Can India Learn from the Conditional Cash Transfer Schemes of Latin America?

By ShreyaDeora

Edited by Nandita Singh, Senior Editor, The Indian Economist

The new government in India has recently launched the Pradhan Mantri Jan Dhan Yojna, which aims at making financial inclusion a more realistic dream with increased rural banking and credit accessibility. The government has undertaken a huge task of constructing about 7,000 more banks and 20,000 more ATMs for this scheme to take off. The wide spread use of mobile phones has made this easier as it allows people to open bank accounts linked with their Aadhaar card numbers. This makes direct cash transfers relatively convenient by getting rid of the possible corruption avenues that would have arisen with the hierarchical federal structure of social welfare programs, since the money is now directly transferred from the centre to the people. Hence, these transfers empower people with more decision making capabilities, making a move away from the ‘maibaap sarkar,’ which has become a characteristic of the country.

Even though the Jan Dhan Yojna aims for more financial inclusion and hopes to give a boost to the country’s growth trajectory, at this juncture, it is worthwhile to take a look at the other social welfare schemes based on conditional cash transfers that have been implemented across the world. Conditional cash transfers are direct transfers to the public given by the government (or a charity), which aim to help reduce poverty, based on a few pre-requisite conditions. These may include regular medical check-ups of family members, especially children; or compulsory schooling and enrollment rates, etc. This way, not only do they help in eliminating poverty in the short run (by giving monetary aid to the poor), but also help in breaking the vicious cycle of poverty in the long run, by creating human capital for the next generation (by providing education and health facilities for the children).

The most popular conditional cash transfer policies can be seen in Latin America- Brazil and Mexico.

Founded in 2002, ‘Oportunidades’ is a social welfare program in Mexico. It is based on the assistance program called ‘Progresa’ created in 1997. The condition for being a recipient of aid under this program is family compliance with certain requirements imposed by the state. Ensuring that children attend school and that family members get proper health care are some of the conditions. It is in this way that the state instills a sense of co-responsibility in the recipient families and ensures that parents invest in the education, nutritional levels and health of their children. This increases the capabilities of the next generation to achieve a higher standard of living. By the end of 2009, Oportunidades had enrolled 5.2 million households in 95,000 localities.

All of Progresa’s original beneficiaries were rural villagers. The average family chosen to participate earned only $18 per capita per month, a fourth of the national average, and spoke an indigenous language rather than Spanish.  Household members who had jobs labored in the fields for about $3 a day.  Ninety five percent of the chosen homes lacked running water, and over three quarters had mud floors^[1].  Each enrolled household got a bimonthly payment that did not change with respect to changes in family size over the course of the program. Families got payments for each child enrolled in the third grade or higher who maintained a minimum of 85% attendance. Students also got payments for school supplies. The education stipend has been revised over time to reflect inflation, and also increases with the child’s grade. This efficiently reflects the opportunity cost of the very poor in terms of loss of potential earnings by sending their children to school.

The cash payments are made directly by the central government to the people to cut down on overhead costs and corruption. Another measure that checks corruption is the hiring of the International Food Policy Research Institute of Washington, DC to externally evaluate the program; which makes the whole process more transparent.

The program survived the change in political power in the 2000 elections, which is note worthy because the country has seen several different social programs being implemented by each new government. This tells us that this program is a huge success. Progresa worked as a good social scheme, which was built upon, and re introduced as Oportunidades in 2002. Evaluation indicated that families use 70% of the payments on better diets, leading to a better nutritional status. There are significant increases in health and educational parameters as well.

A striking characteristic of such conditional cash transfers is that the female head of the family is the official recipient. This has not only ensured that the benefits have been used for the welfare of the family (which is more likely when women are given the monthly budgets), but has also led to gender empowerment. Women have reported that they feel more confident, empowered and have more self esteem as the scheme has also increased their ‘credit worthiness’ in the society, and given them more decision making power.

‘BolsaFamília’ is a similar social scheme implemented in Brazil in 2003, covering 12 million Brazilian families. By February 2011, 26% of the country’s population was covered under this program. The poverty rate has fallen from 42.7% to 28.8% after its implementation. The cash transfers are facilitated through ‘Citizen Cards,’ which work as debit cards, and the money can be withdrawn from any facility established for this purpose. The payments are dependent on children’s schooling till 17 years of age, and attendance must be at least 85% up to 14 years and 75% for the rest. Children should also get proper vaccinations in their initial years and mothers should receive pre and post natal care.

BolsaFamilia depends on centre-local collaboration as a redistribution program. Thus, it has by-passed Brazil’s three-fold power hierarchy to cut down on administrative costs and corruption, further facilitating user access. This dynamic relationship between the central government and the municipalities has enabled a direct relationship between the people and the government.

Despite their evident success, such conditional transfers have not been free of criticisms. The most debated one is the idea that as soon as the poor receive the cash transfer, they tend to go and spend it on alcohol. Studies however, have shown that most of the welfare money is sensibly spent on food, clothes and school supplies, and this is also visibly clear in the health and educational improvements. Another criticism is that it will adversely create a dependency culture where the poor will just start relying on these welfare handouts and not participate in any productive activity themselves.As can be seen from the data, the cash transfers are big enough to help aid poor families, but are still too small to replace income accruing from jobs. By contributing to the money influx in the market, the scheme is increasing purchasing power, which in turn is actually boosting the local community markets.

A similar welfare scheme has even been adopted in New York City to help the poorest of the poor under ‘Opportunity NYC’.

In the Indian context, the direct cash transfer scheme is also empowering people with the freedom to make decisions. However, the government should at the same time look into conditional cash transfers as a better modus operandi. In the Mexican case, a control group was created who were given unconditional cash payments due to the mishap of not receiving school enrollment and health care forms on time. Studies revealed that all income and health indicators showed the control group to be lacking in contrast to those who were subjected to restrictions or requirements to be recipients. There is sufficient data to claim that conditional cash transfers work better in terms of implementation and human capital formation than unconditional ones.

Thus, even though the Indian government is on the right path to financial inclusion and alleviation of poverty, the debate of unconditional versus conditional cash transfers is worth looking into. Financial integrity and credit accessibility can be built upon in another fashion as well. Then again, the direct cash transfer policies in India have only recently been theorized, and the results of such policies are yet to be seen.

[1] Case 9: Improving the Health of the Poor in Mexico in Millions Saved: Proven Success in Global Health by Ruth Levine and the What Works Study Group.  Center for Global Development, 2004