The World Bank S 7 stm . . i li ~~~~~~~~~~~~~~~~~~~A P R I L NUMBER 2 POVERTY Lessons in designing safety nets While labor-absorbing growth is required to reduce poverty, safety nets are also needed to help the destitute and those in temporary distress. Because poorly designed safety nets squander funds and fail to reach the needy, a recent World Bank book offers lessons on good design. oor people fall into three cate- is crucial-safety nets designed to com- gories: those who are able to work plement growth must include the poor in but have low incomes arising from productive activity. low productivity, those who are unable to In addition, safety nets can be combined Safety nets aimed work (the elderly, the handicapped), and with long-term programs that build human those who are forced into temporary capital and transfer assets to the poor, rais- at complementing poverty by drought, recession, structural ing growth potential. For example, public adjustment, or political transition. works programs can create growth-enhanc- growth must Most poor people are members of the ing infrastructure, including irrigation first group, and are best helped by growth- (which increases productivity and reduces i n cl ud e the poor enhancing policies that foster labor absorp- the impact of future droughts). The poor tion and raise productivity. Although safety typically suffer the most from shocks like in productive nets are important components of such drought or transition because they have few policies, they should never be conceived as insurance mechanisms and limited savings. activity solutions to poverty. Rather, they are impor- As a result they tend to avoid risk rather than tant palliatives for the destitute and those in maximize productivity-they simply cannot transient poverty. They also can help work- afford to be entrepreneurial. By providing ers in slack seasons when jobs are scarce. an insurance mechanism, safety nets help the poor become entrepreneurial, enhanc- Main concerns ing productivity and growth. Several issues must be considered when Private transfers within families and designing safety nets. Are they tailored to communities are traditional mechanisms local needs? Are they financially and polit- for alleviating distress. Safety nets should ically sustainable? What are the costs and try not to displace these. Rather, publicly benefits of different safety nets? And how funded safety nets should, where possible, can they be targeted at needy groups? strengthen informal and traditional A recent World Bank book, Safety Net arrangements. Programs and Poverty Reduction: Lessons All assistance affects the behavior of from Cross-Country Experience, answers recipients. High-wage public works pro- these questions by distilling best practice grams will lead to employment diversion from global experience. The book argues from private jobs rather than employment that good design can help ease the bud- creation. Cash transfers and subsidized food getary conflict between safety nets and may make recipients work less. Transfers are growth-enhancing spending. One feature fungible, so subsidies to feed schoolchild- FROM THE DEVELOPMENT ECON OM CS \11( E DPPESIDENCY AND POVER FY FIEDUCTIr)N AND ECONOM MANAGEMENT NETWORK ren may cause parents to cut back on house- Choosing the approach hold meals. Such responses may increase Turning from general principles to real economic costs, and so mrust be kept in , specifics, the book provides a framework for mind in designing safety nets. choosing among four types of safety nets: Targeting focuses scarce funds on the cash transfers, in-kind transfers, public needy, but it also has costs. Administrative works programs, and credit programs. mechanisms to screen out the nonpoor- Country circumstances-including institu- for example, ration cards-may unwittingly tional capacity, the nature of poverty and screen out the poorest, who often are external shocks, and fiscal and delivery con- unaware of their rights and unable to afford straints-will determine which approach is Targeting must the transactions costs of securing benefits. most appropriate (figure 1). Subsidies that focus on too narrow a portion be carefully of the population may lose political support Cash transfers (as in Sri Lanka's food subsidy). Moreover, Cash transfers are effective if programs are designed to targeting has significant administrative relatively small and the poor are easily iden- costs. And it can distort incentives, inducing tifiable-as in countries where poverty is ensure a good less work and reduced output. Thus target- stronglycorrelatedwithfamilysizeorfemale- ing must be carefully designed to ensure a headed households. But in cases where iden- tradeoff between good tradeoff between costs and benefits. tifying poor families is difficult and costly, The best schemes are often self-targeted, other mechanisms (such as geographical tar- costs and like public works programs at wages attrac- geting) may prove superior. Self-selection tive only to the poor, or subsidies for foods can be tried by linking cash transfers to a benefits; self- consumed mainly by the poor. The worst work requirement or to child nutrition pro- schemes are those that fail to reach the poor. grams. Alternatively, identifying and exclud- targeting is ing the nonpoor (based on ownership of, say, Design guidetines land or automobiles) may be more effective ouft:en the Cross-country experience highlights seven than trying to identify the poor. lessons for good safety net design: One advantage of cash transfers is that best approach a Avoid open, general subsidies, which they do not distort commodity markets. are unsustainable, distortionary, and But all cash transfers create problems. mainly benefit the nonpoor. Poverty traps develop for people livingjust * Limit program costs to a small percent- below the poverty line. Traditional safety age of the total budget, ensuring sus- nets (private transfers) may be displaced. tainability. And beneficiaries may work less. Program * Use innovative designs and delivery design should recognize and attempt to mechanisms (like village-level non- minimize such behavioral responses. governmental organizations) to reach groups that standard safety nets often In-kind transfers miss (poor women, indigenous groups). In-kind transfers include food stamps, * Keep transactions costs low to avoid nutritional supplements, and food, hous- eroding the real cost of benefits. ing, and energy subsidies. Experience in * Ensure that safety nets are broad many countries provides four lessons. First, enough to maintain political support- universal subsidies are fiscally unsustain- very fine targeting can undermine such able, so targeting is essential. Second, the support. nonpoor can be screened out by attaching * Avoid excessive fine-tuning in targeting, obligations (such as a work requirement) since it may end up excluding the poor to recipients. These obligations should not along with the nonpoor. raise transactions costs significantly, how- * Keep assistance modest to minimize ever, or the poor will be screened out. changes in incentives and behavior, Third, like cash transfers, in-kind trans- which can erode real benefits. fers can generate incentive costs, and are Figure 1. How should a safety net be chosen? Strategies for reducing poverty * Fostering labor-absorbing growth * Investing in people (health care, education) * Imptementing a safetv net / Defining the context Nature of poverty \ Whotare the pooer?y Why are they poorCountry conditions and constraints Who are the poor? Why are they poor? aEooi * Numbers, depth, severity * Lack of access to factors of production * Economic * Indicators of living standards * Lack of social and family networks * Physical infrastructure * Regional characteristics * Inability to exercise rights of exchange * Fiscal, political, and administrative context * Income and spending pattems * Inadequate or variable income * Institutional context and delivery mechanisms * Demographic characteristics * Highly risk-prone * Strength of private transfers and informal safety nets * Household sks5/ , < ~~~~~~~~~Choosing the approach Appropriate net opbons choice reduces severity of Pure transfers overty and * Price subsidies Appropriate nhances ability * Food rations, feeding and nutrition programs choice eases o mitigate risks * Cash assistance constraints * Family allowance Income-generating programs Appropriate choice complements * Public works economic growth * Food for work * Credit a. Risks include crop failure and entitlement failures, life-cycle risks (old age, disabitity), newly emerging risks (AIDS-orphaned children, orphans In postconflict societies), and inability to bear production risks. Source: Subbarao 1996. open to abuse and political rent seeking. There are, however, tradeoffs between Self-selection can lower such costs. employment intensity and the durability of Subsidies for lower-quality foods or for such works. Unpaved roads provide imme- foods consumed-mainly by the poor can be diate employment but will soon be washed a useful form of self-selection that is also away. Paved roads are durable but provide politically acceptable. Fourth, food trans- fewerjobs. fers to schoolchildren or lactating moth- The wage rate is the most important ers can be effective but require design element in public works programs. If well-developed administrative and deliv- wages are at or below the market rate, only ery systems. the poor are likely to participate. Ifwages are higher than the market rate, the nonpoor Public works programs will be drawn away from productive work in Public works programs can be important the private sector, and excess demand will countercyclical mechanisms during times lead to job rationing in public works pro- of temporary distress (droughts, reces- grams (as in Botswana, Kenya, and Tanzania sions), can smooth incomes by providing and in India's Maharashtra Employment work in slack agricultural seasons, and can Guarantee Scheme after 1988). Paying a sig- help countries undergoing transition or nificant portion of wages in kind can attract emerging from civil conflict. These pro- more female workers (as in Lesotho and grams are flexible and can be expanded or Zambia). India's Maharashtra Employment cut according to need. Moreover, they can Guarantee Scheme obliges the administra- be used to build infrastructure-village tion to provide work within 5 kilometers of water tanks, rural roads, social forestry- where five or more people demand employ- and so increase growth potential. ment. This program has helped reduce the severity (as distinct from the incidence) of have subsidized interest rates-yet experi- poverty and eroded gender barriers in ence has shown that the poor are good credit employment. risks, and are often better served by a line of Public works programs are costly to credit at market rates than by a one-time loan administer and have high nonwage costs. at subsidized rates. Credit programs also run So while they are a good means of target- the risk ofleakages to the nonpoor, especially ing the needy, they should be wound up when interest rates are subsidized and pro- when times of need end. They must not be grams are administered without local partic- viewed as permanent solutions to poverty. ipation and community oversight. Because of these and other challenges, even the most Thie poor are Credit programs successful credit programs have a modest Credit programs improve the poor's access record in reaching the poor. olten better to credit. Credit increases self-employment, Government-run credit programs have and can be important where underemploy- the worst track record, and NGOs and other served by a liine ment and unemployment are widespread. local groups (such as women's microcredit Credit also helps alleviate the inefficiencies groups) provide better delivery. To ensure oif credit at created by market failure in financial mar- that credit-based work programs benefit the kets (banks are normally reluctant to lend to poor, rules should be clear and simple, and market interest the productive poor because of information paperwork minimized to cut transactions problems). Moreover, credit raises the costs. Moreover, savings should be pro- raites than by poor's productivity and so aids economic moted as an integral part of these programs growth. Finally, credit programs have been (women's microcredit groups are typically one-shot loans at extremely successful in breaking down tra- thrift-and-loan societies). Finally, the risks ditional gender barriers, especially when credit programs pose to borrowers and siubsidized rates administered by nongovernmental organi- lenders can be reduced through group zations (NGOs).Women accountfor only 25 lending and small loans that are repeated percent of beneficiaries in India's govern- for those who repay on schedule. ment-administered credit program, the -Swaminathan S.A. Aiyar Integrated Rural Development Programn. In NGO credit programs, by contrast, women This brief, an earlier version of which appeared account for much larger shares of benefi- in Poverty Lines, was written by Swaminathan S.A. ciaries-60 percent in India's Mysore Aiyar under the supervision of K Sarwar Lateef Resettlement and Development Agency and and Kalanidhi Subbarao for the Poverty 90 percent in Bangladesh's Grameen Bank. Reduction and Economic Management (PREM) Credit programs have drawbacks, how- network. It is based on: ever. They require specialized skills that are often scarce in developing countries. Subbarao, Kalanidhi. 1996. "Best Practice on Political pressures for writeoffs can lead to Social Assistance and Poverty-Targeted high levels of default-often willful default. Programs." World Bank, Poverty and Social The poorest are often excluded because they Policy Department, Washington, D.C. are illiterate and cannot handle the required Subbarao, Kalanidhi, and others. 1997. Safety paperwork or other transactions costs. Net Programs and Poverty Reduction: Lessons Money is fungible, so credit for production from Cross-Country Experience. A Directions in may be diverted to consumption. To lower Development book. Washington, D.C.: the cost of borrowing, many governments World Bank. b | , | This note series is intended to summarize good practice and key policy findings on PREM-related topics. PREMnotes are distributed widely to Bank staff and will also s1111 be available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Kim Murrell. For additional copies of this PREMnote please contact the PREM Advisory Service at extension 87736. Prepared for World Bank staff