Targeting of Public Spending Menno Pradhan Senior Poverty Economist The World Bank office, Jakarta

Central Question Who benefits from public spending? and How to improve the targeting of public spending?

Benefit Incidence Analysis

Data Source Derived from household survey data Did you use facility? Did you receive benefit? and, Welfare measure, usually per capita consumption

Does this answer the question? No, because: Benefit incidence ignores administrative cost - Total program cost = benefit + admin cost Benefit incidence is based on ex-post welfare indicator – should based on welfare before program Benefits may not be homogeneously distributed – for example, quality of school may vary across location

Solutions Need more detailed information on service delivery and expenditure tracking (public expenditure tracking surveys) - to identify leakage/administrative cost - to identify heterogeneity in benefits

Solutions (cont.) Needs to consider what welfare level would have been without program - Simplest case for cash transfer Consumption before = consumption after – cash transfer - Too simple households are likely to have behaved differently if they had not received the benefit - Impact evaluation

Marginal benefit incidence Policy question is often too scale up or down an existing program Standard benefit incidence compares situation with or without program Marginal benefit incidence ≠ average benefit incidence

Marginal Benefit Incidence Marginal Spending is Pro-Poor while average spending is pro-rich

How to predict marginal benefit incidence? Exploit differences in coverage across regions j = region q = quintile t = time

Conclusion Benefit Incidence Analysis Benefit incidence analysis is useful and cost effective to assess targeting of programs/policies Does often not provide complete picture - ignores leakage / efficiency - does not provide impact of program Tools and techniques are available to address those issues

Targeting of Government Expenditures How to ensure that the poor benefit ?

Outline 1. Targeting of expenditures – introduction 2. Decentralization and Geographic targeting of programs 3. Potential gains of regional targeting 4. Poverty maps 5. Concluding remarks

Targeting of Public Expenditures Ways to reach the poor. Target using : Household income (means testing) Other household indicators of welfare Self-targeting Commodities (rice, basic education and health care) Empowerment of the poor

Geographic Targeting Of relevance during Decentralization - Central government allocates budgets to local government - Local governments make local spending allocations Geographic targeting: Poorer regions get a larger share of the pie

Why do geographic targeting ? Stark regional differences in poverty - Indonesia Head count ratio % (source: Susenas 99) Poorest province61.1 Median province23.8 Richest province2.8

Geographic targeting, cont. Pros – Leads to better targeting of the poor – Cheap and simple – Promotes local ownership – Local administrators better informed about local conditions Cons – Less control of center over final outcome – local capture – Political opposition to regional allocations based on statistical estimates – May be less fair. The probability for a poor to receive a benefit depends on the region that person lives in – Incentive to move to poor region

Geographic targeting, Example Example: JPS scholarship program Implementation unit Scholarships Allocation Per district Allocation Per school Allocation Per sub-district Allocation Per school Student selection CPCU Jakarta District committee Sub -district committee School committee

Operational issues in regional targeting At what level to do the regional targeting? – The smaller the area, the better the targeting – And, the higher the statistical error How far to go in regional targeting? – Exclude rich districts? In proportion to nr of poor? – More extreme first stage targeting may yield to worse performance, depending on the second stage targeting

Does more precise targeting lead to better targeting to the Poor ? Hypothetical example A country with 27% poor. Program has potential to reach 27% of population Second stage allocation is done randomly First Stage Allocation

The smaller the area – the higher the statistical error

How far to go in regional targeting ? Example: 250 poor, 250 scholarships Percent of poor reached (100 percent is perfect targeting) Second stage RandomPerfect First stage In proportion to population 31%88% In proportion to poor47%100% Extreme59%75%

Poverty Maps Provide estimates of welfare for small geographical area. Could be along any dimensions of poverty To improve regional targeting To increase understanding of regional dimension of poverty (causes and consequences)

Poverty maps: Project, cont.. Basic Procedure: – Estimate a model of (log) per capita consumption, y h, using sample survey data. – Restrict explanatory variables to those that can be linked to households in survey and census. – Simulate expected level of poverty or inequality using their census-based characteristics for each population of interest, and the estimates from the “first-stage” model of y. – Model thus provides empirical weighting scheme.

Concluding Remarks - Targeting Regional targeting be closely linked to decentralization Regional targeting is a convenient planning tool to improve targeting of public expenditures programs, but no panacea. There is potential for improvement of first stage targeting of programs, but much more in the second stage. So, incentive mechanism for pro-poor spending at the local level is more important than the regional distribution component. Poverty maps can improve first stage targeting by restricting expenditures by small geographic area

Thank you