LEAP to greater poverty: A plan to spend c20 billion on the poor
How would you spend 20 billion cedis (about US$2million) annually on the ?poor and vulnerable persons?? One option is to identify an intervention that demand that beneficiaries invest in their future, so as to break the cycle of poverty. Another option is to turn the whole pot of money into free cash hand-outs to the poor. There is a great temptation to pick the latter, in particular in an election year.
Few days ago, the Minister of Manpower, Employment and Youth Development, Nana Akomea, revealed a pro-poor program dubbed, Livelihood Empowerment Against Poverty (or LEAP), that will distribute about 20 billion cedis cash, as free hand-outs to the poor. According to Nana Akomea, LEAP is ?a key component of the National Social Protection Strategy,? and will provide direct cash transfers of between US$15 to US$30 a month to the ?extremely poor and vulnerable persons,? such as care givers of orphans and vulnerable children, persons with severe disability, and the incapacitated aged 65 years and above (See Ghanaweb.com, 9/18/07). Assuming an average payment of $20 a month, LEAP will benefit about 100,000 people.
Any attempt to assist the poor in the society should be lauded: the entire society becomes stronger if we find a way to raise the living standards of the weakest members. However, a policy to help the poor must be carefully thought-out so as to deliver the desired outcome; in this case, a chance to break the cycle of poverty in most of these households. Giving out free money just does not cut it. For starters, it will be difficult to sustain such program in the long run. But a fundamental flaw in this program is that it runs the risk of perpetuating a dependency syndrome.
Let?s suppose that the government is able to properly identify the true beneficiaries of the program. How will such transfers impact the consumption levels of the target groups, and the households? For these groups, cash payments of $15 ? $30 per month, although a paltry sum, will constitute a big chunk of their total monthly income. That means, they will now be able to afford more goods and services. That is fine. But there are likely to be unintended consequences. In particular, old beneficiaries of LEAP are likely to pay the younger members of their households to provide domestic services. So if beneficiaries of LEAP are not required to make any investments in their future (or that of children in the household), school-age members of the household may reduce time spent in school, and young adults will reduce labor supply, to care for the old beneficiaries.
A recent study to assess the impact of pension payments to old black South Africa households yielded a similar finding. The study?s authors, Marianne Betrand (Univ of Chicago), Sendhil Mullainathan (Harvard) and Douglas Miller (Univ of California, Berkeley), found a sharp drop in the labor supply of working-age family members of the household as soon as an old relative becomes eligible for pension. Given the predominance of extended family structures in Ghana, LEAP may provide an incentive for the non-target group to reduce work hours or time spent acquiring skills.
So what are some alternatives? Is there a better way to assist the poor with c20 billion cedis? For starters, we should be asking the poor this question. And most of them will tell you that they want to trade; they will say they too have skills that can be developed to create value. They fully understand that if ?you give them a fish today, they will fry it; but what next?? They will also tell you that the one thing that stands between them and realizing their potential is credit. The few who are able to access credit do so at effective rates between 50% and 220% per annum, partly because lending to the poor is risky. But no one can escape poverty with credit at such high rates. How can a c20 billion fund help? We need the capacity to identify low-risk borrowers among the poor. For example, a public-private partnership (PPP) can be created to develop credit score index that can be accessed by all microfinance institutions; so those with good scores can be offered lower rates of interest. This, in and of itself, will encourage loan clients to pay up to increase their scores. It is one of the best way to help the poor help themselves.
Another plan is to turn LEAP into conditional cash payment program. For example, Oportunidades in Mexico and Bolsa escola in Brazil are two cash programs that require poor rural and urban families invest in improving the health, education and nutrition of their children. Under Bolsa escola, a poor household (usually, the mother) receives a cash payment if their school-age child does not miss more than 3 days of school in a month. In addition, the child must attempt the home-work assigned by the teacher. The payment varies between US$20 ? US$50, depending on the size of the family. But the rationale behind Opportunidades (formerly called Progresa) and Bolsa escola is simple: Poor families make their kids work because they need money. So you pay them what their kids would have earned selling on the streets; so the kid can spend more time in school and more time doing homework after school. It?s simple, yet very powerful, because it gives poor homes an incentive to invest in their children.
In fact, Oportunidades? success has been so remarkable that the model is now replicated in 20 countries, including Argentina, Bangladesh, Indonesia, Jamaica and Turkey. Last April, the Mayor of New York City, Michael Bloomberg visited Mexico to learn more of the program so he can better design an equivalent program for New York city, called Opportunity NYC program. So here lies the irony: one of the richest city in the wealthiest nation of the world, that can afford free hand-outs to its poor citizens, will choose to make such payments conditional on recipients making investments for their future. Ghana, a HIP (as in, Highly Indebted Poor) nation plans to give it freely.
However, I fully support the plan to make unconditional cash transfers to those with severe disabilities. They need all the help we cab give them. But even in this case, as in the entire program, why not eliminate the ?middle guy?? The sponsors of LEAP (British Department for International Development, UN Children's Fund, and the World Bank), can simply ask the government for a list of beneficiaries; let each open an account with the nearest (rural) bank, and then deposit the monies directly into the account. That way, Opanin Kwaku will receive all of the $30 meant for him.