Narrow targeting makes a lot of sense for reaching the poor in some circumstances, but it can also have costs for the poor. Here are some principles for holding those costs down
In poverty alleviation, targeting means trying to shift the benefits of specific public spending programs to the poor by selecting them as the direct beneficiaries of public programs.
To its advocates, targeting is the latest solution to the poverty problem. Why spread money around when, with targeting, gains to the poor come at lower cost? In reality, targeting may reduce some program costs but raise others.
Targeting also has critics who argue that finely targeted programs have usually failed--either in fully covering the poor or in avoiding leakage to the nonpoor. Such efforts are bad for morale. They create dependency. They cannot be sustained because they lack political support. "Programs for the poor are poor programs" the criticism goes. Further, if governments effectively promote economic growth and invest in basic social services for all--through broad targeting of budge-tary allocations--there should be no need for finely targeted programs.
The truth lies somewhere in between, conclude Bank researchers Dominique van de Walle and Kimberly Nead.[1] Without any attempt at targeting, a development path on which participation in economic growth and access to basic social services are both broad--covering the poor and nonpoor--can be effective in improving the living standards of the poor. Yet, country experience--both industrial and developing--also shows that circumstances often require supplementary, more finely targeted public action (see the box).
There are many examples. Undernourished children should not be made to wait for long-term solutions (such as education and jobs) if their suffering can be relieved now at modest cost to long-term welfare.
In an extended drought, broad-based solutions may offer little to famine victims. But an effective transfer program providing food for work can mean the difference between life and death and prevent damaging responses--such as asset sales--which inhibit poverty reduction in the long term.
And even in the best of times, some among the elderly and the disabled require public assistance to meet their most basic needs.
Policies that try to identify the poor and to target benefits to them can clearly serve vital redistributive and safety net roles in a market economy. The risk: seeing targeted programs as the main instrument for reducing poverty rather than as an important complement to a broad poverty reduction strategy.
Targeting can hold down the social cost of reducing poverty. Whether it really does depends on how much it costs to identify the poor and target benefits to them--and on the size of the disincentive effects and participation costs incurred as a result of targeting. The benefits from better targeting can be large, but they are never free.
The costs of administering a program can rise substantially when you have to discriminate among beneficiaries. In the United States, administrative costs range from 12% of total costs for means-tested programs (in which recipients are screened by their income) to only 2.5% for universal programs (in which access is open to all).
Targeted transfer schemes can also cause individuals to change their behavior. For example, in countries with pervasive inter-household transfers from the rich to their poorer relations (as in Peru and the Philippines), introducing public transfer programs, such as unemployment insurance, may cause the rich to cut back on their transfers.
There may also be costs associated with taking part in targeted programs. Participants in public employment schemes must provide labor in exchange for a cash or food transfer. In so doing, they must forgo other work and the incomes they would have earned if the scheme had not been available. One study assessed forgone incomes in two villages participating in the Employment Guarantee Scheme of India's Maharashtra state at about a quarter of the total wage earnings in the scheme. A full evaluation of the scheme would have to examine the benefits net of these costs.
The popularity and sustainability of Maharashtra's Employment Guarantee Scheme is often explained by the scheme's indirect benefits. Well-off urban dwellers, whose taxes finance the scheme, support it because it stems rural migration to Bombay. The rural elite benefit from the assets built and the fact that the scheme keeps their labor force in the area through the lean seasons. And in an environment prone to drought and other sources of severe vulnerability, the scheme's promise of a job in times of need provides a safety net. Such indirect benefits help counteract a lack of political support--a further cost often associated with targeted programs.
Clearly, merely being well targeted does not ensure that a program is cost-effective in reducing poverty. A convincing evaluation should compare a scheme's impact on poverty with the impact that could have been achieved through realistic alternative uses of the same resources. It is sometimes unclear what the policy options are, but we can compare a targeted policy's impact with that attainable through a universal (untargeted) handout of the same budget.
In general, benefits and costs will be dispersed widely among the poor. That means there will be an issue of how net gains at different levels should be weighted. The most widely accepted judgment is that gains to the poorest should receive the highest weight. Without imposing an explicit formula for aggregation, much can be learned from a simple tabulation of what the likely monetary gains will be for each broad subgroup of the poor--ultra-poor, poor, and near-poor.
Also look closely at how the benefits can be enhanced--and the costs reduced--through, say, taking more care in designing and implementing the scheme.
A key lesson from experience is that the costs and benefits from fine targeting depend critically on program design. Subsidizing a food staple heavily consumed by the rich, or setting the wage rate too high in a public works scheme, can quickly destroy targeting performance. Under ideal circumstances the policy practitioner would know incomes and distribute transfers to eliminate poverty accordingly. In practice, the most extreme form of targeting--means testing--is difficult and costly to do well in developing countries. Hence the search for identifying characteristics, or indicators, that are highly correlated with low incomes.
It is always better to use correlates that are easily observed and difficult to manipulate, such as gender and old age.
Combining several indicators often works to achieve a fairly high level of targeting without resorting to costly means testing. Bangladesh's well-respected Grameen Bank credit scheme uses three screens: female gender, landlessness, and rural residence.
In some cases, letting the poor select themselves both minimizes targeting costs and results in well- targeted benefits. In self-targeting schemes, the poor, and only the poor, wish to participate. Such schemes work by imposing a cost of participation that only the poor are willing to incur--such as a work requirement in return for low wages. Only those who cannot command a better wage will turn up.
Tacking a targeted scheme onto the existing social infrastructure, such as food stamps distributed at health clinics, can also hold down administrative costs.
