The Economist on the global spread of cash transfers and Jokowi’s flying start in Indonesia

January 13, 2015

     By Duncan Green     

Some fascinating coverage of the new Indonesian president and cash transfers in the Economist this week. First up, Indonesia:fuel subsidies v social transfers

‘Having trimmed petrol subsidies in November, Indonesia’s president, Joko Widodo, who is universally known as Jokowi, scrapped them entirely from January 1st. Small subsidies (1,000 rupiah, or eight cents, per litre) will remain in place for diesel, used for public transport and by the country’s millions of fishermen. But for the first time in decades, the price of petrol will reflect global market prices.’

Thinking about this from a theory of change angle, Jokowi seized two brief opportunities – his honeymoon period as a new president, and a slump in global oil prices which allowed him to remove subsidies without prices going through the roof. The move liberates about $16bn a year that previously subsidised the better off at the expense of social transfers (see chart). Another article covers what that cash might be destined for:

‘Barack Obama signed his health-care programme into law 427 days after taking office. Jokowi took just two weeks to begin honouring his health-care and education promises. On November 3rd his government began issuing cards that will give poor Indonesians access to three programmes—two expanding publicly funded health care and education, and one giving cash handouts of 200,000 rupiah ($15.75) per month. The income top-up scheme is planned eventually to cover 86.4m people in 15.5m households—a third of Indonesia’s population. That would make it the largest such programme in the world.’

The shift to cash transfers is part of a wider movement discussed elsewhere in the magazine:

‘Public handouts in developing countries are nothing new: India has had them for decades. But in the past few years their number and coverage has soared. A fifth of all those living in developing countries now receive benefits from at least one programme that aims at alleviating poverty, and Martin Ravallion of Georgetown University estimates that coverage is growing by 3.5% of their combined populations each year. A recent tally by the World Bank found only nine countries without some anti-poverty scheme, whether income-contingent cash payments, subsidies for food or public-work schemes which offer a low wage for manual labour. No-strings cash handouts are catching on quickly in Africa: 37 countries had them in 2013, up from 21 just three years earlier.

Many long-standing programmes are, like India’s, plagued with waste and corruption. But as the developing world weaves its social safety net, better record-keeping and technology hold out the promise of changing that.

Even some very poor countries are starting to build robust records of who gets what. Brazil was a trailblazer: its Bolsa Família (family grant), a stipend for poor families paid on condition that the children are vaccinated and go to school, replaced several smaller schemes in 2003. The register of recipients is published online to help reduce fraud. At least 22 other developing countries now have similar records, and several more are building them, including Bangladesh, Bolivia, Indonesia and Kenya. Such lists cut administrative costs and make it less likely that the same person benefits from overlapping schemes.

India cash transfersUsing biometrics as well helps cut fraud. A recent tally by the Centre for Global Development (CGD), a think-tank in Washington, found 230 programmes in over 80 countries that verify identities with biometric information, including voter registries and health records. Some are keeping track of the recipients of social spending. Databases that store fingerprints or iris scans will exclude ghost or dead recipients. Checking such data at disbursement means the right person is paid.

Nearly two-fifths of South Africans, for example, are enrolled in the national benefits system, which stores fingerprint and voice records for authentication when cash is disbursed. This year India’s biometric ID register should be complete—holding out the hope that its social schemes could be made less leaky. Alan Gelb and Caroline Decker of CGD estimate that switching to biometrics for a typical cash-transfer scheme that gives a million people $20 a month would pay for itself in a year. After five years the savings would reach $64m.

Mobile-payment systems are another ingredient of an efficient, fraud-resistant scheme, since they record what has been paid, make it easier to reach remote areas and can incorporate security checks and reduce the need to transport and store cash. Indonesia is planning to make payments via pre-loaded SIM cards. Other countries, including Nepal, are working on “branchless banking”: roving teams or local vendors equipped with fingerprint-reading devices disburse the cash. Some even announce the amount dispensed to make sure operators do not cheat illiterate users.

But even the best technology can do little to solve a basic problem: deciding who is poor. In the poorest countries few other than government employees appear on any official records of income or wealth. Those scraping a living as street vendors, subsistence farmers, day labourers and so on are unlikely to feature.

So decisions about who should receive benefits often rely on observable proxies for poverty, such as whether someone is old or orphaned, lives in poor-quality housing or lacks consumer goods such as a fridge. Another common approach is to outsource the task of deciding who is destitute to local leaders or community meetings. Research in Indonesia suggests that local scrutiny can work well. But it can also fall victim to corruption or local feuds—especially in communities divided along ethnic or religious lines.

All these difficulties mean that developing countries’ social spending often goes on the wrong people. Between fraud, poor eligibility criteria and patchy data, just a third of beneficiaries are among the poorest fifth in the countries where they live. Some are very well-off.

Some governments are throwing up their hands and leaving it to the poor themselves to step up. They increasingly rely on “ordeal mechanisms”, such as requiring participants to go through a lengthy application process, to discourage the better-off from bothering to apply. Public-works schemes are particularly onerous, since they require recipients to do manual labour. More than 80 countries had these in 2013, a third more than in 2011.

But such schemes also have flaws. The tougher the ordeal, the greater the number of needy candidates who will fail to qualify. Some poor people cannot be spared from household duties for public works; others are illiterate and will struggle with confusing application processes. And though public-works schemes seem to offer good value for money, since they make the poor do something, once administrative costs and the other income forgone by participants are taken into account they look less appealing. A recent study estimates that the money spent on India’s huge public-works scheme would cut poverty more if it was simply divided equally between all rural residents.’