identified by the Ficha CAS (a proxy means): ~ 5% of population • Social worker works with eligible families to determine assets and deprivation • Families identify highest-priority needs • Beneficiaries sign a “contract” with social worker • No rigid “conditions” • Social worker helps beneficiaries get appropriate documentation, access existing social programs • Small cash transfer • Monetary benefits taper off over time and, in theory, families become ineligible after five years in the program

29. What role for CCTs in Eastern Europe and Central Asia? • “Niche” programs: The example of Chile Solidario • First round of evaluation suggests mixed results: • Increased uptake of social programs • Increased enrollment in preschool, primary, and adult education • Increase use of preventive visits to health facilities by children and adults • Greater optimism about a family’s future • However, disappointingly, no increase in labor supply or earnings—at least in the short-term • Other examples include a program being developed for Aboriginal groups in Australia • Is there scope for a program like this in countries in ECA—for example, to address issues of social exclusion or under-investment in human capital among the Roma?

30. What role for CCTs in Eastern Europe and Central Asia? 2. Conditional programs—with different conditions: the 1996 US welfare reform • Central government:Transformed entitlement program into block grant to states • Work requirement: States had to show that 50% of recipients were at work or in work programs to receive transfers • Time limits:60 months over entire lifetime • State governments introduced a series of reforms to their transfer programs: changing the “culture of welfare” • Lowering earnings disregards: decreasing magnitude of overall transfers, but allowing recipients to keep a higher fraction of earnings while maintaining eligibility for transfers • Sanctions—for example for noncompliance with work programs or training programs

31. What role for CCTs in Eastern Europe and Central Asia? • Conditional programs—with different conditions: the 1996 US welfare reform • Reforms are generally credited with: • Decreasing caseloads • Increasing labor market participation • Reducing poverty • But…implemented during very healthy economic expansion—some believe that reforms have not yet really been put to the test

32. What role for CCTs in Eastern Europe and Central Asia? 3. Niche programs—with different conditions: The New York Opportunity program • In one sense, this is a “traditional” CCT, targeted at the poor in NYC • Family has to demonstrate income<130% of the national poverty line • Households receive payments if their children are enrolled in school, regularly attend school, and have regular preventive health care visits • However, there are a variety of NYC-specific innovations: • Includes additional payments for adequate performance, including child performance on test scores • Includes payments to parents if they maintain sustained full-time employment, and if they receive education and training while employed • An exciting case in which a country (or city) in the developed world learned from one in the developing world • Program has just been launched by Mayor Bloomberg--no evaluation of the impact is available, although a rigorous evaluation is planned

33. What role for CCTs in Eastern Europe and Central Asia? The importance of impact evaluation • The reason we know so much about CCTs, and what they accomplish and do not accomplish, is because many programs took impact evaluation very seriously • PROGRESA in Mexico: randomly assigned communities into “treatment” and “control” groups during roll-out of national program • Smaller programs (Nicaragua, Honduras) also evaluated by random assignment • Other evaluations based on matching techniques or regression discontinuity • US Welfare reform: built on a series of state-level experiments in the 1980s and early 1990s: randomized evaluation mandated by national government