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  • Venice Summer Institute 2016

    POLITICAL ECONOMY ASPECTS OF INCOME (RE-)DISTRIBUTION Organiser: Jan-Egbert Sturm

    POLITICAL REGIMES AND PRO-POOR TRANSFERS IN DEVELOPING COUNTRIES

    Marina Dodlova, Anna Giolbas and Jann Lay

    CESifo GmbH Poschingerstr. 5 81679 Munich, Germany

    Tel.: +49 (0) 89 92 24 - 1410 Fax: +49 (0) 89 92 24 - 1409

    E-Mail: office@cesifo.de www.cesifo.org/venice

    20 21 July 2016

    CESifo, a Munich-based, globe-spanning economic research and policy advice institution

    Venice Summer Institute

  • Political Regimes and Pro-poor Transfers

    in Developing Countries

    Marina Dodlova, Anna Giolbasand Jann Lay

    Abstract

    The political regime constraints may create biases for the optimal design of poverty

    alleviation programs. We explicitly consider the implications of regime types for social

    policy choices. Specifically, we examine the incentives of the ruling elite to choose a so-

    cial transfer program with certain targeting mechanisms. On the basis of the new NSTP

    dataset on social transfers in developing countries for 1960-2015 (Dodlova and Giolbas,

    2016), we find that democracies attach more conditions than autocracies. In addition,

    in autocracies transfers are more often based on community-based and geographical tar-

    geting. As community-based schemes involve local intermediaries it becomes easier to

    target specific groups of population, however, such targeting proves to be more strategic.

    Autocracies then demonstrate more political than pro-poor targeting.

    JEL: D72, H53, H75

    Key words: Regime type, conditional transfers, democracy, redistribution, pro-poor

    policy

    We gratefully acknowledge financial support from the EU NOPOOR project entitled Enhancing Knowl-

    edge for Renewed Policies against Poverty (Theme SSH.2011.1, Grant Agreement No. 290752) and United

    Nations University World Institute for Development Economics Research (UNU-WIDER).German Institute of Global and Area Studies (GIGA), CESifo, Germany. Email: mdodlova@gmail.comUniversity of Gottingen and German Institute of Global and Area Studies (GIGA), Germany.University of Gottingen and German Institute of Global and Area Studies (GIGA), Germany.

    1

  • 1 Introduction

    Since the beginning of the 1990s the number of anti-poverty transfer programs has been

    remarkably increasing. These programs become fundamental for poverty alleviation and

    prove critical for maintaining the living standards of the poor. Moreover, if in developed

    countries the design and implementation of such programs have been broadly studied, in

    developing countries anti-poverty politics remains under large debate. A trade-off between

    current and future purposes of poverty reduction, selection and social exclusion problems,

    regularity, duration and budget size of social protection programs are major disputable issues.

    However, only a few studies address the impact of political constraints on the process of

    adoption of anti-poverty programs.

    The principal determinants of social policies include not only economic and historical

    prerequisites but also political motives. In developing countries where high inequality and

    poverty problems are far from uncommon, the political leaders have to base their platforms

    on redistribution and anti-poverty policies. The policymakers may adopt policies in a way

    to please the voters in case of elections, to increase office value, to pursue rent seeking, and

    eventually, to provide a certain welfare level for citizens. The policymakers need to allow for

    the constraints of political institutions, hence the latter create biases for the optimal design

    of social policy. Therefore, the key challenge is to understand at what extent social programs

    are defined by regime type and political institutions.

    This paper answers the latter question by analysing a variety of non-contributory transfer

    programs aimed at the poor in different political regimes. We consider the process of adoption

    of different types of transfer programs in democracies versus autocracies. In addition, we

    examine how political regimes influence the budget and coverage of such programs.

    We present a simple model of the choice of social transfer programs in different political

    regimes. The regime is defined as a share of people enfranchised to remove the leader in a

    standard probabilistic model. The ruling class chooses whether to adopt a transfer program

    and how much to redistribute to the poor. Further, it contrasts conditional versus uncondi-

    tional programs. The constituency is divided into three classes, the elite, middle class and

    the poor. In autocracy only the elite may remove the leader. However, the poor can dethrone

    the leader through revolution. In democracy all classes can vote, so the middle class is ruling.

    The model predicts that democracies distribute more and implement more targeted transfer

    programs. If inequality increases, democracies redistributes even more. The political poverty

    line is defined by the elite in such a way to hold power and maintain liveable inequality. The

    autocrat strives for holding power and avoids revolution. The targeted transfers for the poor

    are perfectly in line with such policy.

    Using an assembled quantitative panel dataset of non-contributory social transfer pro-

    grams in developing countries we support our theoretical predictions. We combine the data

    2

  • from Barrientos, Nino-Zarazua, and Maitrot (2010), IloLaborsta and GEES and encode the

    main characteristics of 125 social transfer programs in developing countries. We use the in-

    formation on the program type as well as its budget and coverage. We confront pure targeted

    transfer programs with transfers conditioned to asset accumulation like human development

    or productive capacity growth. Pure transfers include all cash and in-kind transfers that are

    unconditionally allocated to the poor. This group of transfers is aimed at current consump-

    tion increase and short-run income smoothing effects. Social pensions are a good example

    of such transfers. The second group of transfers combines social transfers that are available

    to the beneficiaries under special requirements as school attendance, health safeguards or

    labor supply. These social transfer programs pursue long-run effects as human, physical and

    financial asset accumulation.

    We confirm our theoretical predictions that democracies favor redistribution and ap-

    prove more transfer programs than autocracies. Also, democracies invest more in human

    capital development by supporting a higher number of conditional and integrated transfer

    schemes. With increasing inequality both democracies and autocracies choose more un-

    conditional transfer programs, whereas autocracies are significantly less likely to provide

    conditional transfers.

    Social transfer programs constitute a part of the redistribution mechanism in any coun-

    try. However, only in developing countries such programs prove to be fundamental for the

    wealth of the poor. Therefore, we limit our sample to the developing countries with low and

    middle income. Indeed, the standard proxies for redistribution like tax revenue, government

    expenditure or health and education spending are inadequate in such countries which are

    characterized by high corruption, poor governance and weak state capacity (Chu, Davoodi,

    and Gupta, 2000). Further, in developing countries pre- and post-tax revenues are only

    slightly different. That makes evident that social assistance programs play a major role in

    redistribution as redistributive transfers provide a large part of income of the poor.

    The paper proceeds as follows. The next section reviews the related literature. Section

    3 presents general set up, formulates equilibria and model predictions. Section 4 describes

    data. Section 5 reports the main empirical results. Section 6 discusses robustness checks.

    The last section concludes.

    2 Literature review

    The Meltzer and Richards (1981) seminal model assumes that because the income distribu-

    tion is always right-skewed, the median voter has below-mean income and so favors redistri-

    bution. Further, in democracy higher inequality lead to greater redistribution as the median

    voter shifts more to the left (Alesina and Rodrik, 1994). In autocracies redistribution plays

    rather a strategic role. The leader solely or the ruling elite decides on social policies. For

    3

  • example, redistribution might be used to appease the poor and prevent a revolution that

    could result in democratization (Meja and Posada, 2007). Further, by targeting specific

    groups redistribution may help to increase the number of supporters and thus contribute

    to the political survival of autocrats (Knutsen and Rasmussen, 2014). Or, on the contrary,

    redistribution may be used by the leader to reduce the wealth of some groups to limit their

    future political power (Leon, 2014).

    Despite a large body of the literature on this topic the empirical findings are very con-

    troversial. Therefore, our contribution is twofold. First, we revisit the empirical approach

    to study redistribution across regimes by focusing on social transfers that constitute a major

    part of the poors wealth in developing countries. Second, we contrast the two types of social

    transfer programs to reveal the incentives of decision makers in democracies

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