Files
Abstract
It is now widely accepted that social safety nets play a crucial role in any comprehensive
poverty alleviation strategy. However, many people perceive that existing social safety nets
are not cost effective because they are both badly targeted to poor households and often
involve inefficient financing policies. Consequently, many developing-country governments
and international development institutions have come to favor direct transfer instruments such
as cash transfers or subsidized food rations. But most evaluations of such programs focus solely
on the partial equilibrium impacts of program targeting outcomes, and those that focus on the
general equilibrium impacts tend to concentrate on their efficiency implications with very limited
analysis of income distribution outcomes and little attempt to combine both the equity
and efficiency dimensions.
In this report, Coady and Harris study the general equilibrium effects of transfer programs,
focusing on the recent switch by the government of Mexico toward targeted transfer programs
and away from universal food subsidies. They show how the results from a computable general
equilibrium model can be combined with the information available in standard household
surveys to provide an integrated analysis of both the direct distributional impact of such programs
and the indirect distributional and efficiency impacts arising from the nature of its
domestic financing. The focus on the domestic financing aspect of these programs reflects the
view that any credible poverty alleviation strategy must have a credible underlying financing
strategy, and this need for domestic financing can have important consequences for both the
level and the distribution of household incomes. It is often argued, for example, that the major
constraints for developing countries in establishing a comprehensive social safety net are the
undue strain put on domestic finances and the economic inefficiencies generated by the policy
instruments used.
The results presented in the report clearly show that the general equilibrium welfare impacts
associated with domestic financing can be quite substantial. When initial redistribution
mechanisms are inefficient, the welfare gains from switching to a better-targeted direct transfer
scheme are reinforced by efficiency gains associated with the removal of relatively distortionary
financing instruments. More generally, the indirect welfare costs associated with domestic
financing can be reduced by taking the opportunity to reform the existing tax system to reduce
any existing trade-off between efficiency and equity objectives. The analysis of the spatial distribution
of these welfare impacts helps to highlight the importance of recognizing the shortcomings
of crude geographic targeting. Not only did the urban poor not benefit from the transfer
program but they were also adversely affected by its general equilibrium impacts. The
analysis also found, however, that combining the transfer program with efficient tax reforms
reduced this adverse impact and ultimately benefited the urban poor through the general equilibrium
changes in incomes and prices.