How to best finance antipoverty transfers in developing countries

Asian Development Bank
Armando Barrientos

Philippine cash transfer project help poor families support their children through school. Supplied

The rapid expansion of antipoverty transfers, or social assistance, in low- and middle-income countries is one of the most significant features of the 21st century. There is growing consensus around the view that direct income transfers to families in extreme poverty can facilitate their exit from poverty if sustained over a reasonable period of time. Rigorous impact evaluations are contributing to a growing evidence base on their poverty reduction effectiveness.

Financing has been a constant challenge to the expansion of antipoverty transfers. Detractors have raised concerns over whether antipoverty transfers are affordable in developing countries, and also whether the resources allocated to antipoverty transfers could be better employed supporting infrastructure projects like schools and clinics. Advocates have often responded to these concerns by highlighting potential sources of finance, often at the global level.

Reviewing the experience of low- and middle-income countries offers reassurance to detractors that antipoverty transfers are affordable, but it also suggests that finance issues are broader than resource mobilization. The financing modalities of antipoverty poverty transfers are important because they have implications for their scope, legitimacy, and effectiveness.

What size budgets are required to support antipoverty transfers in developing countries? To answer this question one could look at what countries currently spend on antipoverty transfers.

Using data from available sources, and including high-income countries, social assistance expenditure for 133 countries ranges from a fraction of 1% of GDP to 7% of GDP. The mean value for social assistance expenditure as a proportion of GDP is 1.3%, although the median is lower, at 1.1 %. Only 20 out of the 133 countries spend more than 2% of GDP, 57 countries spend 1-2%, and 45 countries spend 1% or less. The main policy implication is that all low- and middle-income countries should aim to secure moderate increases in their social assistance budgets.

How then to finance a moderate rise in social assistance budgets? Debates on how to finance the extension of antipoverty transfers in developing countries have been dominated by the revenue mobilization approach – the view that what is needed is to find ‘new money’ to finance transfer programs. There are some disadvantages associated with this approach: it goes hand in hand with a short-term timeframe unsuited to longer-term institution building. It focuses on antipoverty transfers mainly as expenditure, rather than as investment in human development. It often takes it for granted that existing budget allocations are both efficient and desirable.

In fact, the financing of antipoverty transfers involves three tasks: (i) generate an appropriate level of resources for social assistance programs; (ii) ensure that the pattern of incentives generated by the financing mix is consistent with poverty reduction and other policy objectives and priorities; and (iii) guarantee that the financing mix progressively supports the legitimacy and sustainability of social assistance policies and institutions.

International aid has an important role to play in helping finance the introduction or reform of antipoverty transfer programs. The large set-up costs associated with new programs, information and financial systems for example. They might be an obstacle to the adoption and implementation of antipoverty transfers. But relying on international aid to finance regular transfers could limit the legitimacy, sustainability, and effectiveness of the social assistance programs.

For most countries, antipoverty transfers are financed from tax and other sources of government revenues. Strengthening the revenue-raising capacity of governments is essential to ensure the medium- and long-term sustainability of social assistance and social protection institutions. Ensuring that social assistance budgets are embedded in standard budgetary processes and approved by legislators contributes to their legitimacy and effectiveness.

In low- and middle-income countries, introducing or expanding antipoverty transfers is often supported by a financial 'narrative', a statement of the source of the finance committed to these programmes. They vary across countries, but raising consumption taxes and/or using revenues from the exploitation of natural resources are common financial 'narratives' to support antipoverty transfers. Earmarking financing for antipoverty transfer expenditure is in the main a political intervention, a means by which to legitimize tax–transfer linkages.