Conditional Cash Transfers: Reducing Present and Future Poverty

Conditional Cash Transfers

A World Bank Policy Research Report

Conditional Cash Transfers

Reducing Present and Future Poverty

Ariel Fiszbein and Norbert Schady

with

Francisco H.G. Ferreira,

Margaret Grosh, Niall Keleher,

Pedro Olinto, and Emmanuel Skoufias

©2009 The International Bank for Reconstruction and Development / The World Bank

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Library of Congress Cataloging-in-Publication Data

Fiszbein, Ariel, 1960–

Conditional cash transfers: reducing present and future poverty /

Ariel Fizbein, Norbert Schady.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-8213-7352-1 — ISBN 978-0-8213-7353-8 (electronic)

1. Transfer payments—Latin America—Case studies. 2. Economic assistance, Domestic—Latin America—Case studies. 3. Poverty—Government policy—Latin America—Case studies. I. Schady, Norbert Rüdiger, 1967- II. Title.

HC130.P63F564 2009

338.91098—dc22

2008047645

Cover design: Drew Fasick

Cover image:Chorale and Landscape by Paul Klee, 1921, 125 (gouache, pencil, and oil on paper, 35 × 31 cm); Zentrum Paul Klee, Bern, private loan. Used with permission. © 2009 Artists Right Society (ARS) New York/ VG Bild-Kunst, Bonn.

Contents

Foreword

The potential impact of the global financial crisis of 2008 on living standards in the developing world has given renewed emphasis to the importance of social safety net programs. The right policies can be a smart investment in an uncertain world. This report reviews the evidence on conditional cash transfers (CCTs)—safety net programs that have become popular in developing countries over the last decade. It concludes that CCTs generally have been successful in reducing poverty and encouraging parents to invest in the health and education of their children.

The CCT programs studied in the report span a range of low- and middle-income countries; large and small programs; and those that work at local, regional, and national levels. Although there are important differences between countries and regions in how CCTs are used, they all share one defining characteristic: they transfer cash while asking beneficiaries to make prespecified investments in child education and health.

The largest CCTs, such as Brazil’s Bolsa Família and Mexico’s Oportunidades, cover millions of households. In Chile and Turkey, CCTs are focused more narrowly on extremely poor and socially excluded people, whereas CCTs in Bangladesh and Cambodia have been used to reduce gender disparities in education. Most recently, CCT pilot programs are being implemented in Sub-Saharan Africa to help alleviate the plight of millions of orphans in the wake of the continent’s devastating HIV/AIDS epidemic. CCTs are proven versatile programs, which largely explains why they have become so popular worldwide.

This report considers the impact that CCTs have had on current poverty, education, health, and nutrition outcomes. It draws heavily on a large number of carefully constructed impact evaluations of CCT programs. As the authors note, it would not have been possible to write this report without the efforts made by the administrators of CCT programs themselves, a number of academics, and staff at international organizations, including the World Bank, to encourage and sustain these evaluations, and to make the results widely available. This clearly is a legacy worth sustaining.

By and large, CCTs have increased consumption levels among the poor. As a result, they have resulted in sometimes substantial reductions in poverty among beneficiaries—especially when the transfer has been generous, well targeted, and structured in a way that does not discourage recipients from taking other actions to escape poverty. Because CCTs provide a steady stream of income, they have helped buffer poor households from the worst effects of unemployment, catastrophic illness, and other sudden income shocks. And making cash transfers to women, as virtually all CCTs do, may have increased the bargaining power of women (itself an important goal in many contexts).

In country after country, school enrollment has increased among CCT beneficiaries—especially among the poorest children, whose enrollment rates at the outset were the lowest. CCT beneficiaries also are more likely to have visited health providers for preventive checkups, to have had their children weighed and measured, and to have completed a schedule of immunizations. These are important accomplishments. Nevertheless, the report shows that the evidence of CCT impacts on final outcomes in health and education—achievement and cognitive development rather than school enrollment, child height for age rather than growth monitoring—is more mixed. An important challenge for the future is better understanding what complementary actions are necessary to ensure that CCTs have greater impact on these final outcomes. This report argues that these complementary actions broadly fall into two categories: policies that improve the quality of the supply of health and education services, and policies that help promote healthier and more stimulating environments for children in their homes.

Even the best-designed CCT program cannot meet all the needs of a social protection system. It is, after all, only one branch of a larger tree that includes workfare, employment, and social pension programs. The report therefore considers where CCTs should fit within a country’s social protection strategy.

As the world navigates a period of deepening crisis, it has become vital to design and implement social protection systems that help vulnerable households weather shocks, while maximizing the efforts of developing countries to invest in children. CCTs are not the only programs appropriate for this purpose, but as the report argues, they surely can be a compelling part of the solution.

Justin Lin

Senior Vice President and Chief Economist

The World Bank

Joy Phumaphi

Vice President, Human Development Network

The World Bank

January 2009

Acknowledgments

This policy research report was managed by ariel fiszbein and Norbert Schady. Contributing members of the report were Francisco H.G. Ferreira, Margaret Grosh, Niall Keleher, Pedro Olinto, and Emmanuel Skoufias. Substantial contributions were provided by Maria Victoria Fazio, Deon Filmer, Emanuela Galasso, Margaret Koziol, Phillippe Leite, Mette Nielsen, and Christine Weigand.

The report benefited from comments from an advisory committee, which included Harold Alderman (World Bank), Orazio Attanasio (University College, London), Jere Behrman (University of Pennsylvania), Timothy Besley (London School of Economics), Santiago Levy (Inter-American Development Bank), Christina Paxson (Princeton University), and Laura Rawlings (World Bank).

François Bourguignon, in his role as chief economist of the World Bank, provided strong encouragement and intellectual support to the report. The report was written under the direction and general supervision of Elizabeth King (research manager) and Martin Ravallion (director, Development Research Group).

The authors have benefited from comments and useful input from Vivi Alatas, Colin Andrews, Caridad Araujo, Jehan Arulpragasam, Felipe Barrera, Maria Isabel Beltran, Nazmul Chaudhury, David Coady, Dante Contreras, Rafael Cortez, Aline Coudouel, Amit Dar, Gaurav Datt, Damien de Walque, Carlo del Ninno, Gershon Feder, Roberta Gatti, Paul Gertler, Rebekka Grun, Phillip Hay, Budi Hidayat, Jason Hobbs, Robert Holzmann, Emmanuel Jimenez, Theresa Jones, Peter Lanjouw, Benedicte Leroy De la Briere, Dan Levy, Maureen Lewis, Anja Linder, Kathy Lindert, Humberto Lopez, William Maloney, Andrew Mason, Alessandra Marini, Annamaria Milazzo, Amna Mir, Fernando Montenegro, Juan Martin Moreno, Edmundo Murrugarra, Shinsaku Nomura, Berk Ozler, Lucy Payton, Mansoora Rashid, Helena Ribe, Dena Ringold, Manuel Salazar, Tahseen Sayed, Nistha Sinha, Hedy Sladovich, Emma Sorensson, David Steel, Cornelia Tesliuc, Alan Winters, and Elif Yukseker.

Financial support from the Development Impact Evaluation Initiative, the Knowledge for Change Program, and the Spanish Impact Evaluation Fund helped greatly in the preparation of this report.

Acronyms

All dollar amounts are in U.S. dollars, unless otherwise indicated.

Overview

Conditional cash transfers (CCTS) are programs that transfer cash, generally to poor households, on the condition that those households make prespecified investments in the human capital of their children. Health and nutrition conditions generally require periodic checkups, growth monitoring, and vaccinations for children less than 5 years of age; perinatal care for mothers and attendance by mothers at periodic health information talks. Education conditions usually include school enrollment, attendance on 80–85 percent of school days, and occasionally some measure of performance. Most CCT programs transfer the money to the mother of the household or to the student in some circumstances.

Countries have been adopting or considering adoption of CCT programs at a prodigious rate. Virtually every country in Latin America has such a program. Elsewhere, there are large-scale programs in Bangladesh, Indonesia, and Turkey, and pilot programs in Cambodia, Malawi, Morocco, Pakistan, and South Africa, among others. Interest in programs that seek to use cash to incentivize household investments in child schooling has spread from developing to developed countries—most recently to programs in New York City and Washington, DC.

In some countries, CCTs have become the largest social assistance program, covering millions of households, as is the case in Brazil and Mexico. CCTs have been hailed as a way of reducing inequality, especially in the very unequal countries in Latin America; helping households break out of a vicious cycle whereby poverty is transmitted from one generation to another; promoting child health, nutrition, and schooling; and helping countries meet the Millennium Development Goals. Do those and other claims make sense? Are they supported by the available empirical evidence? What does all of this imply for the way in which countries that have CCTs should structure or reform the programs? What about countries that do not have CCTs but are considering implementing them, often in circumstances very different from those in which the programs were first introduced?

This report seeks to answer those and other related questions. Specifically, it lays out a conceptual framework that considers the economic and political rationale for CCTs; it reviews the very rich evidence that has accumulated on CCTs, especially arising from impact evaluations; it discusses how the conceptual framework and the evidence on impacts should inform the design of CCT programs in practice; and it considers where CCTs fit in the context of broader social policies.

The report shows that there is good evidence that CCTs have improved the lives of poor people. Transfers generally have been well targeted to poor households, have raised consumption levels, and have reduced poverty—by a substantial amount in some countries. Offsetting adjustments that could have blunted the impact of transfers—such as reductions in the labor market participation of beneficiaries—have been relatively modest. Moreover, CCT programs often have provided an entry point to reforming badly targeted subsidies and upgrading the quality of safety nets. The report thus argues that CCTs have been an effective way to redistribute income to the poor, while recognizing that even the best-designed and best-managed program cannot fulfill all of the needs of a comprehensive social protection system. CCTs therefore need to be complemented with other interventions, such as workfare or employment programs and social pensions.

The report also considers the rationale for conditioning the transfers on the use of specific health and education services by program beneficiaries. Conditions can be justified if households are underinvesting in the human capital of their children—for example, if they hold incorrect beliefs about the returns to these investments; if there is incomplete altruism between parents and their children; or if there are large externalities to investments in health and education. Political economy considerations also may favor conditional over unconditional transfers: taxpayers may be more likely to support transfers to the poor if they are linked to efforts to overcome poverty in the long term, particularly when the efforts involve actions to improve the welfare of children.

CCTs have led poor households to make more use of health and education services, a key objective for which they were designed. Nevertheless, the evidence on improvements in final outcomes in health and education is more mixed. Thus CCTs have increased the likelihood that households will take their children for preventive health checkups, but that has not always led to better child nutritional status; school enrollment rates have increased substantially among program beneficiaries, but there is little evidence of improvements in learning outcomes. These findings suggest that to maximize their potential effects on the accumulation of human capital, CCTs should be combined with other programs to improve the quality of the supply of health and education services, and should provide other supporting services. They also suggest the need to experiment with conditions that focus on outcomes rather than on the use of services alone.

The CCT Wave

Interest in and the scope of CCT programs have grown enormously in the last 10 years. The maps shown in figure 1 reveal the expansion between 1997 and 2008.

Figure 1 CCTs in the World, 1997 and 2008

Source: World Bank.

Paralleling the rise in the number of countries with CCT programs has been an increase in the size of some programs. Mexico’s PROGRESA started with approximately 300,000 beneficiary households in 1997, but now covers 5 million households. (This program was renamed Oportunidades in 2001. In this report we will refer to the program as Oportunidades.) Brazil started with municipal Bolsa Escola programs in Brasilia and the municipality of Campinas. Those programs led to replication by local governments, followed by formulation of sector-specific federal programs, and then their unification and reform. Today the federal Bolsa Família program serves 11 million families (46 million people). In other countries, the increase in size has been less explosive but still notable. In Colombia, for instance, the program’s initial goal was 400,000 households, but it had expanded to cover 1.5 million beneficiary households by 2007.

CCTs vary a great deal in scope. Some programs are nationwide, others are niche programs that serve a regional or narrow target population, and yet others are small-scale pilot efforts. Some programs require that households receiving transfers comply only with schooling conditions; others, especially programs in Latin America and the Caribbean, require that households comply with both schooling and health conditions. Table 1 presents a partial list of the CCT programs considered in this report. The list is not exhaustive in that it does not cover all existing programs. There are additional programs in operation for which little information was available, and some programs fit the CCT label less well than do others.

Table 1 Matrix of Program Size and Extent of Conditions

Source: Authors’ compilation.

The role of CCT programs in social policy varies from place to place as a consequence of differences in both program design and the context in which they operate. Most obviously, CCT programs vary with respect to pertinent measures of size. In terms of absolute coverage, they range from 11 million families (Brazil) to 215,000 households (Chile) to pilot programs with a few thousand families (Kenya, Nicaragua). In terms of relative coverage, they range from approximately 40 percent of the population (Ecuador) to about 20 percent (Brazil, Mexico) to 1 percent (Cambodia). In terms of budget, the costs range from about 0.50 percent of gross domestic product (GDP) in such countries as Brazil, Ecuador, and Mexico to 0.08 percent of GDP (Chile). The generosity of benefits ranges from 20 percent of mean household consumption in Mexico, to 4 percent in Honduras, and to even less for programs in Bangladesh, Cambodia, and Pakistan.

Many of the CCT programs in middle-income countries have pursued an integrated approach to poverty reduction, balancing goals of social assistance and human capital formation. They cover children from birth (or before) through the mid-teens, with conditions on health care use for children from birth to age 5 or 6 and with conditions on school enrollment thereafter. Programs usually are administered by ministries of social welfare or freestanding agencies under the presidency. Examples of that type of CCT include the programs in Brazil, Colombia, El Salvador, Jamaica, Mexico, Panama, and Turkey.

Mexico’s Oportunidades is one of the iconic cases. The program started early, its evolution has been carried out thoughtfully, and it has been successful. What really makes Mexico’s program iconic are the successive waves of data collected to evaluate its impact, the placement of those data in the public domain, and the resulting hundreds of papers and thousands of references that such dissemination has generated.

Brazil also is exemplary in its use of CCTs. It started early, its programs have evolved enormously, and the current program (Bolsa Família) is similar to Mexico’s program in coverage and importance. In various respects, Brazil’s Bolsa Família program provides something of an interesting contrast to the Mexican case—the issue of federalism is more in the forefront; it takes a softer, more gradual tack on conditions; and puts a shade more emphasis on redistribution than on human capital formation. Also, unlike Oportunidades, the Brazilian programs did not explicitly incorporate impact evaluations in their design; as a result, much less is known about the effect they have had on consumption, poverty, health, nutrition, and education.

Chile Solidario works in a very different way to fill a different niche. The program is targeted only to extremely poor people, about 5 percent of Chile’s population. It differs notably from the classic CCT design by customizing conditions. Families initially work intensely with social workers to understand actions that could help them get out of extreme poverty. They then commit to action plans that become the household-specific conditions for receiving the benefit. The cash transfer itself really is intended only to motivate clients to make use of social workers’ services. Thus far, Chile Solidario is a model unto itself, although other programs are moving to emulate it to a degree.

Another branch of the CCT program family focuses on education in low-income countries. The programs usually cover a more narrow segment of education—some only secondary (Bangladesh’s Female Secondary School Assistance Program [FSSAP], Cambodia’s Japan Fund for Poverty Reduction [JFPR], and Cambodia Education Sector Support Project [CESSP]), some only primary (programs in Bolivia and Kenya and proposals in Nigeria and Tanzania), and occasionally both (Indonesia’s Jaring Pengamanan Sosial [JPS] program). The genesis of these programs is rather varied. In Bangladesh, the FSSAP was part of a strategy to close a then-significant gender gap in education. In Indonesia, the JPS program was instituted following the East Asian financial crisis to prevent students from dropping out. In Kenya and Tanzania, the programs are geared especially to coping with the crisis of orphans and vulnerable children, a crisis that has burgeoned in the wake of HIV/AIDS.

CCT programs require the same systems as other transfer programs: at minimum, (1) a means to establish the eligibility of clients and enroll them in the program, and (2) a mechanism to pay their benefits. Strong monitoring and evaluation systems also are desirable. CCTs further require a means to monitor compliance with conditions and to coordinate among the several institutions involved in operating the program. In general, CCT programs have handled these systems rather well and, in some cases, they have been leaders in modernizing social assistance practice.

Almost all CCTs have tried to target their benefits rather narrowly to the poor through a combination of geographic and household targeting (mostly via proxy means testing). Moreover, many programs use community-based targeting or community vetting of eligibility lists to increase transparency. In many cases, CCTs have been the drivers for developing poverty maps or household targeting systems in their countries, or for upgrades to them. Indeed, it would not be an exaggeration to say that CCTs have moved forward the state of the art and standards for targeted programs generally.

A number of CCT programs have had unusually proactive management based on cutting-edge technical systems, especially with respect to monitoring and evaluation. Two features inherent to CCTs—the number of actors involved and the need for extensive information management to verify compliance with conditions—may have interacted in ways that have spurred creative development in monitoring and management. This excellence in systems, and the high degree of transparency in documentation and information that characterizes most programs, has contributed to the attraction of CCTs, although they are not inherent to them. The evaluation culture around CCTs is quite strong, well beyond traditional practice in social policy. Many programs have conducted impact evaluations with credible counter-factuals. Of those programs, a large share used experimental methods, at least initially. This culture of evaluation is spreading not only from one CCT program to another, but also from CCTs to other programs within the same countries.

The role and design of CCT programs is evolving. Early successes with the basic model are prompting countries to address second and third rounds of challenges, including the following: Should the emphasis on expanding the supply of services be complemented with efforts to improve the quality of those services? Should the range or definition of conditions be changed, for example, to reward performance instead of, or in addition to, mere service use? What can be done to ensure that youth who are aging out of the school support provided by the program can get jobs or further training? What should be the balance between targeting younger and older children? In some countries, CCT programs themselves are addressing these challenges through adjustments to their basic design; in other cases, they are catalyzing changes in other programs.

The Arguments for CCTs

Although market-driven economic growth is likely to be the main driver of poverty reduction in most countries, markets cannot do it alone. Public policy plays a central role in providing the institutional foundations within which markets operate, in providing public goods, and in correcting market failures. In addition to laying the foundations for economic growth, policy can supplement the effects of growth on poverty reduction, and one of the instruments that governments can use to that end is direct redistribution of resources to poor households. Direct cash transfers have opportunity costs (in terms of forgone alternative public investments) and may have some perverse incentive effects on recipients, but there is a growing body of evidence that in some cases transfers may be both equitable and efficient.

Conditional cash transfers make payments to poor households on the condition that those households invest in the human capital of their children in certain prespecified ways. Because attaching a constraint on the behavior of people one is trying to help is an unorthodox approach for economists, this report reviews the conceptual arguments for making cash transfers conditionally.

There are two broad sets of arguments for attaching conditions to cash transfers. The first set applies if private investment in children’s human capital is thought to be too low. The second set applies if political economy conditions show little support for redistribution unless it is seen to be conditioned on good behavior by the deserving poor.

Under the first group of arguments, private investment in human capital can be too low in two different senses. First, it can be below even the private optimal level for the individual children in question if household decision makers hold persistently misguided beliefs about either the nature of the process of investments in child education and health or the subsequent returns to these investments. For instance, parents may believe that earnings respond to education less elastically than they actually do. In practice, there is some evidence of this from developing countries. Among 15- to 25-year-olds in Mexico, the expected returns to schooling (calculated from questions asked of respondents) are substantially lower than the realized returns (the Mincerian returns calculated from a household survey), especially among children of fathers with low education levels (Attanasio and Kaufmann 2008). In the Dominican Republic, eighth-grade students estimate the rate of return to secondary school to be only one quarter to one third of the rate derived from an income survey (Jensen 2006).

Parents also may discount the future more heavily than they should, perhaps especially with regard to the returns on investments in their children—a case of incomplete altruism. A slightly different but equally plausible version of this problem is a conflict of interest between the parents themselves as opposed to, or in addition to, one between parents and children. Mothers’ objectives may be more closely aligned with those of all her children or, perhaps, especially with those of her daughters.¹ That alignment often is given as a justification for giving the cash transfer to the mother rather than to the father, as is common practice in most CCT programs. In many countries in South Asia, girls’ schooling lags well behind that of boys, even though the returns to female education—both in wages, and in terms of child health—are at least as large as those for males. Low levels of investment in girls’ schooling may be rational from the viewpoint of parents who are thinking of their own welfare (either because girls are more costly in terms of dowries or because boys are more likely to take care of their parents than are girls who move to their husbands’ homes upon marriage), but they are prima facie evidence of a socially inefficient outcome. CCTs that compel parents to send their daughters to school are one way to address inefficient and inequitable gender disparities.

In general, these informational, principal-agent, or behavioral arguments can be seen as providing microfoundations for much older paternalistic arguments for redistribution in-kind or with strings attached.

The second sense in which private investments in children’s health and education can be too low is that the private optimal level may be below the social optimal level. That situation could occur if there are positive externalities from education and health across households. Empirically, many health investments have important external benefits.² In the case of education, externalities might arise if there are increasing returns to skilled labor in production, at the aggregate level, or if education lowers crime.

How large these externalities are and whether (conditioned) cash transfers are the most effective instruments to correct for them, however, remains to be determined. In most countries, education and health services are already heavily subsidized. In many cases, they are publicly provided free of charge. To argue for an additional subsidy that compensates households for some of the indirect or opportunity costs of using these services, on the basis of the externality alone, would require showing that those externalities are quite large.

The political economy family of arguments centers around the notion that targeting tends to weaken the support for redistribution because it reduces the number of beneficiaries relative to the number of those who are taxed to finance the program. Whereas the response most commonly considered in the literature is to establish broad-based redistribution that includes the middle class, an alternative is to appeal to the altruistic motive of voters: the same people who object to targeted transfers as pure handouts might support them if they are part of a social contract that requires recipients to take a number of concrete steps to improve their lives or those of their children.

The notion that CCT programs constitute a new form of social contract between the state and beneficiaries is apparent in the use of the term co-responsibilities (instead of conditions) in a majority of programs, at least in Latin America. When conditions are seen as co-responsibilities, they appear to treat the recipient more as an adult capable of agency to resolve his or her own problems. The state is