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Risks involved in direct cash transfers

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18th-Apr-2017       
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Gavin O'Toole  :
For two decades, Latin American countries have used cash payments to encourage school attendance and strengthen public health. As international development bodies and city administrations pick up the idea, Gavin O'Toole takes stock of this unusual policy tool
It's been 20 years since Latin American countries began introducing direct welfare payments for poor households that participated in health programmes and ensured their children attended school - supporting household incomes whilst boosting education and public health. And now the policy tool is being extended into new areas, including international development: what have we learned about how to use it effectively?
Pioneered in 1997 in Brazil and Mexico, conditional cash transfers (CCTs) have become a tool of choice in poverty-reduction policies throughout the region, where about 20% of the population - at least 130 million people - now live in households receiving them.
The concept has since been taken up enthusiastically by development agencies such as DfID in the UK, and even adopted in the developed world in cities such as New York and Washington DC. Worldwide, by 2014 over 700m people were benefiting from these non-contributory 'co-responsibility' schemes.
The Latin American experience
"Conditional cash transfers are no panacea, but the overall perspective is that they were a success and that we have a lot to learn from these initiatives," says Luis Henrique Paiva, the senior Brazilian civil servant who ran the most well known cash transfer programme in Latin America, Bolsa Família, from 2012 to 2015.
"For countries that had almost nothing to offer in terms of social protection to poor people, conditional cash transfers were a good initiative because they proved to be effective in reaching them; to be relatively inexpensive; that it was possible to have a genuine impact on health and education indicators and reduce poverty and inequality; and to be replicable in other countries."
Until the 1990s, most social policy in Latin America was based upon work-related social insurance that excluded those outside formal labour markets. But in 1997, the federal district of Brasília and the municipality of Campinas in Brazil began making direct cash transfers to families living in extreme poverty, whilst Mexico introduced the nationwide Progresa programme for poor rural families. Progressive governments elsewhere launched similar schemes, and CCTs were championed by bodies such as the World Bank and through multilateral exchanges.
As the number of schemes increased, so did their size. Mexico's Progresa - renamed Oportunidades - grew to 5m beneficiary households by 2009 and Brazil's Bolsa Família extended to least 46m people. By 2006, the number of beneficiaries in Latin America had overtaken the number of poor.
However, coverage rates vary: in Bolivia, half of the population lives in households that receive CCTs, whereas in Chile and Paraguay coverage is less than 4%.
Where they work
Evidence demonstrates that CCTs have improved the lives of poor people across the board, buffering households from unemployment, illness and income shocks. And research has indicated that the poverty head count in Latin America would be on average 13% higher had CCTs not been implemented. Cash transfers have increased school enrolment and food consumption in poor households, whilst boosting the bargaining power of women.
Now a specialist in social policy at Brazil's Institute for Applied Economic Research (IPEA), a government think tank, Paiva attributes the success of CCTs to three core factors.
"The success was driven fundamentally by the design of these programmes," he says. "They were relatively well targeted - in other words, it was the first time that the federal government in Brazil had a programme expressly aimed at reaching poor people.
"Second, there was strong political support for these programmes, so the budget was relatively well protected and they were able to deliver benefits at a minimal level that could affect poverty.
"Third, both in Mexico and in Brazil these programmes were not based on consultancies; they were strictly based on national bureaucracies as part of the state's activities."
Paiva believes a key element of Brazil's success was unification of national-level CCTs under the control of the federal civil service in 2005, by President Luiz Inácio Lula da Silva (2003-11). 'Lula' gave bureaucrats considerable independence in developing the programme; and despite Brazil's size, the scheme proved remarkably cost-effective. Spending and compliance was monitored by school teachers and health workers, so the civil service didn't need to establish a new workforce to administer CCT in local communities.
The constraints on cash transfers
However, CCT schemes have of course had their limitations, and Paiva believes it is important to maintain realistic expectations.
While one key ambition behind the use of CCTs is to break the poverty cycle by developing the human capital of the next generation, the impact of CCTs on outcomes such as levels of educational achievement is mixed.
School attendance has risen, says Paiva. "Did they transform education and health in these countries? No, and this was not their purpose. They affected the demand for services, not the supply side. In other words, the government still has considerable work to do to improve the quality of education and of healthcare services. Cash transfers are not a panacea; they are not going to solve everything."
The limitations of CCTs tend to be determined by overall spending limits on social services, and an expansion in coverage has not necessary been accompanied by significant increases in budgets. While schemes have sharpened their focus on strengthening recipients' employment prospects, evidence suggests that broader structural factors limiting labour mobility trap many beneficiaries in the informal sector. There have also been concerns that CCTs may perpetuate society's organisation of care around women's unpaid work - a key cause of gender inequality.
Paiva points to a global temptation to append other public services to CCT programmes, which puts universal provision at risk. He says there is no one-size-fits-all programme, and cash transfers should respond to local conditions: it would be wrong to require recipients to ensure all their children attend school if it's difficult or expensive for them to do so. "In Brazil, we adopted and monitor conditionalities - but do conditionalities make any sense in an average African context? In my opinion, no, simply because many of their countries have severe problems in the supply side of education."
While the future of CCT programmes seems assured, bodies such as the World Bank and the Institute for the Study of Labor (IZA) in Bonn have encouraged countries to develop complementary strategies and services to maximize their impact on poverty.
"These programmes were the way Latin America found to offer social protection for the very first time to a relatively large share of the population - and they are here to stay," concludes Paiva. "But they will probably change in their design: as countries get richer, their target publics will diminish and the level of benefit will increase, and so you will end up with something similar to that of developed countries where most people are included in the economy."

(Gavin O'Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world).

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