ECONOMIC ARGUMENTS IN FAVOR AND AGAINST CONDITIONAL CASH TRANSFERS (CCTS)
Published Feb. 25, 2020, 11:57 a.m. by Moderator
This essay is going to discuss the pros and cons of conditional cash transfers as instruments of poverty alleviation. It is also going to use as part of the case study Oportunidades a conditional cash transfer program (CCT’s) in Mexico to give an insight into the positive and negative effects of the conditional cash transfers on the beneficiaries and the wider society at large. The analysis will also compare CCT’s programs in Mexico and CCT’s in other countries to understand their impact on different communities. Conditional cash transfers are monies that are given to underprivileged households subject to them fulfilling certain obligations which could be anything from school attendance, healthcare visits, and compliance with dietary requirements. Conversely, unconditional cash transfers are given out without any obligations required of the beneficiaries (Bergstrom and Dodds, 2018).
Conditional cash transfers are social safety net programs that are intended to alleviate poverty levels that are highest in emerging countries. The CCT’s are essentially meant to give underprivileged families additional income to be able to meet their basic needs. Even though conditional cash transfers have obligations, how the money is spent is the prerogative of the recipients. The objective is to alleviate the recipients’ social wellbeing as well as improve their health and education levels (Son, 2008). The restrictions are put in place to target a specific group within the underprivileged communities. The conditional cash transfer program may be aimed at particular demographics. For instance, pregnant mothers or adolescents who have dropped out of school. This is done to alleviate the conditions of a specific target group within the underprivileged communities (Doetinchem, Xu and Carrin, 2008).
Conditional cash transfer programs could be local, regional or national. Different countries have implemented localized conditional cash transfers programs. For example, in Brazil and Mexico, the CCT’s programs distribute monies to millions of underprivileged families. In Kenya, the CCT’s programs are meant to ease the financial burden of orphans who had lost their parents to the HIV virus. In Bangladesh, the program is aimed at narrowing the gender gap in education (World Bank, 2014) while in Cambodia the CCT’s programs are aimed at pregnant women and mothers (World Bank, 2016). In Turkey and Chile, the CCT’s programs are aimed at assisting underprivileged and marginalized communities (Fiszbein et al., 2009).
CCT’s programs have been widely effected in many states of the world. A 2009 report by the World Bank indicates that CCT’s have made constructive impacts on schooling and health care. The report writes conditional cash transfer programs that are well-structured and well-targeted have made an impact on reducing poverty levels. Conditional cash transfers have provided underprivileged families with regular income which has lessened the effects of unemployment, illness and sudden emergencies. Conditional cash transfers targeting women have amplified the negotiating power of women (Fiszbein et al., 2009).
The World Bank report indicates that CCT’s have increased school enrolment rates, especially among school-going children from underprivileged families who had not enrolled in school due to financial difficulties. Conditional cash transfers beneficiaries also help in improving health through scheduled health visits for beneficiaries. The main challenge for policymakers is an enhanced understanding of what matching activities are essential to guarantee that conditional cash transfers have a greater effect on these final outcomes. There is no standard model for conditional cash transfers that work for all (Fiszbein et al., 2009).
Arguments for and against Conditional Cash Transfers
The role of CCT’s programs in public programs differs from area to area as a result of modifications in both program strategy and the local environment. Most visibly, conditional cash transfer programs differ in terms of population size. In terms of the total number of beneficiaries conditional cash transfer programs range from the Brazilian Bolsa Familia and Oportunidades in Mexico which cover millions of households to hundreds of thousands of households in Chile’s Solidario to experimental programs with thousands of households like in Kenya and Nicaragua (Fiszbein et al., 2009).
In terms of population percentages, conditional cash transfer models range from covering almost half of the populace in Ecuador to about 20% in Brazil and Mexico to less than 2% in Cambodia. With regard to budget allocation, the financial overheads vary from less than 1% of gross domestic product (GDP) in Brazil, Ecuador, Mexico, and Chile. In terms of size of supports, CCT’s programs range from about 21% of average domestic intake in Mexico to less than 5% in Honduras. The majority of the conditional cash transfer programs in developed countries follow a unified methodology to reduce income inequalities by harmonizing objectives of social supports and capacity building (Fiszbein et al., 2009).
Mexico’s CCT’s program Oportunidades is one of the most successful. Oportunidades has evolved since its early inception and now covers at least 5 million people. The main reason why Mexico’s Oportunidades program has had so much success is because of its evaluation instrument that has collected huge amounts of data that are available to the public occasioning publication of many research papers and references documenting its policy implications.
Chile’s conditional cash transfer program Solidario differs from Mexico’s Oportunidades. The conditional cash transfer program targets only exceedingly underprivileged people that comprise about 5% of the populace. The CCT program has been designed with the local context in mind. In the initial stages of Chile’s conditional cash transfer program Solidario, underprivileged families collaborate with social workers to understand activities that could support the families to escape from the clutches of extreme poverty. The beneficiaries then commit to their chosen household-specific action plans as conditions for receiving the cash benefits. The intention of the CCT is to encourage beneficiaries to utilize social workers’ services.
Another approach of CCT’s programs is family-focused money transfers with an emphasis on education in emerging nations. The conditional cash transfer typically targets a specific area of education, For example, the CCT’s in Bangladesh are aimed at reducing the gender disparities in secondary school enrolment rates while in some only secondary. In Cambodia’s Japan Fund for Poverty Reduction (JFPR), and Cambodia education sector support programs are also targeted at education for marginalized communities.
Economists have listed several disadvantages of CCT’s. Firstly, some of the underprivileged families might discover the restrictions too expensive to obey. The reasons could be due to the distance of the clinics for health check-ups conditions or the need for the children to assist parents at home outweighs the financial benefits of the conditional cash transfer programs. These social conditions may exclude people genuinely who need cash assistance. The underprivileged families that have opted into the conditional cash transfer program may comply with the obligations for a short time to get the cash but it becomes much difficult in the long run if the costs of complying with the conditions are further compounded by prevailing social conditions such as underprivileged quality of education that makes parents prefer their children staying at home to help them rather than attend school. Conditional cash transfers push underprivileged families to fulfill goals that they might not normally achieve.
There is some indication of this phenomenon from the results of CCT’s in developing countries. For example, in Mexico’s Oportunidades it was observed that among 15 to 25-year-olds, the anticipated upsurge in school enrolments was significantly lower than the expected school enrolments. School enrolments were particularly low among children whose fathers possessed low academic qualifications. In the Dominican Republic, the school enrolment rates for eighth-grade students was estimated at a quarter to a third of the expected rates (World Bank 2013).
Secondly, conditional cash transfers require adequate funding to make any significant impacts on poverty reduction. Most of the underprivileged families that are targeted by conditional cash transfers are from low-income countries whose government budgets are stretched thin. Opponents of conditional cash transfers argue that the best approach for mitigating poverty is economic growth. The main focus of governments in developing economies is building basic infrastructures such as roads, railways, ports, schools and hospitals. In comparison with public infrastructure that directly helps all citizens, conditional cash transfers to underprivileged families are not seen as viable investments by most governments in the developing economies.
Thirdly, conditional cash transfers provide beneficiaries with the wrong incentives. Opponents of conditional cash transfers argue that providing individuals with essential basic needs enables them to become unproductive as long as these basic necessities are catered for by the public. The beneficiaries might not take opportunities to improve their skills to become employed or self-employed in the future. In short, opponents of conditional cash transfers argue that the programs encourage laziness and discourage self-reliance. They argue that people should be resourceful and not depend on welfare to live.
The proponents of conditional cash transfers have in turn came out with arguments to support their position. In addressing the issue that governments of developing countries should focus on economic growth as the mechanism for poverty alleviation. Proponents argue that in developing countries the benefits of public infrastructure and expenditure do not reach the majority of the underprivileged. For example, in Nicaragua, only 1 out of 10 of the bottom 10% of the population could access power compared to 9 out of 10 of the top 10%. In Mexico, the electricity subsidies also had a negative effect of favoring urban areas over rural areas where electricity infrastructure is non-existent or very limited. Well-structured and well-targeted conditional cash transfers are able to reach underprivileged populations that have been left out better than direct spending on public infrastructure.
The second argument in favor of conditional cash transfers addresses the issues of self-reliance and the claim that direct cash transfers create a culture of self-dependency among beneficiaries. There is no perfect CCT program. Even the Oportunidades CCT program in Mexico only became successful after years of fine-tuning their approach to fit the local context, manage expectations and provide an instrument upon which successes and failures are measured. Research from CCT programs in Mexico, Ecuador and Cambodia indicates that the cash disbursements had modest impacts on the productivity of beneficiaries (Bhatt, 2017). In addition to this CCT programs in Brazil, Cambodia, Ecuador, Mexico, and Nicaragua have reduced the number of child laborers. Evidence also suggests that beneficiaries of Mexico’s Oportunidades who invested a certain percentage of their cash transfers into meaningful opportunities had higher average consumption rates. However, this was not the case in Nicaragua.
It must be noted that conditional cash transfer programs do not guarantee educational success to beneficiaries. It only facilitates their access to education. For example in Mexico’s Oportunidades program, the education outcomes indicated that adults in the programs completed more school years than their counterparts outside the program. However, the new educational levels attained by beneficiaries did not translate to higher wages. Evidence also suggests that the higher enrolment rates that were witnessed did not translate to better academic performance which proves the point that conditional cash transfers alone cannot alleviate poverty effectively until other underlying conditions are taken into consideration.
Effective conditional cash transfer programs should start at an early age for the children of beneficiaries to get a firm educational background to be at par with their peers in school. World Bank data indicates that there has been significant improvement in secondary school enrolment of girls in low-income countries (Duman, 2019). In Malawi, for instance, conditional cash transfers significantly improved school attendance while unconditional cash transfers delayed marriage and reduced incidences of teenage pregnancy (PovertyActionLab, 2019).
Conditional cash transfers provide underprivileged families with money to be used for healthcare and educational activities which ultimately improves the quality of life of the beneficiaries and their overall productivity. If a beneficiary gains a new skillset, their chances of earning regular income are magnified. In the case of health, a sick person is not economically productive due to physical limitations. Conditional cash transfers give beneficiaries access to adequate health which improves their lives and stops the spreading of deadly infections that threaten the lives of the public.
Thirdly, conditional cash transfers mitigate the losses incurred by underprivileged families due to economic downturns, inflation, and loss of income. Conditional cash transfers give underprivileged families facing economic hardships a safety net to cope with the difficulties that are brought about by the loss of regular income. Lastly, economic inequalities are brought about by many social factors such as race, gender, age or family backgrounds. Inequality of opportunity requires a multi-dimensional approach and it is incumbent upon the state to legally and financially redress these inequalities.
Efficient cash distribution systems are sometimes hampered by market forces. Many times market forces coupled with financial difficulties make it very difficult for a beneficiary to become productive. Underprivileged families do not have adequate financial resources to uplift themselves, the conditional cash transfer programs enable them to invest in business opportunities, healthcare, and education. For example, empirical evidence in Ghana indicates that underprivileged families might be unable to exploit income-generating activities that could significantly improve their lives due to financial constraints.
In 1999, Goldstein and Udry conducted a study of Ghanaian farmers where a majority had declined to migrate to pineapple cultivation and stuck to their traditional maize and cassava plants even though the expected return from pineapple cultivation was 1200%. The farmers who had not migrated cited the lack of financial resources to effectively cultivate pineapples. This is a classic example of an imperfect credit market that is beyond the reach of ordinary citizens. Conditional cash transfers would have made it easier for these Ghanaian farmers to migrate to a more profitable crop that would have made a big difference in their incomes, families and local economy.
Conditional cash transfers are one of the major approaches that states should implement to reduce poverty levels. One of the reasons cited by proponents is that CCT programs are more effective in poverty alleviation than direct subsidies on products and services. Conditional cash transfers are able to be accessed by harder to reach communities and are effective when well-structured and well-targeted. The social benefits derived from conditional cash transfers outweigh the social concerns raised by its opponents. CCT’s are an excellent way of the reallocation of revenue to marginalized communities and are credited for about 21% decrease in income inequalities in Brazil and Mexico respectively and around 15% drop in Chile (Soares et al., 2009).
Bergstrom, K. and Dodds, W. (2018). The Targeting Benefit of Conditional Cash Transfers. [online] Web.stanford.edu. Available at: https://web.stanford.edu/~katyberg/The%20Targeting%20Benefit%20of%20Conditional%20Cash%20Transfers.pdf [Accessed 1 May 2019].
Bhatt, A. (2017). Unconditional Cash Transfers: Lessons from Ecuador - Chicago Policy Review. [online] Chicago Policy Review. Available at: http://chicagopolicyreview.org/2017/11/10/unconditional-cash-transfers-lessons-from-ecuador/ [Accessed 2 May 2019].
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Duman, A. (2019). Conditional Cash Transfers in Turkey: Advantages and Disadvantages. [online] Available at: https://publications.ceu.edu/sites/default/files/publications/11.pdf [Accessed 2 May 2019].
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World Bank. (2013). Conditional Cash Transfer Program and Subsidies in the Dominican Republic. [online] Available at: http://www.worldbank.org/en/results/2013/04/17/improving-the-quality-of-public-spending-and-providing-social-protection-to-the-underprivileged-in-the-dominican-republic [Accessed 2 May 2019].