Nber Working Paper Series Poverty Traps and the Social Protection Paradox

Progressively targeted cash transfers remain the dominant policy response to chronic poverty in developing countries. But are there alternative social protection policies that might have larger poverty impacts over time for the same public expenditure? To explore this question, this paper develops a dynamic stochastic model of of consumption and asset accumulation by households that confront a non-convex production technology and face missing financial markets. The model demonstrates that a hybrid social protection policy, which devotes resources to funding “state of the world contingent transfers” (SWCTs) to vulnerable, but non-poor households in the wake of negative shocks, can result in lower rates of poverty in the medium term than does a conventional cash transfer policy. We also explore the prospects for using subsidized index insurance as a way to implement SWCTs and find that an insurance-based hybrid policy can result in lower total public expenditures than a conventional cash transfer social protection program. Munenobu Ikegami International Livestock Research Institute Nairobi, Kenya [email protected] Michael R. Carter Department of Agricultural and Resource Economics University of California, Davis One Shields Avenue Davis, CA 95616 and NBER [email protected] Christopher B. Barrett Dyson School of Applied Economics and Management Cornell University Ithaca, NY [email protected] Sarah A. Janzen Department of Economics Montana State University Bozeman, MN 59717; USA [email protected] Poverty Traps and the Social Protection Paradox Cash transfer programs, progressively targeted at the poorest, have become a predominant policy for addressing chronic poverty in developing countries. While pioneered by middle income developing countries (notably Mexico, South Africa and Brazil), cash transfer programs have spread more broadly across the developing world, including the risk-prone pastoral regions of Northern Kenya whose economic reality underwrites the analysis in this paper.1 There is ample evidence that cash transfers break the liquidity constraints that Loury (1981) argues propagate poverty inter-generationally by limiting parents’ health and education investment in their children. However, there is much more modest evidence that these programs enhance the earned incomes of recipient households and impact their living standards once the cash transfers come to an end, despite their theoretical potential to do so.2 Indeed policymakers in Latin America now confront the conundrum of former cash transfer recipients who revert to their pre-transfer living standards once their transfer eligibility ends. In northern Kenya, the Hurrell and Sabates-Wheeler (2013b) impact evaluation of the Hunger Safety Net Program (HSNP) cash transfer scheme found that while transfers allowed recipient households to economically tread water even as their untreated neighbors sunk under the weight of continuing shocks, it did nothing to help recipient households craft a pathway from poverty. Similar to Latin American countries, Kenya is now looking to augment its HSNP cash transfer program with a “poverty graduation program.”3 The apparently weak impact of cash transfer programs on the upward mobility of poor households in at least the medium run has particular salience in risky regions. If cash transfers do little to promote upward mobility in general, their impact on poverty dynamics may be further blunted in risky environments because they do not protect the assets of 1With the region receiving “emergency” food aid year after year, the Kenyan government in 2009 created a social protection scheme, the Hunger Safety Nets Program (HSNP), built around bi–monthly cash transfers targeted at the region’s chronically poor and indigent. By regularizing progressively-targeted assistance, HSNP had hoped to put households on a pathway from poverty by enabling asset accumulation and sustained investment in child health and education so as to avert future chronic poverty arising due to economic disability (see the discussion in the Hurrell and Sabates-Wheeler (2013a)). 2The Gertler et al. (2012) study of Mexico’s Progresa program finds notable investment and income effects from a purely cash transfer program. The Bastagli et al. (2016) review study finds more modest evidence of such effects, unless specific efforts were made by implementers to support planning, investment and business development. In a similar spirit, the six country studies contained Maldonado et al., eds (2016) find some evidence that the potential impacts of cash transfers on earned income are when cash transfers are paired with ancillary business development programs targeted at cash transfer recipients. 3The current generation of graduation programs take their inspiration from BRAC’s ultra-poor program that recognizes that more than liquidity increments to reduce poverty. Such programs involve a mix of cash transfers, financial education, confidence building and coaching, and culminate with a discrete asset transfer. Banerjee et al. (2015) summarize evaluations of graduation programs that span both middle and low income countries.