Welfare Programs, Structural Poverty, and Shocks: A Categorization of Programs in the Region

1. Welfare Programs, Structural Poverty, and Shocks: A Categorization of Programs in the Region Cristian Aedo Third Meeting of the Social Policy Monitoring Network

2. Presentation Index • Objectives of the Programs: CCTs and Employment/public works programs • How fast can you implement and/or expand these program in the presence of an aggregate shock • Complementarities between these programs in forming a Social Safety Net • Programs´ Challenges

3. 1. Objectives of the Programs • In social safety nets in LAC we find programs that address structural determinants of poverty and programs which address the need to alleviate the social and economics impacts of the economic crisis and fiscal adjustment processes • Conditional Cash Transfer (CCT) programs are examples of the first type. They focus on the structurally poor, that is on people/families who lack the skills or productive assets to live above the poverty line • The Employment/public works programs are examples of the second type, and they focus on people/families who are throne into poverty or suffer a large decline in income because of economic crisis (aggregate shock)

4. The standard CCT program is based on the premise that the main reason behind the chronic poverty situation which affects the most vulnerable is an insufficient investment in human capital • In order to cope with their specific situation, households in extreme poverty usually use strategies which have permanent effects not only on their own human capital but also on the human capital of their children. These decisions affect the labor productivity of these future worker, thus perpetuating the poverty situation and imposing costs to society • A transfer or monetary incentive (demand subsidy) is provided to those eligible who comply with the conditions set by the programs, to maintain or increase their long term investment in human capital

5. With the subsidy families increase their current income helping them in the short run to support minimum levels of consumption • These programs, which use demand subsidies, constitutes a clear departure from traditional supply side interventions, such as investments in schools, primary health care units and in other social services • Some programs include supply actions as well to strength the supply of educational and health services, but even pure demand programs put pressure to respond to the increased demand they create

8. Next we come to these other type of programs which are less structured and less theoretically based. The Employment/public works programs aim is to redistribute income and resources to current unemployed by providing jobs during economic crisis • As a difference with the CCT programs which are targeted to the structurally poor, these programs can be use to target different types of beneficiaries: • Temporary unemployed/inactive skilled workers • Temporary unemployed/inactive unskilled workers • The structurally poor will be natural beneficiaries of these programs, but also people close to the poverty line

9. Empleo en Acción (Colombia): Implemented in 2000 to alleviate the impacts that the economic crisis and fiscal adjustment have had on the poorest by providing short time employment, to unskilled workers from poor households, for construction or maintenance of community infrastructure in low income urban areas • Jefes y Jefas de Hogares (Argentina): Implemented in 2002 as a response to the economic crisis. It provided a universal subsidy (Ar$ 150 /month) to unemployed head of the households with dependents. Because of targeting problems, later a working conditioning was implemented in order to be eligible to receive the subsidy (20 hours in community work, labor training activities, etc.)

10. These programs are oriented to smooth out consumption and are short time programs. Hence, they don't usually have a long term impact (or concern) on productivity • It is hard to distinguish between Social Investment Funds and programs such as Empleo en Acción • In my mind the primary objective for Social Investment Funds was the investment/development project, with employment generation being secondary • With programs like Empleo en Acción the opposite is true, generating employment is the primary objective with the infrastructure projects being secondary

11. These programs might coexist with an unemployment insurance system and social security contributions (social insurance mechanism) which covers the formal workers • The extensive informal sectors, which are “endemic” to some LAC, restrict the coverage of such a system to some group of workers (formal sector) as informal workers may choose not to contribute because they are income constrained and/or they are close to the survival threshold • This increases the vulnerability of the poorest and worsens even further the prospects for human capital accumulation

12. 2. How fast can you implement and/or expand these programs in the presence of an aggregate shock? • A standard CCT program can't expand the number of eligible families easily in times of crisis because they are intensive in information on the beneficiaries • They use either Mean Tests or Score Tests to check eligibility, which are based on survey information, census data or socioeconomic characterization profiles (“fichas”), which are difficult and costly to obtain for the new eligible families • Some programs check eligibility every 3 years because it is costly and because they want to avoid gaming (people change behavior to become eligible), which is an additional reason for not considering idiosyncratic risks in the design

13. The expansion of the Programs require, in addition to funding, the operative capacity at the level of program execution and the monitoring capacity to accommodate the expansion of the program. This highlights the importance of having a good information system • Given the new economic situation, new needs may arise. Do countries have the institutional and financial capacity to redirect these programs or to create new programs? Are programs flexible? • Employment programs/Public Works Programs may be easier to expand in times of crisis as the eligibility requirements are less strict. On the other, the pressing needs they address and the quick response which is needed, may imply some difficulties in targeting the “right” beneficiaries

14. Once in place, vested interests make them harder to get rid of these programs • Empleo en Acción has apparently been chopped although the preliminary evaluation results were good. From the beginning it was set as a counter-cyclical program, and the funding was assured for the expected duration of the economic crisis • Is it a good indication? You can stop a Program which can start up again easily • Or is it a bad indication? A good Program was stopped mid-stream • Both programs present the challenge of designing a proper exit scheme that guarantees a smooth transition toward an independent status, which helps individuals and families to remain self sufficient and above the poverty line

15. 3. Complementarities of these programs in forming a Social Safety Net • The two types of Programs have distinct objectives and therefore target different groups of beneficiaries, which is helpful: • You can cover more population during economic crisis • You can fill the gaps by addressing different population needs specially when CCT subsidies are very low • They can also overlap for the structurally poor and hence these programs can work together in a safety net

16. Even though the employment programs don't assure the achievement of the goals of the CCT program, it may reduce the risks that they are not obtained when beneficiaries overlap • The employment program may protect the labor income of the head of the household, making it more likely that children continue their accumulation of human capital through CCT programs and hence obtaining positive impacts from future gains in labor productivity • Both programs will be fulfilling their goals of assisting those in need in the short run period and alleviating poverty in the long-term, thereby implying the programs complements each other instead of being substitutes. Both programs can therefore exist in an effective social safety net

17. 4. Challenges: CCT programs • Given that the effectiveness of the CCT programs is conditioned by supply factors they should include supply incentives/actions. Public resources might be misspent otherwise • Do they have a permanent impact? Are they achieving learning goals, besides greater school attendance and decreases in dropping rates? Are people leaving the poverty condition in the medium and long run? • Is there a more cost effective way of increasing human capital among the poorest?

18. 4. Challenges: Employment/public work programs • In crisis time, a rapidly increasing program might fail to be well targeted. Can you target? • Even though it is not its explicit purpose: • Do the projects bring about increases in labor productivity? • At the individual level, do they increase the likelihood of employment in the formal sector? Do they have a long term impact on consumption and labor income? • Can they be linked to training or other programs which increases human capital?

19. 4. Common Challenge: Funding • These programs impose heavy funding requirements for the economy: • Oportunidades 0,32% of GDP • Bolsa Escola 0,13% of GDP • Familias en Acción 0,12% of GDP • They should be funded with current fiscal resources. Chile and Brazil have done so. In other cases there is a higher dependency on international loans, which compromises the continuity of the programs • Saving funds for financing social safety nets could be evaluated as a possible mechanism

20. To Conclude: • An effective social safety net should include programs which protect vulnerable households during crisis and programs that provide incentives for human capital build up among the most vulnerable • This means to include: • Programs which help current workers to cope with fluctuations in income and consumption • Programs that create incentives for human capital investments