Rural Poverty Alleviation and Household Consumption Smoothing: Evidence from PROGRESA in Mexico

This study uses three rounds of panel data between October 1998 and November 1999 and covering 506 villages and 24,000 households in rural Mexico, to examine how the replacement of pre-existing subsidy programs by a conditional cash transfer program such as PROGRESA (the Health, Education and Nutrition Program) affects the consumption smoothing of households. The results obtained are consistent with the prevalence of formal of informal insurance arrangements aimed at protecting household consumption from fluctuations in income. Yet, total consumption as well as food and nonfood consumption are significantly correlated with idiosyncratic changes in income suggesting that insurance is incomplete. A comparison of the results between villages covered and not yet covered by PROGRESA (treatment versus control villages) suggests that PROGRESA did not replace or reinforce any pre-existing risk sharing among households within villages or lead to any substantial changes in how households cope with shocks. The analysis did reveal that households eligible for the PROGRESA benefits in the treatment villages were able to insulate their consumption from fluctuations in income better than their counterparts in control villages. Thus a poverty alleviation program providing cash transfers conditioned on households investing in their human capital is associated with a reduction of household vulnerability to risk. JEL classification: D1, R2, P5