Giving cash to poor people and reducing inequality: lessons from Latin America

August 4, 2009

     By Duncan Green     

Two interesting ‘one pagers’ from the consistently excellent International Policy Centre for Inclusive Growth, run by the UNDP and based in Brazil. In ‘Do Conditional Cash Tranfer (CCT) Programmes Work in Low-Income Countries?’ Simone Cecchini of ECLAC takes the well-known successes of cash transfers in large middle income countries such as Brazil (Bolsa Familia) and Mexico (Oportunidades) and evaluates efforts to replicate them in their much poorer neighbours in Central America. CCT programmes pay poor families a monthly amount provided they meet certain conditions, such as keeping their kids in school or getting them vaccinated.

The scale of CCT is much greater in the middle income countries. In Brazil, LA CCT progsBolsa Familia reaches 22% of the total population and accounts for 2% of total government spending, in Mexico the numbers are even higher (see table); by contrast, in Nicaragua CCT reaches just one in forty people and accounts for only 0.4% of public spending. Cecchini argues that this is explained by some of the institutional weaknesses that characterize small, low income countries. For CCT programmes to work:

– because of their multidimensional approach to poverty, CCT programmes require coordination between different ministries and levels of government (eg local and national). In low income countries weak state machineries struggle to do this.

– state policy mustn’t change every time a new government is elected, or aid donors change their minds, both of which are more likely in poorer countries without strong bureaucracies

– CCT programmes require solid data and payment systems, but low income countries often have weak statistical capacity and fragile banking systems – in Guatemala, payments are often made in cash at public events attended by the first lady, which feels more like old school patronage than CCT.

Cecchini concludes that cash transfer programmes may have to be adapted to low income countries, for example putting more emphasis on targeting poor regions rather than means testing, which is expensive and not much use when nearly everyone is poor. Insisting on conditioning cash payments on school attendance or health check-ups may not make sense when schools and clinics are either absent or of dismal quality.  In that case, the government has to sort out supply of essential services rather than just focus on increasing demand. For her full paper (in Spanish) see here.

Meanwhile IPC’s ‘What Explains the Decline in Brazil’s Inequality?‘ returns to the explanations of Brazil’s success in reducing inequality. From 2001-2007 Brazil’s gini coefficient, a standard measure of inequality, fell sharply from 0.59 to 0.53. Over that period, the poorest 60% of Brazilians, who receive only 18% of national income, accounted for 40% of total income growth.

The authors, Degol Hailu of the IPC and Sergei Suarez Dillon Soares of the Brazilian parastatal thinktank IPEA, crunch the numbers and find three factors driving the improvements:

– a third of the fall in the gini index comes from improved access to education (presumably through its knock-on effect on incomes).

– a third comes from the kind of social protection programmes discussed earlier.

– a third comes from broader improvements in social and economic policy, falling unemployment etc, which have increased domestic demand and consumption.

See my previous post for more on Latin America’s significant progress in reducing inequality in recent years.