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Are poorer states worse at targeting their poor?
Economics Letters 65 (1999) 373–377 www.elsevier.com / locate / econbase
Are poorer states worse at targeting their poor? Martin Ravallion* Development Research Group, World Bank, 1818 H Street NW, Washington DC, USA Received 21 January 1999; accepted 18 May 1999
Abstract As a rule, the governments of poor states (provinces or countries) do not seem to be very good at targeting public spending to their poor. Yet anti-poverty programs often target poor states, in the hope of reaching poor people. Should this change? 1999 Elsevier Science S.A. All rights reserved. Keywords: Federalism; Foreign aid; Poverty; Targeting JEL classification: F35; H73; I38
1. Introduction Anti-poverty programs rely heavily on existing governmental structures. A national government aiming to fight poverty targets poor provinces, leaving the provincial governments to reach their own poor. Similarly, international donors sometimes rely heavily on national governments to reach their poor. This is often (administratively and politically) easier than finer targeting. As is well recognized in the public finance literature, the outcomes from decentralization will depend in part on the behavior of lower levels of government, over which the central government may have little control (see, for example, Atkinson and Stiglitz, 1980, p. 551). It is known that without successful intra-provincial targeting efforts, even dramatic redistributions from rich provinces to poor ones can have little impact on poverty.1 So the performance of poor states (countries or provinces) in reaching their poor through public spending may well be crucial to the overall outcomes from targeting poor states. From what we know about the incidence of public spending in poor countries, it would be hard to defend the view that they
*Tel.: 001-202-473-6859; fax: 001-202-522-1153. E-mail address: [email protected] (M. Ravallion) 1 For empirical evidence on this point see Datt and Ravallion (1993) (for India) and Ravallion (1993) (for Indonesia). 0165-1765 / 99 / $ – see front matter PII: S0165-1765( 99 )00173-1
1999 Elsevier Science S.A. All rights reserved.
374
M. Ravallion / Economics Letters 65 (1999) 373 – 377
typically perform well in this regard.2 Although there are exceptions, one does not often see an incidence of social spending in developing countries that is much better than uniform, whereby the absolute gains to the poor are roughly the same as to the non-poor. I do not know of any systematic comparisons of performance in targeting the poor between countries at different levels of economic development. Elsewhere, I have found that targeting performance tends to be worse in poorer provinces for a specific anti-poverty program in one country (Ravallion, 1999). Is there any systematic reason why poorer states might be less effective in reaching the poor? Imperfect information about who is ‘poor’ is commonly identified as a reason for poor targeting (see, for example, Besley and Kanbur, 1993). Possibly poor states have worse information about who is poor. This paper explores another possible reason why poor states may be less effective at targeting their poor, namely that a high incidence of poverty makes targeting the poor more costly. In the context of a rudimentary model of a state’s choice about how much to target the poor, the paper identifies conditions under which the fact of being a poor state diminishes performance in reaching the poor though public spending (Section 2). The paper then examines possible implications for the central government or international donor (Section 3).
2. Targeting performance and poverty There are poor and non-poor people within a given state’s jurisdiction, and public spending is to be allocated between them. A proportion H of the population is poor (giving the ‘headcount index’ of poverty). H is taken to be pre-determined. This assumption sweeps away issues of inter-state mobility and the fiscal externalities that mobility can generate (Wildasin, 1991; Cremer et al., 1996). The government attributes a net benefit B p (G p) to its spending G p on each poor person, and B n (G n) to its spending G n on each of the non-poor. Various interpretations of the B functions are possible; there could be expected votes in an election, or social preferences. The B functions subsume other exogenous variables, and interpreted as expected values over the distribution of any random variables influencing the benefits from making transfers to a given group. Each of the B functions is taken to be smoothly increasing and strictly concave. The state government chooses G p and G n to maximize total benefit: H.B p (G p) 1 (1 2 H )B n (G n)
(1)
subject to its budget constraint: H.G p 1 (1 2 H )G n 5 G
(2)
Let the optimal allocations be G p (H, G) and G n (H, C) for the poor and non-poor. These equate marginal benefits, B pG 5 B nG , where subscripts denote partial derivatives. The difference between optimal spending on the poor and the non-poor is: 2
Evidence and references on this can be found in van de Walle and Nead (1995), Demery (1997), van de Walle (1998), and Subbarao et al., 1997. Comparisons of inter-provincial differences in performance at reaching the poor can be found in Ravallion (1999) (for Argentina) and Lanjouw and Ravallion (1998) (for India).
M. Ravallion / Economics Letters 65 (1999) 373 – 377
T ; G p 2 G n 5 T(H, G)
375
(3)
I will call this the ‘targeting differential.’ A positive (negative) value of T can be interpreted as indicating that the program is targeted to the poor (non-poor). It is readily verified that: G pH 1 T.G pG 5 0 n
n
G H 1 T.G G 5 0
(4) (5)
where G pG 5 B nGG /J . 0
(6)
G nG 5 B pGG /J . 0
(7)
J ; H.B nGG 1 (1 2 H )B pGG , 0
(8)
Thus G pH . 0 if and only if T , 0. Amongst states targeting the poor (T . 0), the per capita amount received by the poor falls as H rises.3 This reverses amongst states with T , 0. How does the targeting coefficient vary with H? Subtracting (5) from (4) gives: T H 1 T.T G 5 0
(9)
Two cases can now be distinguished: Case 1: Targeting improves with higher spending, i.e., T G 5 (B nGG 2 B pGG ) /J . 0. Then it can be seen from (9) that T H has the opposite sign to T. For programs that are targeted to the poor (T . 0), states with a higher incidence of poverty will be less effective in reaching their poor at any given budget allocation from the center. This reverses for programs that favor the non-poor (T , 0); then poorer states will perform better at reaching their poor. If incidence is uniform (T 5 0) then targeting performance will be the same in poor states as in rich ones. Case 2: Targeting worsens with higher spending. Then (from Eq. (9)) T H has the same sign as T. For programs that favor the poor (T , 0), states with a higher H will be more effective in reaching their poor at any given allocation from the center. For programs that favor the non-poor (T , 0), poorer states will be worse at reaching their poor. The difference between these cases is whether targeting is a ‘normal good’ with respect to the budget. That is an empirical question. Evidence for various social programs in India can be found in Lanjouw and Ravallion (1999); they find that the non-poor tend to capture the early benefits consistent with Case 1 above. The same is found for an anti-poverty program in Argentina (Ravallion, 1999). However, further empirical research is needed on how targeting performance varies with total spending. 3
Note that a higher transfer from the center benefits both poor and non-poor in this model. A concave benefit function is crucial for this result. If the benefit function for the poor is linear then extra benefits will go entirely to the poor, while if the benefit function for the non-poor is linear then extra transfers will go to the non-poor.
376
M. Ravallion / Economics Letters 65 (1999) 373 – 377
3. What should the center do? The center’s choices must be consistent with the choices made by the provincial governments, conditional on the center’s actions. How should inter-state differences in average poverty incidence influence the center? The analysis is straightforward if the center has the same objective as the states. Let V(H, G) denote the maximum of (1) subject to (2) and assume that the center maximizes the population-weighted sum of V(H, G) over all states, subject to an aggregate budget constraint that fixes the population-weighted sum of G over all states. The solution equates VG (H, G) across all states.4 It is readily verified that the allocation to a given state is increasing (decreasing) in H if the targeting coefficient T is positive (negative). (Noting that VGH 5 2TVGG and that VGG ,0.) So, when the center shares the states’ objectives, and the program is targeted to the poor (T . 0), states with a higher incidence of poverty should receive more from the center even though they will be less effective at reaching their poor at any given budget allocation. What if the center’s sole objective is to maximize the amount received by the poor, irrespective of which state they live in? The center now maximizes the population-weighted sum of G p (H, G)H over all states, subject to an aggregate budget constraint. Assume that G p (H, G) is concave in G. (This is not implied by the assumptions made so far, but it will hold in special cases. For example, it will hold if B pGGG , 0 and B nGGG 5 0). Concavity in G assures that there is an interior solution to the center’s p problem, equating G G (H, G)H across all states. So the necessary and sufficient condition for the p p center’s allocation to be increasing in H is that G G 1 G GH H . 0. This is clearly a stronger condition p than when the center shares the state’s objective, since (as is readily verified) the sign of G GH is ambiguous in this model. It remains, however, that a central government or aid agency aiming to maximize the gains to the poor may well be justified in targeting poor states, even when they are less effective in targeting their own poor. Indeed, without suitable central redistributions, the behavior of state governments may well entail that the poor in poor states tend to share less in the benefits of public spending, which helps perpetuate the inter-state disparities in living conditions.
References Atkinson, A.B., Stiglitz, J.E., 1980. Lectures On Public Economics, McGraw-Hill, New York. Besley, T., Ravi, K., 1993. Principles of targeting. In: Lipton, M., van der Gaag, J. (Eds.), Including the Poor, World Bank, Washington DC. Cremer, H., Fourgeaud, V., Leite-Monteiro, M., Marchand, M., Pestieau, P., 1996. Mobility and redistribution: A survey. Public Finance 51, 325–352. Datt, G., Ravallion, M., 1993. Regional disparities, targeting and poverty in India. In: Lipton, M., van der Gaag, J. (Eds.), Including the Poor, World Bank, Washington DC. Demery, L., 1997. Benefit incidence analysis, World Bank, Washington DC, mimeo. Lanjouw, P., Ravallion, M., 1999. Benefit incidence and the timing of program capture, World Bank Economic Review, forthcoming. 4
Note that the function V is strictly concave in G, given that this holds for the B functions in (1). Hence the population-weighted sum of V(H, G) over all states is a strictly quasi-concave function of the allocation of the center’s spending over all states.
M. Ravallion / Economics Letters 65 (1999) 373 – 377
377
Ravallion, M., 1993. Poverty alleviation through regional targeting: A case study for Indonesia. In: Hoff, K., Braverman, A., Stiglitz, J.E. (Eds.), The Economics of Rural Organization,, Oxford University Press, Oxford. Ravallion, M., 1998. Reaching poor areas in a federal system, World Bank, Washington DC, Policy Research Working Paper 1901. Ravallion, M., 1999. Is more targeting consistent with less spending? International Tax and Public Finance 6, 411–419. Subbarao, K., Bonnerjee, A., Braithwaite, J., Carvalho, S., Ezemenari, K., Graham, C., Thompson, A., 1997. Safety Net Programs and Poverty Reduction: Lessons From Cross-country Experience, World Bank, Washington DC. van de Walle, D., 1998. Targeting revisited. World Bank Research Observer 13, 231–248. van de Walle, D., Nead, K. (Eds.), 1995. Public Spending and the Poor: Theory and Evidence, Johns Hopkins University Press, Baltimore. Wildasin, D.E., 1991. Income redistribution in a common labor market. American Economic Review 81, 757–774.
Are poorer states worse at targeting their poor? Martin Ravallion* Development Research Group, World Bank, 1818 H Street NW, Washington DC, USA Received 21 January 1999; accepted 18 May 1999
Abstract As a rule, the governments of poor states (provinces or countries) do not seem to be very good at targeting public spending to their poor. Yet anti-poverty programs often target poor states, in the hope of reaching poor people. Should this change? 1999 Elsevier Science S.A. All rights reserved. Keywords: Federalism; Foreign aid; Poverty; Targeting JEL classification: F35; H73; I38
1. Introduction Anti-poverty programs rely heavily on existing governmental structures. A national government aiming to fight poverty targets poor provinces, leaving the provincial governments to reach their own poor. Similarly, international donors sometimes rely heavily on national governments to reach their poor. This is often (administratively and politically) easier than finer targeting. As is well recognized in the public finance literature, the outcomes from decentralization will depend in part on the behavior of lower levels of government, over which the central government may have little control (see, for example, Atkinson and Stiglitz, 1980, p. 551). It is known that without successful intra-provincial targeting efforts, even dramatic redistributions from rich provinces to poor ones can have little impact on poverty.1 So the performance of poor states (countries or provinces) in reaching their poor through public spending may well be crucial to the overall outcomes from targeting poor states. From what we know about the incidence of public spending in poor countries, it would be hard to defend the view that they
*Tel.: 001-202-473-6859; fax: 001-202-522-1153. E-mail address: [email protected] (M. Ravallion) 1 For empirical evidence on this point see Datt and Ravallion (1993) (for India) and Ravallion (1993) (for Indonesia). 0165-1765 / 99 / $ – see front matter PII: S0165-1765( 99 )00173-1
1999 Elsevier Science S.A. All rights reserved.
374
M. Ravallion / Economics Letters 65 (1999) 373 – 377
typically perform well in this regard.2 Although there are exceptions, one does not often see an incidence of social spending in developing countries that is much better than uniform, whereby the absolute gains to the poor are roughly the same as to the non-poor. I do not know of any systematic comparisons of performance in targeting the poor between countries at different levels of economic development. Elsewhere, I have found that targeting performance tends to be worse in poorer provinces for a specific anti-poverty program in one country (Ravallion, 1999). Is there any systematic reason why poorer states might be less effective in reaching the poor? Imperfect information about who is ‘poor’ is commonly identified as a reason for poor targeting (see, for example, Besley and Kanbur, 1993). Possibly poor states have worse information about who is poor. This paper explores another possible reason why poor states may be less effective at targeting their poor, namely that a high incidence of poverty makes targeting the poor more costly. In the context of a rudimentary model of a state’s choice about how much to target the poor, the paper identifies conditions under which the fact of being a poor state diminishes performance in reaching the poor though public spending (Section 2). The paper then examines possible implications for the central government or international donor (Section 3).
2. Targeting performance and poverty There are poor and non-poor people within a given state’s jurisdiction, and public spending is to be allocated between them. A proportion H of the population is poor (giving the ‘headcount index’ of poverty). H is taken to be pre-determined. This assumption sweeps away issues of inter-state mobility and the fiscal externalities that mobility can generate (Wildasin, 1991; Cremer et al., 1996). The government attributes a net benefit B p (G p) to its spending G p on each poor person, and B n (G n) to its spending G n on each of the non-poor. Various interpretations of the B functions are possible; there could be expected votes in an election, or social preferences. The B functions subsume other exogenous variables, and interpreted as expected values over the distribution of any random variables influencing the benefits from making transfers to a given group. Each of the B functions is taken to be smoothly increasing and strictly concave. The state government chooses G p and G n to maximize total benefit: H.B p (G p) 1 (1 2 H )B n (G n)
(1)
subject to its budget constraint: H.G p 1 (1 2 H )G n 5 G
(2)
Let the optimal allocations be G p (H, G) and G n (H, C) for the poor and non-poor. These equate marginal benefits, B pG 5 B nG , where subscripts denote partial derivatives. The difference between optimal spending on the poor and the non-poor is: 2
Evidence and references on this can be found in van de Walle and Nead (1995), Demery (1997), van de Walle (1998), and Subbarao et al., 1997. Comparisons of inter-provincial differences in performance at reaching the poor can be found in Ravallion (1999) (for Argentina) and Lanjouw and Ravallion (1998) (for India).
M. Ravallion / Economics Letters 65 (1999) 373 – 377
T ; G p 2 G n 5 T(H, G)
375
(3)
I will call this the ‘targeting differential.’ A positive (negative) value of T can be interpreted as indicating that the program is targeted to the poor (non-poor). It is readily verified that: G pH 1 T.G pG 5 0 n
n
G H 1 T.G G 5 0
(4) (5)
where G pG 5 B nGG /J . 0
(6)
G nG 5 B pGG /J . 0
(7)
J ; H.B nGG 1 (1 2 H )B pGG , 0
(8)
Thus G pH . 0 if and only if T , 0. Amongst states targeting the poor (T . 0), the per capita amount received by the poor falls as H rises.3 This reverses amongst states with T , 0. How does the targeting coefficient vary with H? Subtracting (5) from (4) gives: T H 1 T.T G 5 0
(9)
Two cases can now be distinguished: Case 1: Targeting improves with higher spending, i.e., T G 5 (B nGG 2 B pGG ) /J . 0. Then it can be seen from (9) that T H has the opposite sign to T. For programs that are targeted to the poor (T . 0), states with a higher incidence of poverty will be less effective in reaching their poor at any given budget allocation from the center. This reverses for programs that favor the non-poor (T , 0); then poorer states will perform better at reaching their poor. If incidence is uniform (T 5 0) then targeting performance will be the same in poor states as in rich ones. Case 2: Targeting worsens with higher spending. Then (from Eq. (9)) T H has the same sign as T. For programs that favor the poor (T , 0), states with a higher H will be more effective in reaching their poor at any given allocation from the center. For programs that favor the non-poor (T , 0), poorer states will be worse at reaching their poor. The difference between these cases is whether targeting is a ‘normal good’ with respect to the budget. That is an empirical question. Evidence for various social programs in India can be found in Lanjouw and Ravallion (1999); they find that the non-poor tend to capture the early benefits consistent with Case 1 above. The same is found for an anti-poverty program in Argentina (Ravallion, 1999). However, further empirical research is needed on how targeting performance varies with total spending. 3
Note that a higher transfer from the center benefits both poor and non-poor in this model. A concave benefit function is crucial for this result. If the benefit function for the poor is linear then extra benefits will go entirely to the poor, while if the benefit function for the non-poor is linear then extra transfers will go to the non-poor.
376
M. Ravallion / Economics Letters 65 (1999) 373 – 377
3. What should the center do? The center’s choices must be consistent with the choices made by the provincial governments, conditional on the center’s actions. How should inter-state differences in average poverty incidence influence the center? The analysis is straightforward if the center has the same objective as the states. Let V(H, G) denote the maximum of (1) subject to (2) and assume that the center maximizes the population-weighted sum of V(H, G) over all states, subject to an aggregate budget constraint that fixes the population-weighted sum of G over all states. The solution equates VG (H, G) across all states.4 It is readily verified that the allocation to a given state is increasing (decreasing) in H if the targeting coefficient T is positive (negative). (Noting that VGH 5 2TVGG and that VGG ,0.) So, when the center shares the states’ objectives, and the program is targeted to the poor (T . 0), states with a higher incidence of poverty should receive more from the center even though they will be less effective at reaching their poor at any given budget allocation. What if the center’s sole objective is to maximize the amount received by the poor, irrespective of which state they live in? The center now maximizes the population-weighted sum of G p (H, G)H over all states, subject to an aggregate budget constraint. Assume that G p (H, G) is concave in G. (This is not implied by the assumptions made so far, but it will hold in special cases. For example, it will hold if B pGGG , 0 and B nGGG 5 0). Concavity in G assures that there is an interior solution to the center’s p problem, equating G G (H, G)H across all states. So the necessary and sufficient condition for the p p center’s allocation to be increasing in H is that G G 1 G GH H . 0. This is clearly a stronger condition p than when the center shares the state’s objective, since (as is readily verified) the sign of G GH is ambiguous in this model. It remains, however, that a central government or aid agency aiming to maximize the gains to the poor may well be justified in targeting poor states, even when they are less effective in targeting their own poor. Indeed, without suitable central redistributions, the behavior of state governments may well entail that the poor in poor states tend to share less in the benefits of public spending, which helps perpetuate the inter-state disparities in living conditions.
References Atkinson, A.B., Stiglitz, J.E., 1980. Lectures On Public Economics, McGraw-Hill, New York. Besley, T., Ravi, K., 1993. Principles of targeting. In: Lipton, M., van der Gaag, J. (Eds.), Including the Poor, World Bank, Washington DC. Cremer, H., Fourgeaud, V., Leite-Monteiro, M., Marchand, M., Pestieau, P., 1996. Mobility and redistribution: A survey. Public Finance 51, 325–352. Datt, G., Ravallion, M., 1993. Regional disparities, targeting and poverty in India. In: Lipton, M., van der Gaag, J. (Eds.), Including the Poor, World Bank, Washington DC. Demery, L., 1997. Benefit incidence analysis, World Bank, Washington DC, mimeo. Lanjouw, P., Ravallion, M., 1999. Benefit incidence and the timing of program capture, World Bank Economic Review, forthcoming. 4
Note that the function V is strictly concave in G, given that this holds for the B functions in (1). Hence the population-weighted sum of V(H, G) over all states is a strictly quasi-concave function of the allocation of the center’s spending over all states.
M. Ravallion / Economics Letters 65 (1999) 373 – 377
377
Ravallion, M., 1993. Poverty alleviation through regional targeting: A case study for Indonesia. In: Hoff, K., Braverman, A., Stiglitz, J.E. (Eds.), The Economics of Rural Organization,, Oxford University Press, Oxford. Ravallion, M., 1998. Reaching poor areas in a federal system, World Bank, Washington DC, Policy Research Working Paper 1901. Ravallion, M., 1999. Is more targeting consistent with less spending? International Tax and Public Finance 6, 411–419. Subbarao, K., Bonnerjee, A., Braithwaite, J., Carvalho, S., Ezemenari, K., Graham, C., Thompson, A., 1997. Safety Net Programs and Poverty Reduction: Lessons From Cross-country Experience, World Bank, Washington DC. van de Walle, D., 1998. Targeting revisited. World Bank Research Observer 13, 231–248. van de Walle, D., Nead, K. (Eds.), 1995. Public Spending and the Poor: Theory and Evidence, Johns Hopkins University Press, Baltimore. Wildasin, D.E., 1991. Income redistribution in a common labor market. American Economic Review 81, 757–774.