social transfers and growth: what do we know? what do we need to find out?

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Social Transfers and Growth: What Do We Know? What Do We Need to Find Out? ARMANDO BARRIENTOS * University of Manchester, UK Summary. The paper examines the extent to which emerging social transfer programs in developing countries can improve the pro- ductive capacity of households in poverty and contribute to micro-level growth. It introduces a basic framework linking transfers to growth mediating processes and productive capacity outcomes. This is then used to organize and assess relevant findings from program evaluation studies. The paper concludes that social transfer programs can have positive effects on the productive capacity of poor and poorest groups; but further research is needed to identify and measure the size and significance of these effects. Ó 2011 Elsevier Ltd. All rights reserved. Key words — social transfers, social assistance, pro-poor growth, poverty, poverty reduction 1. INTRODUCTION A feature of the last decade has been the emergence of large- scale social transfer programs in developing countries focused on households in extreme and persistent poverty. A large and fast growing literature assesses the poverty reduction effective- ness of these programs. 1 The broad findings from this litera- ture, covering social transfer programs of different types and in different settings, suggest that, in combination with policies promoting growth and strengthening basic services, they have the potential to make a significant difference to global poverty and vulnerability. Less attention has been paid to examining the potential impact of social transfers on growth and develop- ment. 2 Permanent exit from poverty requires conditions for sustained income growth among households in poverty. This is well understood by policy-makers in developing countries, as demonstrated by their concerns to ensure social transfer programs are consistent with growth and development objec- tives. The main objective of this paper is to throw light on how social transfers may affect growth at the micro-level, by setting out a basic framework with which to collect, organize, and assess the findings from the program evaluation literature. In this paper, social transfers describe programs providing direct assistance in cash or kind to individuals or households, with the primary objective of reducing poverty and vulnerabil- ity. The focus is on programs providing regular transfers, as opposed to programs providing emergency and humanitarian assistance or programs providing short-term support. In the main, social transfer programs are noncontributory, financed from tax revenues (where international aid is involved, tax rev- enues are collected in a different jurisdiction), and are focused on the poorest groups. Increasingly, social transfer programs combine direct transfers with other interventions, access to basic services or credit for example. The emergence of large-scale social transfer programs in developing countries has been swift. Rough estimates suggest that currently between 0.75 and 1 billion people are reached by social transfers. 3 Most large-scale social transfer programs have emerged in middle-income countries, but there are also examples from low-income countries. The Minimum Living Standards Scheme in China reaches 24 million households in urban areas, and a rural equivalent currently under implemen- tation reached 46 million households in 2010; the National Rural Employment Guarantee Scheme (NREGS) in India reached 48 million households in 2009/10; a Safety Net pro- gram in Indonesia is expected to reach 6.5 million households in extreme poverty; Bolsa Familia reaches a further 12 million households; Ethiopia’s Productive Safety Net Programme (PSNP) reaches 1.7 million households; in South Africa, social assistance grants reach one half of the households, and Progresa/Oportunidades in Mexico and Bolsa Famı ´lia in Brazil reach one quarter of all the households. In low-income countries the growth has been slower, but noticeable. Social transfer programs have the potential to make a significant contribution to global poverty reduction. Transfer programs in developing countries show diversity in program design. Pure income transfers, like South Africa’s Old Age Grant, supplement the purchasing power of households in poverty. In other countries, income transfers combined with ac- cess to basic services or improvements in infrastructure have been introduced. Mexico’s Oportunidades, for example, links transfers to school attendance and primary health care utiliza- tion with the objective of reducing intergenerational poverty persistence. Social transfers conditioned on labor supply link the transfer to local infrastructure development (as in Ethio- pia’s PSNP or India’s NREGS). Integrated poverty reduction programmes, like Chile’s Chile Solidario or Bangladesh’s Chal- lenging the Frontiers of Poverty Reduction Targeting the Ultra Poor, combine transfers with a range of other interventions aimed at ensuring social and economic inclusion. In the main, these programs focus on extreme and persistent poverty. Examining the potential effects of social transfers on growth in a developing country context is challenging. The following three key questions underline these challenges and introduce the core issues. Which is the dimension of growth relevant to social trans- fers? The focus here is on growth among poorest households. Social transfer programs, even large-scale programs in middle- income countries, absorb a very small share of resources. Mexico’s Oportunidades and Brazil’s Bolsa Famı ´lia absorb just below 0.5 of GDP. Transfers constitute a fraction of household consumption, typically around 20–30%, and are * I am grateful to the Editor and three anonymous referees for helpful comments and suggestions. Final revision accepted: May 11, 2011. World Development Vol. 40, No. 1, pp. 11–20, 2012 Ó 2011 Elsevier Ltd. All rights reserved 0305-750X/$ - see front matter www.elsevier.com/locate/worlddev doi:10.1016/j.worlddev.2011.05.012 11

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World Development Vol. 40, No. 1, pp. 11–20, 2012� 2011 Elsevier Ltd. All rights reserved

0305-750X/$ - see front matter

www.elsevier.com/locate/worlddevdoi:10.1016/j.worlddev.2011.05.012

Social Transfers and Growth: What Do We Know?

What Do We Need to Find Out?

ARMANDO BARRIENTOS *

University of Manchester, UK

Summary. — The paper examines the extent to which emerging social transfer programs in developing countries can improve the pro-ductive capacity of households in poverty and contribute to micro-level growth. It introduces a basic framework linking transfers togrowth mediating processes and productive capacity outcomes. This is then used to organize and assess relevant findings from programevaluation studies. The paper concludes that social transfer programs can have positive effects on the productive capacity of poor andpoorest groups; but further research is needed to identify and measure the size and significance of these effects.� 2011 Elsevier Ltd. All rights reserved.

Key words — social transfers, social assistance, pro-poor growth, poverty, poverty reduction

* I am grateful to the Editor and three anonymous referees for helpful

comments and suggestions. Final revision accepted: May 11, 2011.

1. INTRODUCTION

A feature of the last decade has been the emergence of large-scale social transfer programs in developing countries focusedon households in extreme and persistent poverty. A large andfast growing literature assesses the poverty reduction effective-ness of these programs. 1 The broad findings from this litera-ture, covering social transfer programs of different types andin different settings, suggest that, in combination with policiespromoting growth and strengthening basic services, they havethe potential to make a significant difference to global povertyand vulnerability. Less attention has been paid to examiningthe potential impact of social transfers on growth and develop-ment. 2 Permanent exit from poverty requires conditions forsustained income growth among households in poverty. Thisis well understood by policy-makers in developing countries,as demonstrated by their concerns to ensure social transferprograms are consistent with growth and development objec-tives. The main objective of this paper is to throw light onhow social transfers may affect growth at the micro-level, bysetting out a basic framework with which to collect, organize,and assess the findings from the program evaluation literature.

In this paper, social transfers describe programs providingdirect assistance in cash or kind to individuals or households,with the primary objective of reducing poverty and vulnerabil-ity. The focus is on programs providing regular transfers, asopposed to programs providing emergency and humanitarianassistance or programs providing short-term support. In themain, social transfer programs are noncontributory, financedfrom tax revenues (where international aid is involved, tax rev-enues are collected in a different jurisdiction), and are focusedon the poorest groups. Increasingly, social transfer programscombine direct transfers with other interventions, access tobasic services or credit for example.

The emergence of large-scale social transfer programs indeveloping countries has been swift. Rough estimates suggestthat currently between 0.75 and 1 billion people are reachedby social transfers. 3 Most large-scale social transfer programshave emerged in middle-income countries, but there are alsoexamples from low-income countries. The Minimum LivingStandards Scheme in China reaches 24 million households inurban areas, and a rural equivalent currently under implemen-tation reached 46 million households in 2010; the National

11

Rural Employment Guarantee Scheme (NREGS) in Indiareached 48 million households in 2009/10; a Safety Net pro-gram in Indonesia is expected to reach 6.5 million householdsin extreme poverty; Bolsa Familia reaches a further 12 millionhouseholds; Ethiopia’s Productive Safety Net Programme(PSNP) reaches 1.7 million households; in South Africa, socialassistance grants reach one half of the households, andProgresa/Oportunidades in Mexico and Bolsa Famılia in Brazilreach one quarter of all the households. In low-incomecountries the growth has been slower, but noticeable. Socialtransfer programs have the potential to make a significantcontribution to global poverty reduction.

Transfer programs in developing countries show diversity inprogram design. Pure income transfers, like South Africa’s OldAge Grant, supplement the purchasing power of households inpoverty. In other countries, income transfers combined with ac-cess to basic services or improvements in infrastructure havebeen introduced. Mexico’s Oportunidades, for example, linkstransfers to school attendance and primary health care utiliza-tion with the objective of reducing intergenerational povertypersistence. Social transfers conditioned on labor supply linkthe transfer to local infrastructure development (as in Ethio-pia’s PSNP or India’s NREGS). Integrated poverty reductionprogrammes, like Chile’s Chile Solidario or Bangladesh’s Chal-lenging the Frontiers of Poverty Reduction—Targeting the UltraPoor, combine transfers with a range of other interventionsaimed at ensuring social and economic inclusion. In the main,these programs focus on extreme and persistent poverty.

Examining the potential effects of social transfers on growthin a developing country context is challenging. The followingthree key questions underline these challenges and introducethe core issues.

Which is the dimension of growth relevant to social trans-fers? The focus here is on growth among poorest households.Social transfer programs, even large-scale programs in middle-income countries, absorb a very small share of resources.Mexico’s Oportunidades and Brazil’s Bolsa Famılia absorb justbelow 0.5 of GDP. Transfers constitute a fraction ofhousehold consumption, typically around 20–30%, and are

12 WORLD DEVELOPMENT

focused on households facing adverse social and economicconditions. They are, therefore, unlikely to produce macroeco-nomic effects on a scale sufficient to influence aggregate GDPgrowth. 4 The dimension of growth relevant to social transfersis growth among the households in poverty.

How can social transfers aimed at raising consumption sup-port growth processes? Some programs, perhaps even a major-ity, explicitly aim to influence households’ productive capacity,through facilitating human, physical or financial asset accumu-lation. Even among pure income transfer programs which focuson raising consumption, studies have observed that receipt oftransfers is often associated with a range of household invest-ment in human capital and other productive assets, often on asmall scale. In developing countries, social transfers focusedon those in poverty are developmental. They have effects whichgo beyond the supplementation of current consumption in so faras they strengthen the productive capacity of households in pov-erty with a potential to support income growth among benefi-ciary households and their communities.

Under what circumstances could relatively low level trans-fers support growth processes? This is perhaps the hardestquestion to answer, but one that goes to the core of the issuescovered in the paper. The poverty traps literature focused atthe micro level suggests circumstances in which small incre-ments (decrements) in the income or assets of householdscould lead to growth (decline) in household productive capac-ity and welfare. In particular, nonlinearities in the dynamics ofproduction and consumption, as well as complementarities inasset accumulation, would be consistent with small transferspotentially having important effects upon households. Theempirical evidence on the existence of poverty traps is patchy,but the approach throws important light upon this, thirdquestion.

The paper draws on the growing impact evaluation litera-ture on social transfer programs in developing countries. 5 Inthe main, this literature is focused on establishing whetherprogram objectives are met. Information on improvementsin productive capacity is often a by-product of program eval-uation, and as a result important gaps remain. Taken as awhole, this literature provides reasonably strong findings onthe extent to which social transfers lead to improvements inthe productive capacity of beneficiary households, which inturn suggests potential effects on growth; but information onthe size and significance of the growth effects is weak or non-existent.

The structure of the paper is as follows. Section 2 introducesa framework for examining the potential effects of social trans-fers on growth, and discusses two sources of heterogeneity inthese effects. Section 3 reviews the findings from studies on so-cial transfers relating to growth-mediating processes. Section 4reviews and organizes findings on the outcomes of social

Social Transfers

Taxation

NON-BENEF

BENEFICI

Growth-mediating Processes:Credit and liquidity constraints Consumption and asset security Household resource allocation

Figure 1. A basi

transfer programs on the productive capacity of householdsin poverty. A final section draws some policy implicationsand concludes.

2. A BASIC FRAMEWORK

This section introduces a basic framework for tracing thegrowth effects of transfers by focusing on the linkages existingbetween social transfers, growth mediating processes, and pro-ductive capacity outcomes at the household level. Several ap-proaches to constructing a framework are available. Oneapproach examines the design properties of transfer programsand models the behavioral responses of beneficiary house-holds, in a partial equilibrium setting. 6 A different approachis to model the welfare effects of transfers in a general equilib-rium setting. 7 Both approaches have been applied successfullyto the study of the welfare effects transfers. For the purposesof this paper, the first approach provides a limited perspectiveon the broader effects of transfers, and their financing, oncommunities and the economy, while the second approachthrows limited light upon intermediate processes. In the paper,the focus is on developing a basic framework which could use-fully help identify key intermediate growth processes, linkthese to outcomes, and suggest the likely direction of growtheffects. The framework is a device to organize the findingsfrom available studies. The second part of the section exam-ines two potential sources of heterogeneity in the size of the ef-fects, across programs.

(a) Framework

Figure 1 below summarizes a basic framework tracing themain linkages existing between social transfers and improve-ments in the productive capacity. They are discussed brieflybelow.

The framework distinguishes the effects on beneficiaries andon nonbeneficiaries. Nonbeneficiaries are primarily affectedthrough taxation. 8 In the literature, taxation impacts nega-tively on work and saving incentives, though the size of the ef-fects is uncertain. 9 This issue is not taken further here, as thefocus is on households in poverty. As regards beneficiaryhouseholds, the framework suggests that transfers to house-holds in poverty influence growth-mediating processes by lift-ing restrictions on their productive capacity. The impact onbeneficiaries is measured in terms of program outcomes re-lated to their productive capacity: human capital, physicaland financial asset accumulation, labor supply, and localeconomy effects. These outcomes are expected to have positiveeffects on the income growth of households in poverty, exceptfor the impact of transfers on labor supply, which can be

ICIARIES

ARIES

Expected direction of growth effects

( - )

( - )

Saving

Labour supply

( + ) ( + ) (-/+) ( + )

Outcomes: Asset protection and accumulation inc. human capital Labour supply Local economy effects

c framework.

SOCIAL TRANSFERS AND GROWTH 13

positive or negative. 10 Information on productive capacityoutcomes is available for a good number of social transferprograms and will be presented and assessed in Section 4.Improvements in the productive capacity of households inpoverty might not lead directly to market income growth.The absence of employment opportunities could ensure thatimproved productive capacity remains un(der)used anddeclining economic opportunity, lower wages, or lower com-modity prices, might lead to contracting market income. Thefocus of the discussion below will be primarily on the effectsof transfers on the productive capacity of households inpoverty.

A useful framework for tracing the growth effects of socialtransfers would need to identify the growth-mediating pro-cesses through which transfers lead to these outcomes at thehousehold level. Three such processes identified in the litera-ture are particularly relevant here (Banerjee & Duflo, 2004).Firstly, social transfers could lift credit constraints. Creditmarkets often exclude the poor and poorest, but regular andreliable transfers can help overcome barriers in access to cred-it. This can work in two ways: through enhancing the savingcapacity of poor households; or through facilitating improvedaccess to credit. Secondly, social transfers could providegreater certainty and security in consumption and thus invest-ment outcomes. Poor households have fewer buffers to protecttheir consumption and their assets against hazards. Insuranceservices seldom reach the poor and poorest. Uncertainty andinsecurity make investment especially risky and, therefore,undermine investment in productive capacity. Transfers canprovide increased security and in the process make investmentpossible. Thirdly, social transfers could facilitate improvedhousehold resource allocation. Household resources allocationcan be less than optimal if they experience poverty. Socialtransfers can help overcome cost restrictions, such as serviceuser-fees, or migration costs. The design of social transferprograms can generate additional effects by influencing deci-sion-making processes within the households. Social transferschanneled through the mother or carer can ensure greaterinvestment in children’s education and health. These growthmediating processes suggest ways in which social transferscould generate outcomes which facilitate growth amonghouseholds in poverty.

(b) Two potential sources of heterogeneity in effects acrossprograms

In view of the diversity of program design and implementa-tion, and because of the importance of context, similar

A. Linear effects of transfers B. N

Future income

b’ a’

d’

c’

a b c d Current income

Futurincom

Non-lconstrproduhouse

Figure 2. Nonlinear e

programs could lead to very different effects, and different pro-grams could generate similar effects. It is important to take ac-count of two sources of heterogeneity in observed effects. Afirst important source of possible heterogeneity in the effectsof transfers on growth arises from the presence of nonlineari-ties in the dynamics of consumption and production at thehousehold level. The poverty trap literature demonstrates ana-lytically that nonlinearities in the function linking current andfuture income can generate large and persistent effects fromrelatively small changes in household resources.

Figure 2 below will help illustrate the points made here. Sup-pose that the rise in consumption translates itself directly intoan increase in productivity, via improvements in nutrition forexample. In Panel A, it is assumed the effects of nutrition onwork capacity are linear. Therefore, transfers equivalent toa–b and c–d can at best lead to proportionate increases in fu-ture income a0–b0 and c0–d0, respectively. In this case, incomegrowth would depend solely on the amount of the additionalincome transferred. Now take Panel B, where the functionlinking current to future income is assumed to be nonlinear.Transfers equivalent to a–b and c–d have different effects onfuture income. The transfer a–b has a less than proportionateeffect on future income; while the transfer c–d generates amore than proportionate increase in future income, as in d0–c0.

The literature on poverty traps suggests several potentialfactors responsible for nonlinearities in the dynamics of con-sumption and production: thresholds in nutrition and workcapacity (Dasgupta, 1997; Dasgupta & Ray, 1986); thresholdsin asset collateral in accessing credit (Banerjee,2001, 2005); as-set thresholds in production (Barrett & McPeak, 2005; Barrett& Swallow, 2006; Carter & Barrett, 2006); liquidity constraintsin human capital investment (Baland & Robinson, 2000). Theinsights from poverty traps perspectives apply to householdresource allocation too (Duflo, 2006; Udry, 1996). Context isimportant. 11

A second source of heterogeneity in effects across programsis associated with nonincome effects of transfers, arising fromprogram design and implementation. In particular, householdinvestment in productive capacity could be linked to designfeatures of social transfer programs in developing countries,such as preferential access and utilization of basic services,conditions attached to transfers, and payment modalities. So-cial transfers conditional on schooling or health utilisation, forexample, are expected to encourage investment in human cap-ital over and above the additional income effects from thetransfer. Figure 3 below illustrates the effects of schooling con-ditions on household consumption and investment (Das, Do,& Ozler, 2005; Skoufias, 2005).

on-linear effects of transfers

0 Current income a b c d

d’

c’

e e

inear effects can arise in the presence of credit aints, ‘lumpiness’ in asset accumulation or ction, or poverty-related constraints in hold resource allocation

ffects of transfers.

c i

a

h g

e f

o z b d

All other goods

Schooling

Figure 3. Conditions and nonincome effects of transfers.

14 WORLD DEVELOPMENT

In the figure, ab represents the quantities of schooling andall other goods available to poor households, given their pres-ent income. An unconditional transfer equivalent to eg makesit possible for poor households to invest more in schooling andraise their consumption of all other goods, as their budget lineis now cd. Suppose that in the absence of the transfer a poorhousehold is at h, then with the transfer household consump-tion will be in the range ig (at i the household consumes moreof other goods but does not invest in more schooling, and at gthe household invests in more schooling but does not raiseconsumption of all the other goods; points in the range ig,therefore, represent feasible combinations).

Program designers concerned that poor households consumeat least oz schooling could make the transfer conditional onachieving this minimum level of schooling. The new budget linefor the poor households is indicated by aegd. A poor householdat point h before the transfer will now need to invest more inschooling, at least to point g, to secure entitlement to the trans-fer. A poor household at point e before the transfer will now beable to move to a point in the range gf. Given conditions rep-resented in the figure, a schooling condition will ensure invest-ment in schooling over and above an unconditional transfer.Taking account of the possible influence of income receipt onthe bargaining power of household members, policy designerswho believe mothers have a stronger preference for higher con-sumption/investment among their children could make themrecipients of the transfer, in the expectation that this wouldstrengthen their bargaining power within the household andensure cash transfers do result in improvement in children’sconsumption. For example, a poor household consuming atpoint e before the transfer will be more likely to consume at,or close to, f if the transfer is paid to the mother. Nonincomeeffects arising from the design and implementation of transferprograms can, therefore, further facilitate investment, and con-stitute an additional source of heterogeneity in the effects oftransfers on productive capacity.

This section provided a basic framework for examining thepotential effects of social transfers on productive capacity out-comes. The second half of the section then considered poten-tial sources of heterogeneity in the effects on growth acrossdifferent programs, due to context and diversity in programdesign and implementation. The next section will review therelevant findings from studies assessing social transfer pro-grams.

3. SOCIAL TRANSFERS AND GROWTH-MEDIATINGPROCESSES

This section organizes available findings from studies on so-cial transfer program throwing light on growth-mediating pro-cesses.

(a) Alleviating credit constraints

The theoretical and empirical literature confirms that house-holds in poverty face binding credit constraints. They have dif-ficulties in providing collateral to secure loans from financialinstitutions, especially as the urgency of their consumptionneeds makes them more likely to default (Banerjee, 2005).The development of micro-credit institutions in developingcountries is a policy response to the well documented barriersto accessing credit. However, the literature on microfinanceand micro-credit institutions also documents the difficulties in-volved in reaching the poorest households. Social transferscould help lift credit constraints for poor and poorest house-holds in at least two ways. Firstly, social transfers, providingthey are regular and reliable, can encourage small-scale savingand investment, opening another route to lowering credit con-straints. Secondly, social transfers could prove effective, incombination with other interventions, in enabling access tocredit.

There are indications across a variety of social transfer pro-grams, in middle- and low-income countries, that beneficiariesare able to save and invest a fraction of their income followingthe receipt of transfers, and also that access to credit can befacilitated by the transfer. The evidence is largely qualitative,but has been carefully measured in some programs. In Bolivia,a social pension Bono Dignidad is paid once a year to personsaged 60 and over. At US$246, it is a significant injection ofliquidity for rural farmers who have land but lack sufficientcash or credit to purchase seeds and other agricultural inputs.A study has estimated that among pension beneficiaries in rur-al areas, overall consumption rises by twice the amount of thebenefit, suggesting that improved household production wasfacilitated by the transfer (Martinez, 2007). The effect is ob-served only among rural households with land, and is strongerfor goods which are typically produced by these households,such as diary, meat, and vegetables.

Social transfers can also help lift credit constraints for poor-est households as a component of a package of interventionsincluding micro-credit. Direct evidence of improved access tocredit is available for BRAC’s Challenging the Frontiers ofPoverty Reduction—Targeting the Ultra Poor program inBangladesh. This program provides a mix of transfers in kindand cash to households in extreme poverty in preparation formore standard micro-credit programs after 18 months. A sam-ple of selected beneficiary households was compared with asample of eligible but nonselected households, the latterslightly better off, 12 in 2002 at the start of the program andin 2005 (Ahmed, Rabbani, Sulaiman, & Das, 2009; Rabbani,Prakash, & Sulaiman, 2006). Beneficiary households showedsignificant improvements over time in the incidence and sizeof loans they held, in part explained by their access to the mi-cro-credit component of the program. The studies also show ashift in the motivation for credit among selected households.In 2002, credit is primarily a means of smoothing out con-sumption, but in 2005 the dominant motivation is investmentin productive assets.

Studies have also shown nonincome effects of social trans-fers relating to access to credit. In Brazil, Previdencia Rural,a social pension, was introduced in 1991 to cover informalworkers and their households. The regularity of the pensionbenefit enables pension beneficiaries to access loans frombanks, by showing the magnetic card which is used by themto collect their pensions (Schwarzer, 2000). A detailed studyof the program observed a high incidence of investment in pro-ductive capital among beneficiaries (Delgado & Cardoso,2000).

SOCIAL TRANSFERS AND GROWTH 15

While providing important insights, the evidence reviewed isnot systematic across all social transfers. In some transfer pro-grams, especially pure income transfers such as social pensionsor human development transfer programs, access to credit issimply a by-product of the income transfer and not an explicitobjective. The capacity of social transfers to help lift creditconstraints is likely to vary across programs, target groupsand environments. These effects are stronger where creditconstraints are directly targeted, as in Bangladesh. Broadly,transfers have greater effects among rural households withdeficits in complementary ‘productive’ assets (e.g., inputs,labor). These studies also indicate that transfers can supportgrowth in household production and, therefore, havemultiplier effects. It is harder to observe these effects in urbansettings.

(b) Improving consumption and asset security

Households in poverty adopt a range of strategies to protecttheir consumption and assets from the impact of hazards.Insecure and precarious livelihoods are bound to limit invest-ment by poor households. The gaps in effective policy instru-ments in this area are well recognized. The theoretical andempirical literature finds that insurance markets seldom reachthose in poverty, with the implication that they remain insuf-ficiently protected (Dercon, 2005; Jalan & Ravallion, 1999).Insufficient insurance protection has damaging effects on theability of the poor and their households to exit poverty andbenefit from economic opportunity. Insecurity leads to ineffi-cient use of resources by those in poverty, for example, byforcing rural poor households to opt for low-risk/low-returncrops and production methods, which reduces growth oppor-tunities (Morduch, 1995). Insecurity also forces poor house-holds to hold liquid but less productive assets (Dercon,2003). It could also lead to distortions in inter-temporal re-source allocation, forcing a focus on current consumption inpreference to investment. This is typically the case whenhouseholds withdraw children from school or ‘economize’on health care in response to crises. In the absence of security,responding to short-term shocks can lead to povertypersistence.

Regular and reliable social transfers can improve house-hold consumption and asset security, firstly through supple-menting household income, and, therefore, ameliorating theimpact of consumption shocks; and secondly through inte-grating insurance features protecting consumption, assets,and investment (Lichand, 2010). In practice, few social trans-fers have explicit insurance components. Some variants ofpublic works are an exception. The National Rural Employ-ment Guarantee Scheme in India, for example, provides enti-tlement to up to 100 work days for unemployed ruralhouseholds, on demand. The design of the employment guar-antee is specifically aimed at smoothing consumption amongrural households (Kannan, 2006). The Unemployed Heads ofHouseholds program in Argentina was crucial in supportinghouseholds affected by the 2001 crisis in Argentina (Galasso& Ravallion, 2005).

By contrast, social pensions or human development trans-fers programs have no explicit insurance component, asidefrom the buffer provided by the supplementary income trans-ferred. This is mainly because transfers are fixed in level, andup-rated at regular intervals. Human development conditionalsocial transfer programs in Latin America have at best indirectinsurance components, for example, through the enforcementof schooling conditions which are sustained through crises (deJanvry, Finan, Sadoulet, & Vakis, 2006). This is an important

deficiency of these types of social transfers in both middle-income and low-income countries, one which became apparentin the context of the 2008 global financial crisis. In the contextof the crisis, program agencies reacted by expanding thecoverage of programs through inclusion of adolescents aged16–17 and by speeding up the processing of applications;and in other cases by raising the level of the transfer. The crisiswill generate some ‘learning’ among program agencies on howbest to address covariate shocks.

(c) Improving household resource allocation

Household dynamics is an important factor in determiningthe capacity of poor households to access economic opportu-nity, and especially unequal bargaining power within thehousehold. Udry (1996) finds that differentials in yields inmen’s and women’s plots in Burkina Faso are accounted forby differences in input intensity, especially labor and fertilizers.These differences in turn could be explained by women’s con-cerns to avoid having their plots and yields expropriated bytheir husbands. Decisions about allocation of time and effortmade within the household, often reflecting unequal bargain-ing influence, can generate inefficiencies. These in turn couldbecome an important impediment to investment and incomegrowth among the poor.

There is an emerging literature looking at the impact oftransfers on intra-household resource allocation, with implica-tions for income growth among those in poverty (Duflo, 2006).In human development social transfers, it is common thattransfers are paid to the mother, in the expectation that chil-dren stand to benefit more directly if it is the mother who re-ceives them. An interesting issue is whether this modality oftransfer payment has any effect on intra-household resourceallocation, especially in the context of bargaining models sug-gesting that household decision making is strongly influencedby relative shares of income contributed by different house-hold members (Haddad, Hoddinott, & Alderman, 1997).Studies of the impact of Oportunidades transfers on patternsof consumption in Mexico observe a shift in consumption to-ward children-related goods and services (Attanasio &Lechene, 2002). This finding could be interpreted as support-ing the view that transfers are capable of effecting changes inintra-household resource allocation.

A related issue is whether transfers encourage changes inhousehold labor allocation, especially through migration. Thispoint will be discussed in more detail below, but studies onOportunidades identify impacts of transfers on domestic andinternational migration (Angelucci & De Giorgi, 2006;Stecklov, Winters, Stampini, & Davis, 2005).

The findings on the effects of transfers on householdresource allocation are far from systematic, but they areespecially insightful. This issue has not been sufficiently wellresearched. It can be argued that changes in household alloca-tion have the greatest potential to make a large and long-termcontribution to poverty eradication and prevention. Furtherresearch is needed to identify with greater precision andcertainty these effects.

4. SOCIAL TRANSFERS AND PRODUCTIVECAPACITY OUTCOMES

This section reviews the findings evidence on the effects ofsocial transfers on changes in the productive capacity ofhouseholds in poverty.

16 WORLD DEVELOPMENT

(a) Asset protection and accumulation

Several studies have observed improvements in asset hold-ings among beneficiaries of social transfer programs. ForOportunidades, Gertler, Martinez, and Rubio-Codina (2005)estimate that, on average, around 12% of transfers to benefi-ciaries were invested in productive assets. Sadoulet, de Janvry,and Davis (2001) who compared transfers under Oportunid-ades and Procampo—a human development conditional trans-fer program, and a productive transfer to owners of smallfarms, respectively—find that the latter had income multipliersof around 1.5–2.6. The main effect of Oportunidades was in-stead on human capital investment. Ethiopia’s ProductiveSafety Net Programme addresses persistent food insecuritythrough a public works component, which helps prevent assetdepletion and build community assets. Participants in the pub-lic works component can also access productivity-enhancinginterventions and asset transfers. A study comparingoutcomes between this group and a control group 18 monthsafter a baseline survey observed improved food security(0.36 months), increased borrowing for productive purposes(12 percentage points), and increased use of fertilizers (10.7percentage points) (Gilligan, Hoddinott, & Seyoum Taffesse,2008). A dimension often overlooked is investment in housing.Studies of activities associated with first receipt of social pen-sion benefits have indicated that housing investment is impor-tant (Schwarzer, 2000).

Human development-focused social transfer programs deli-ver large improvements in school enrollment attendanceamong the poorest beneficiaries, especially where they explic-itly target schooling through conditions. This is a commonfinding for programs not only in Latin America, but also inBangladesh. The transfers are made conditional on schoolage children attending school. In Oportunidades, the designof the transfer strengthens the incentives for household invest-ment in girls’ schooling at secondary level, by raising the levelof the transfer for them. This program has ensured high schoolattendance for girls in rural areas. Many Latin American pro-grams also ensure primary health care utilisation through con-ditions. Oportunidades has been very successful in achievinghigher rates of utilization and improved health status amongbeneficiaries (Skoufias, 2005).

Positive findings are not limited to transfer programsspecifically targeting human development or children. Studieson the impact of social pension receipts in South Africa andBrazil, for example, find that households with a pensionbeneficiary have higher enrollment rates among children ofschool age, and improved health status (Carvalho, 2008a; Case& Menendez, 2007; Duflo, 2003). This also applies in low-income countries, although the effects are strongly mediatedby supply-side conditions in these countries. Raising educa-tional and health service utilization in low-income countriesrequires that attention is paid to improving infrastructure inline with growth in service demand. Supply-side policies imple-mented alongside such programs may be necessary to ensurethat services do not decline in standards due to increaseddemand.

These findings describe short-term effects, but investment inhuman capital will raise the future productive capacity of ben-eficiary children. Todd and Wolpin (2006) extend the medium-term estimates of impact with the help of a structural modelrepresenting household fertility and schooling decisions. Theypredict that children participating in Oportunidades will com-plete the schooling cycle with almost one extra year of educa-tion. Given the strong correlation existing between years ofschooling and labor market earnings, it is expected that trans-

fers will contribute to improved labor market outcomes forbeneficiaries. It is, of course, too early for the actual effectsto be observed.

(b) Labor supply effects

Standard economic models predict that income transferswill have adverse labor supply effects among beneficiaryhouseholds, on participation and hours of work (Saez,2006). A concern with minimizing labor supply disincentiveshas dominated discussions on the optimal design of transfersin developed countries, and has informed policy discussionsaround welfare reform (Moffitt, 2002). In developing coun-tries, studies have examined this issue in some detail, and ina variety of contexts. 13

Some transfer programs have direct labor supply objectives,for example, programs with a work condition or programsaiming to reduce child labor or improve school attendance.Among programs focused on human capital investment, areduction in the labor supply of children of school age is animplicit objective of programs requiring school attendance.The success of these programs in reducing child labor has beenmixed. Given that children’s time could be split into schooling,working and other activities, education subsidies providingincentives for schooling may not, by themselves, result in aproportionate reduction in the incidence of child labor(Ravallion & Wodon, 2000). Impact assessments ofBangladesh’s Food for Education program suggest that thereduction in child labor time was less than proportionate tothe rise in schooling, and in Mexico’s Oportunidades the evi-dence of a rise in enrollment and attendance from beneficiarychildren is stronger and more compelling than evidence thateducation subsidies reduced child labor (Ahmed & del Ninno,2002; Skoufias & di Maro, 2008; Skoufias & Parker, 2001;Skoufias, Unar, & Gonzalez-Cossıo, 2008). The success ofBrazil’s Programme for the Eradication of Child Labor (PETI)in reducing child labor was in large measure due to therequirement that participating children spend time in after-school activities (Yap, Sedlacek, & Orazem, 2002). 14

Transfers targeted on older people are likely to reduce theirlabor supply even in the absence of inactivity tests as a require-ment of eligibility. Social pensions in developing countriesvery rarely include inactivity test as an eligibility requirement,a feature which distinguishes them from noncontributory pen-sions in developed countries (Barrientos, 2006). Labor forceparticipation rates for those eligible to receive a pension arevery low in South Africa, and decline rapidly when individualsreach the age of pension entitlement (Lam et al., 2004). This isto be expected, as the combination of the generosity of thepension benefit and the means test provide strong incentivesfor withdrawal from the labor market.

Given a high incidence of co-residence of pensioners andtheir extended households in developing countries, and evi-dence of widespread pension income sharing, it is of someinterest whether labor supply effects of social pensions can alsobe observed among nonpensioners. This has been investigatedin some detail in South Africa. Bertrand et al. (2003) suggestthat the effects of pension income on hours of work andemployment of 15–50 year-olds co-residing with pensionbeneficiaries in South Africa are significant. Using 1993cross-section data from three-generation African households,they estimate that 15–50 year-old co-residents with a pensioneligible person undertake on average 6.4 fewer hours of workand a 4.3% lower probability of employment. They also findthat the labor supply effect is strongly significant among15–50 year-old males, but not significant among females.

SOCIAL TRANSFERS AND GROWTH 17

Critically, however, this study samples co-residents only andmisses out nonresident household members. Posel et al.(2004) note that a high proportion of household members ofworking age migrate to urban centers in search of work—asmany as 30% of rural households in South Africa have a mi-grant. Replicating the work of Bertrand et al., but now includ-ing migrant household members, Posel et al. find that thenegative association between pension receipt and labor supplyin that study becomes positive, and conclude that 15–50 year-old individual members of a household with a pension eligibleperson have a 3.2% higher probability of employment. Disag-gregating by gender, they find no significant effect associatedwith pension income received by male pensioners on laborsupply of adult household members, but a strong and positiveeffect when the pension recipient is female. They suggest thatpension income received by women is particularly importantfor rural households, “not only because it helps prime-age wo-men overcome income constraints to migration, but also be-cause it makes it possible for grandmothers to supportgrandchildren” (p. 24). A recent study has confirmed this find-ing with longitudinal data helping to track household changesaround pension receipt (Ardington et al., 2009).

Overall, the effects of social transfers on labor supply couldbe summarized as follows. Firstly, an increase in unearnedincome leads to a reduction in the labor supply of childrenand older people, especially where education subsidies or pen-sions target these groups specifically. The effects are strongerwhere social assistance programs include schooling conditionsfor children or inactivity tests on older people. Secondly, thereduction in labor supply from these groups is often compen-sated for by changes in the labor supply of other householdmembers. In the case of Oportunidades, a small reduction inchild labor appears to have been compensated by an increasein the labor supply of adults, but otherwise adult labor re-mained unaffected by the income transfers (Skoufias & Parker,2001). To the extent that social transfers lift credit and careconstraints, they could have the effect of encouraging addi-tional labor supply from other household members, as appearsto have been the case in Chile (Carneiro, Galasso, & Ginja,2008). In these circumstances, the impact of social transferson productivity and growth could well be positive. 15

There is scant evidence that social transfers have largeadverse labor supply effects on beneficiaries and their house-holds. It will be important to reassess this finding in the future,especially as transfer programs expand their coverage,improve the level and generosity of transfer levels, and imple-ment stricter recertification procedures. Attention will alsoneed to be paid to structuring pathways to employmentamong beneficiaries of transfer programs. 16

(c) Local economy effects

In areas with high poverty incidence, household incomegrowth can be constrained by community-level factors, suchas the absence of adequate infrastructure or the scarcity of lo-cal liquidity and trade. Transfer programs conditional on la-bor supply could in principle have an impact on both thesefactors, by transferring income to households and improvingliquidity, while at the same time upgrading available infra-structure. In practice, the assessment of such programs hason the whole been very mixed. Many public works programstransfer only a fraction of their budget to beneficiary house-holds, due to the cost of inputs, equipment and technical ad-vice; and in some cases the value of the newly createdinfrastructure is marginal. Studies assessing the impact of pub-lic works programs find that their impact at the community le-

vel depends to an important extent on program design,especially the level and periodicity of the transfer (McCord,2007).

Transfer programs can also improve liquidity and trade atthe local economy level by stimulating effective demand. Onlya handful of studies have addressed this question. In the con-text of direct income transfer programs, existing studies sug-gest social transfers could generate multiplier effects,especially in poor rural areas, but evidence on multiplier effectsfrom social transfers must be considered with great care. 17

Studies on Oportunidades have observed an increase in con-sumption and productive assets among nonbeneficiary house-holds in treatment areas, compared to nonbeneficiaries incontrol areas (Angelucci & de Giorgi, 2009). This can be inter-preted as reflecting local economy effects, and applies morestrongly to nonbeneficiary households with low asset levelsat the start of the program (Barrientos & Sabates-Wheeler,2010). The knowledge base for the presence of local economiceffects is at present very ‘thin’, as few studies on this issue areavailable. Impact evaluation studies normally focus on benefi-ciaries, and disregard wider effects. This is an important areafor further research.

One aspect that could well turn out to be significant in thecontext of social transfers in poorer areas concerns potential‘demonstration effects’ and community development effects.Demonstration effects could be responsible for observed in-creases in health care utilisation by nonbeneficiary householdsin Oportunidades (Handa, Huerta, Perez, & Straffon, 2000).There is only limited information on the impact of transferson community institutions and action. These can be importantin lifting the constraints on local economy growth in areaswith high poverty incidence.

5. CONCLUSIONS

The paper studies the potential growth effects of socialtransfer programs in developing countries. It examined howtransfers could strengthen the productive capacity of house-holds in poverty by setting out a basic framework with whichto collect, organize, and assess the relevant findings from exist-ing evaluation studies. The objective was to discuss what weknow and what we need to know about these effects.

This is challenging in a developing country context. Despitetheir rapid growth, social transfers in developing countriesredistribute a very small share of GDP to households in extremeor persistent poverty, often facing adverse economic circum-stances. The paper focused on the impact of transfer programson micro-level growth among poor and poorest groups, as it isunlikely that they could influence aggregate GDP growth. Thisis the dimension of growth relevant to this study. The basicframework mapped out the potential linkages existing betweensocial transfers, growth-mediating processes, and outcomesrelating to the productive capacity of households in poverty.The framework focused attention on the potential role of socialtransfers in lifting credit constraints, providing greater security,and enabling a re-allocation of household resources, leading toimproved household investment and productive capacity. Gi-ven favorable economic conditions, improved productivecapacity among poor households can be expected to lead togrowth outcomes. The paper emphasized the role of contextand of diversity in program design and implementation in gen-erating heterogeneity in effects across programs.

The paper then examined the findings from the impactevaluation literature on social transfers in order to identifyempirical counterparts to the growth-mediating processes

18 WORLD DEVELOPMENT

identified in the framework, and to assess reported productivecapacity outcomes. The studies reviewed in the paper cover avariety of social transfer programs and contexts. The findingsin these studies are clearer and stronger when they come frommiddle-income countries and from human development-focused programs combining income transfers and access tobasic services. Overall, the findings suggest that social trans-fers are capable of having measurable effects on the productivecapacity of households in poverty, and of influencing micro-level growth.

More research is needed before a comprehensive and sys-tematic assessment of the growth effects of social transferscan be offered. It is much harder to identify the size and signif-icance of nonincome effects, and it is also harder to get a senseof potential growth effects in low-income countries. The dis-cussion in the paper focused on outcomes relating to the pro-ductive capacity of households, but further research is neededto identify the exact circumstances and conditions in whichspecific types of transfers generate sustainable income growthamong the poor and the poorest groups. And more research isneeded to quantify these effects with some precision. The avail-able literature on the impact of social transfers focuses onshort term effects, but further research is needed to examinemedium and longer term effects which are crucial to sustain-able exit from poverty. The rapidly expanding evidence baseon large-scale transfer programs in developing countries, andthe emergence of new programs, provides an opportunity toaddress these knowledge gaps.

How to maximize the growth effects of social transfer pro-grams? The discussion in the paper offers several pointers.

In order to maximize their effects on investment, socialtransfers need to be regular and reliable. Regularity involvesincorporating within the program clear and transparent ruleson eligibility, and on the time period for the entitlements.Duration is important too. The time period during whichhouseholds are supported needs to be long enough to influencehouseholds’ consumption–investment decisions, and not toolong to generate dependency. Beneficiary households musthave clear and credible information on the size, time, andschedule of entitlements. The level of the transfer is importanttoo. Broadly, and keeping all other design features constant, a

higher level of transfers should result in a higher level ofhousehold investment, but attention needs to be paid tothresholds. Where transfers are set at a very low level relativeto household consumption, household investment followingthe transfer will be at best marginal. Significant levels ofhousehold investment are more likely to kick in after basicconsumption levels are reached in a reliable and sustainableway.

It is important to ensure that eligibility conditions do notincorporate incentives for asset depletion. Transfer programswhich make eligibility dependent on relatively liquid assetholdings, such as livestock, could generate incentives fordivestment of assets. The same applies to eligibility conditionsfocused on saving. Eligibility conditions dependent on time-invariant variables less easily manipulated by potential benefi-ciaries have fewer disincentive effects, and greater selectioneffectiveness. Transfers should be designed in ways that facili-tate household allocation of productive resources. Changes inhousehold composition and resource allocation in responseto social transfers are a large knowledge gap. On this samepoint, it is important that eligibility conditions do not includeinactivity tests. This is important, for example, in the contextof social pensions or family allowances. Social transfer pro-grams should take care not to limit the use of productive assetsavailable to the household, either intentionally or unintention-ally.

The design of social transfers should pay attention to appro-priate complementary asset accumulation interventions. Thisshould include human capital and other productive assets.Few social transfer schemes include asset protection compo-nents, but it is worth thinking carefully how these componentscould be incorporated.

There are few studies addressing the extent to which thefinancing of social transfers has adverse incentive effects onnonbeneficiaries. This is not a significant issue at present, be-cause most transfer programmes absorb a very small shareof resources in middle-income countries, while being largelyexternally financed in low-income countries. However, in themedium and longer run, when programs are increasingly fi-nanced from domestic resources, distortions associated withhigher levels of taxation will need to be studied carefully.

NOTES

1. Overviews are available (Grosh, Del Ninno, Tesliuc, & Ouerghi, 2008;Hanlon, Barrientos, & Hulme, 2010), as well as studies of specific types ofprogrammes (Fiszbein & Schady, 2009; Holzman, Robalino, &Takayama, 2009). For programme information and references see theSocial Assistance in Developing Countries database (Barrientos, Nino-Zarazua, & Maitrot, 2010), available from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1672090.

2. The linkages between social protection and growth are reasonably wellunderstood in developed countries with comprehensive welfare states(Atkinson, 1999).

3. This estimate is based on the information contained in the databasereferred to in Footnote 1.

4. Santiago Levy notes that “Progresa-Oportunidades will not directlyincrease growth. . .The Program can contribute to growth as it graduallyfosters a healthier and more educated labor force and it allows poorhouseholds to make more productive investments that have longerhorizons and higher expected returns. But that will not have a first order

effect on the country’s growth rate. This is because the first two deciles ofthe income distribution receive less than 2.5% of aggregate income inMexico. . .If all poor households’ income (net of Progresa-Oportunidadestransfers) increased by 5% a year, aggregate income would increase, atmost, by an additional 0.12% a year over the growth rate without theprogram” (Levy, 2006, pp. 19–20).

5. The studies referred to in the paper were selected on the basis that theirfindings relied on appropriate data and methods. The studies are based onhousehold level survey data, often collected for the purposes of evaluatingtransfer programs, employ econometric techniques which are appropriateto the data, and describe the structure of the data and estimation results insufficient detail. The majority of the studies discussed have been publishedin peer reviewed journals or discussion paper series.

6. See for example Besley and Coate (1992) for transfers with a workrequirement, or Skoufias (2005) for human development transfer pro-grams.

7. See Coady (2004) for a general equilibrium approach.

SOCIAL TRANSFERS AND GROWTH 19

8. This is a simplification; the sources of financing for social protection indeveloping countries vary across low and middle income countries.

9. See Kaplow (2006) for a survey.

10. See Moffitt (2002) for a survey.

11. For an example see the discussion of the differential impact of Bono

Dignidad on urban and rural pensioner households below.

12. Households were ranked through a participatory wealth assessment.Households in the bottom two categories were identified as ultra-poor,around 25% of all households. One fifth of the ultra poor were selected toparticipate in the program based on eligibility criteria.

13. There is a growing literature on this issue (Alzua, Cruces, & Ripani,2010; Ardington, Case, & Hosegood, 2009; Bertrand, Mullainathan, &Miller, 2003; Bourguignon, Ferreira, & Leite, 2003; Carvalho, 2008a,b;

Cortez Reis & Camargo, 2007; Edmonds, 2006; Ferro & Nicollela, 2007;Foguel & Paes de Barros, 2008; Freije, Bando, & Arce, 2006; Hoddinott &Skoufias, 2004; Lam, Leibbrandt, & Ranchhod, 2004; Posel, Fairburn, &Lund, 2004; Skoufias & di Maro, 2008; Skoufias & Parker, 2001)

14. The transfer component of the PETI program has been integratedinto Bolsa Famılia.

15. Some studies find marginal shifts in employment to non-farmactivities (Skoufias & di Maro, 2008; Skoufias et al., 2008).

16. Active labor market policies are beginning to receive attention in thecontext of discussions over exit strategies in transfer programs. For adiscussion of these issues in developed countries see OECD (2003).

17. Multiplier effects from social transfers are usually identified in thecontext of the assets and consumption of beneficiaries, rather than theircommunities as a whole (Sadoulet et al., 2001).

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