I/II.
http://www.thehindu.com/opinion/lead/article1504114.ece
March 2, 2011
The siren song of cash transfers
Jayati GhoshCash transfers cannot and should not replace the public provision of essential goods and services, but rather supplement them.
Cash transfers are the latest fad of the international development industry, as the preferred strategy for poverty reduction. And now Indian policymakers are busy catching up. The idea was mooted in the Government's Economic Survey for 2010-11, and the Finance Minister made an explicit announcement in his budget speech for replacing some subsidies on goods with cash transfers.
So what exactly is this strategy all about? In the recent international experience, cash transfers can be conditional (subject to the households meeting certain demands) or unconditional; targeted (given only to households or individuals meeting particular criteria) or universal. But essentially they amount to just what they sound like — the transfer of money to people by governments, rather than the provision of goods and services.
The basic idea sounds so simple and easy that a toddler could think of it: Why are people poor? Because they have no money. So let's give them money — then they won't be poor anymore!
The proponents of cash transfers tend to present this as a radically new idea, but it actually has a long history. Kautilya's Arthasastra specifies a system of taxation payments from the rich in order to enable transfer payments to the poor, including not only financial assistance during calamities but welfare payments to the chronically indigent and those unable to earn their own livelihood. Islamic rulers in the Middle Ages were required to follow the tenets ofzakat, using state revenues to provide income transfers for the poor, the elderly, orphans, widows and the disabled. Other historical examples abound.
The purpose of cash transfer schemes is to provide poor people with money and give them the freedom to choose what to do with it. Of course, this then generates other choices that have to be made: Who gets the transfers? How much do they get? If they are universal, that usually spreads the money around rather thinly, so they account for very little. But if they are targeted, then the familiar problems of targeting (unfair exclusion, unjustified inclusion, large administration costs, possibilities of leakage) all become significant.
If they are to be effective at all, cash transfers have to be assured, relatively easy to deliver and monitor, and large enough to affect household income. But that also means that they have to be reasonably significant chunks of public spending. And this begs the question of what expenditures they are replacing.
Several of the more well-known recent "success stories" involve targeting and conditions on recipients that range from light to onerous. Brazil's Bolsa Familia is a grant provided to families with less than a threshold monthly income, with the requirement of attendance at government clinics and 85 per cent school attendance. The Oportunidades programme in Mexico is a highly conditional cash transfer system based on a complex system of eligibility (age, gender and level of education of each family member, electricity and tap water, household assets) and requiring family members, especially mothers, to meet various time-intensive conditions like attending meetings and providing "voluntary" community labour.
There is no doubt that progressive redistributive transfers are desirable. Indeed, redistribution is a major, even critical element of any fiscal system of taxation and public expenditure. Minimum income schemes for the destitute, pension payments for the elderly, child support grants, unemployment benefits and other forms of social protection are obviously desirable in themselves and constitute requirements for any civilised society, even the poorest one. They also contribute in the short term to more effective demand and therefore have positive multiplier effects, and in the long term to healthier, better educated and more secure populations.
So the question then is not whether or not to oppose cash transfers in general, but rather what specific importance to give them in an overall strategy of development and poverty reduction. Cash transfers cannot and should not replace the public provision of essential goods and services, but rather supplement them. However, the current tendency is to see this as a further excuse for the reduction of publicly provided services, and replace them with the administratively easier option of doling out money.
In many countries, the argument has become one of encouraging governments to give the poor cash transfers that will allow them to access whatever goods and services they want that are generated by private markets, rather than struggling to ensure public provision.
Such a position completely misses the point. In Brazil, for example, Bolsa Familia can be based on minimum school attendance only because there are enough public (and free) schools of reasonable quality that children of poor households can attend, which in turn means prior and continuing public investment in quality schooling and teacher education. Similarly, providing small amounts of cash to allow people to visit local private quacks will hardly compensate for the absence of a reasonably well-funded public health system that provides access to preventive and curative services. Cash transfers are less effective in periods of rising prices of essential goods. And so on.
This is important, because ultimately social and economic policies are all about choices, and this is most starkly evident than in the allocations of public expenditure. Governments typically do not have the luxury of being able to ensure enough spending to provide good quality public services and provide cash transfers that are large enough to be at all meaningful.
In most developing countries, the choices to be made are not only about having good quality schools versus transfers that incentivise parents to send their children to school but even more basic choices: road or health clinic; electricity or piped water; schools or higher education institution; one airport or many railway stations; this region or that one?
It is evident that the agenda of the UPA government is to bring in cash transfers to replace public distribution of various essential items, including food. To begin with, Finance Minister Pranab Mukherjee has proposed that the existing system of subsidies for kerosene and fertilizers be done away with and replaced by direct cash transfers to chosen beneficiaries.
In his speech, he said "The government provides subsidies, notably on fuel and food grains, to enable the common man to have access to these basic necessities at affordable prices. A significant proportion of subsidised fuel does not reach the targeted beneficiaries and there is large scale diversion of subsidised kerosene oil ... To ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilizers, the government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner."
There are two immediate problems that are evident in this approach. First, what ensures that the amount of the transfer will be sufficient to fully compensate for any price increases in the newly deregulated markets of these goods? Second, how will the government ensure that the cash transfer actually goes to those who were intended to be the beneficiaries of the subsidised kerosene and fertilizer?
The second problem is well known in India, where all public delivery systems have some element of leakage and diversion. How much simpler and easier it will be to divert cash than goods that have to be stored and resold!
The government seems to be under the delusion that a technological fix (such as a Unique Identity number provided to all residents) will somehow eliminate all the potential problems of targeting. But determining who is actually poor and which farmers deserve the cash subsidy are socio-economic decisions that are affected by a complex set of political and social forces as well as power relations. Technology simply cannot address those, they require very different responses.
In India, where much of this basic part of the development project still remains woefully incomplete, the urge to adopt this latest international development fashion involves several risks. In the case of choice between direct public provision of some essential goods (like food and fuel) and cash transfers to consumers instead, the most immediate threat is that the rising prices in these deregulated markets will make such goods unaffordable for those who need them most.
Posing the problem in this way is also misleading, because it completely leaves out the feasible and much more just alternative of universal provision of some essential items, which would ensure better access and create public pressure for greater accountability in public delivery.
II.
http://www.livemint.com/2011/03/01211232/Food-or-cash-the-subsidy-conu.html?h=B
Posted: Tue, Mar 1 2011. 9:12 PM IST
Food or cash: the subsidy conundrum
With the proposal to move towards direct cash transfers, Budget 2011 has put upfront the agenda of reforms in public service delivery. The attractiveness of such transfers lies in the beneficiary getting what's due to him directly, without any intermediary. Therefore, at least in theory, there is no possibility of leakage and the attendant corruption. But however appealing the theory may be, there is more to cash transfers than the textbook suggests.
Similar justifications were once provided for the method of targeting. Given a limited pool of resources, directing subsidies at the poor would not only ensure that they are not wasted on the rich, but also that the same amount of money could be used to provide larger benefits to the poor.
Except the reality turned out to be different. Take the case of the public distribution system (PDS). As the Planning Commission showed in the 11th Plan, leakages increased from 28% in 1993-94 (universal distribution) to 54% in 2004-05 (targeted distribution). Did the poor benefit out of it? Data showed that access to foodgrains for the bottom half of the economic hierarchy increased marginally from 28% in 1993-94 to 30% in 2004-05. Even average foodgrain consumption from PDS failed to improve between 1993-94 and 2004-05. The solution was worse than the problem, because our policymakers could not anticipate the issues that plague the system of targeting.
Even now, those who argue in favour of cash transfers do not acknowledge a simple fact—the problem was not that PDS was delivering grain instead of cash; it was with targeting itself. Unfortunately, this problem will remain even in a cash transfer regime unless it is made universal. At least in the direct provision of foodgrains through PDS, a substantial segment of the population could voluntarily opt out—because of either the inferior quality of grains or of the cost of accessing them (from infrequent opening of PDS shops to standing in queues for hours). Instead, if cash is delivered straight to everybody's bank account in a universal distribution model, why should the non-poor opt out?
Evidence of leakages in PDS has often been cited to argue for benefits that would accrue with cash transfers. The Economic Survey, using National Sample Survey (NSS) data, has gone to great lengths to show leakages to the extent of 40-50% in PDS, but has conveniently ignored the success stories. Using the same NSS data, we find that leakages were almost nil in 2007-08 in Tamil Nadu and Chhattisgarh. Tamil Nadu has achieved this simply by not targeting. In Chhattisgarh, near universal PDS coverage combined with low-cost technological innovations have led to negligible leakages. Even in Andhra Pradesh, Kerala and Himachal Pradesh, leakages were 15% or less because of expanded coverage.
What about cash transfers? Evidence is hard to come by from nationally representative independent surveys. However, some idea of the extent of leakages is available for social pension schemes and Indira Awaas Yojana (IAY), which are cash transfer programmes. Field studies on IAY and social pensions do not suggest a different ratio of leakage than in the case of PDS. Nonetheless, a recent evaluation of old-age and widow pensions in Karnataka by three World Bank economists shows leakages at 17%—significantly higher than that in Tamil Nadu and Chhattisgarh for PDS.
What proponents of cash transfers ignore is that the problem lies not in what form the subsidy takes, but in identifying the right beneficiaries. Fortunately, in the case of direct food provisioning and other direct subsidies, there is a case of self-selection that enables states to bypass targeting and thereby achieve zero leakages. Unfortunately, that benefit is not available in the case of cash transfers, since nobody will select himself out. Also, there is a direct relationship between cash transfers and targeting errors. Since cash is fungible and can be used for various needs, there is greater incentive to subvert the system in the case of cash transfers than with direct provisioning of subsidies.
Support for cash transfers also comes from those who find technological solutions such as the unique identification (UID) to be the panacea to all public service delivery ailments. First, we need to remember that UID may not be a full-fledged solution until everyone in the country has been enumerated. That, by UID's own estimates, is unlikely to happen before the 13th Plan. Even if it does work wonders, there is no reason to believe UID will only work with cash transfers and not with direct food provisioning. The same principles and rules apply to both. But Chhattisgarh and Tamil Nadu have shown that there is a cheaper and faster solution available—using existing technologies such as GPS- and SMS-based tracking and online monitoring to drive delivery of subsidies.
Finally, the issue is not about cash versus food. Nor is it about technological compatibility with newer methods of ensuring accountability. The real issue is the immediate need for governance reform, and for an effective and foolproof way of identifying the correct beneficiaries of subsidies. Unfortunately, the government seems to be intent on covering its failure to correct targeting problems by diverting attention to the cash versus food debate. But that is akin to missing the woods for the trees.
Himanshu is assistant professor at Jawaharlal Nehru University and a visiting fellow at Centre de Sciences Humaines,New Delhi
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