Macro Crises and Targeting Transfers to the Poor

A central question for policy makers concerned to help the poor through a macro crisis is how to target scarcer resources at a time of greater need. Technical arguments suggest that finer targeting, through tightening individual programs or reallocating resources towards more tightly targeted programs, uses resources more efficiently for poverty reduction. These arguments survive even when the greater informational costs and the incentive effects of finer targeting are taken into account. But political economy arguments suggest that finer targeting will end up with fewer resources allocated to that program, and that looser targeting, because it knits together the interests of the poor and the near-poor, may generate greater resources and hence be more effective for poverty reduction despite being “leakier.” Overall, the policy advice to tighten targeting and to avoid more loosely targeted programs during crises needs to be given with considerable caution. However, the advice to design transfer systems with greater flexibility, in the technical and the political economy senses, is strengthened by the arguments presented here. The case for external assistance, to design flexible transfer systems ex ante, and to relieve the painful tradeoffs in targeting during a crisis, is also shown to be very strong by the arguments in this paper. * Cornell University: T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, and Professor of Economics. Paper prepared for the Commission on Growth and Development.