Friday, April 18, 2008

Middle class welfare as a strategy to help poor countries develop

I attended a seminar today given by Michael Carter on ‘Poverty Traps and Social Protection’ that is available in full online. Carter suggests that, because of poverty traps, ‘needs based’ targeting may lead to higher levels of long-term poverty than a modestly regressive targeting of those vulnerable to falling into poverty that is based on critical asset thresholds subject to risk. If they do fall into poverty and a poverty trap arises there may be large irreversible costs. It may be preferable from some standpoints to stop 'at-risk' middle class families from falling into a state of poverty than it is to focus purely on assisting the current poor – particularly those with low skills - for whom aid might be ill-advised for triage reasons. There are tradeoffs between preventing poverty and preventing transfers into it. If programs are purely ‘needs based’ then more immediate poverty may be eliminated at the expense of greater long-term poverty as middle class people fall into poverty traps. Then, over time, this means that today’s poor will be worse off in the sense that dollars to relieve their poverty will need to be spread around more thinly.

Carter is seeking to implement this type of policy in northern Kenya. That surprised me for an argument that is entirely a priori. If I was a policy-maker I wouldn’t buy these specific policy prescriptions at all. Instead, maybe investing in the education of those at the bottom of the skill/wealth scale is an option that should at least be assessed. Presumably providing aid to people who are barely surviving has large social payoffs – don’t we get a kick out of seeing people being saved from starvation? In addition, capital market development that might enable poor but highly skilled people to realise their potential and generally devoting resources to simple institutional reform seems a good way to move.

I am sceptical of ‘poverty trap’ arguments generally – when I went to university as an undergraduate this was the way all developing countries were seen – they were ‘basket cases’ caught up in a poverty trap. Over the past 30 years this was seen to be wrong.

Maybe Carter is right but I found his arguments unconvincing.


Slim said...

Much better, Harry :-). It's posts like this that make it worth coming here, not the flim flam.

Anonymous said...

I am the other way, I was very sympathetic to his story and policy conclusions. After decades of failed 'needs-based' aid creating dependence, an alternative should be given a chance.

His proposal (in the more sophisticated form that avoided the moral hazard) creates incentives for independence of economic subjects.

Anonymous said...

There's confusion here because the term "poverty trap" has two distinct meanings here. One refers to a highly unfavourable low-productivity equilibrium that a whole society is trapped in, due to failures of governance and low levels of human capital. The other refers to individual poverty traps, created by relatively generous but tightly means-tested help.

The former is a complex problem for which a welfare system of any design won't be more than a small part of the answer. The latter has well-known methods of amelioration, mainly by "tagging" - that is, targeting a proxy for need which is unaffected by the recipients' behaviour. For example, it may be much more efficient to give help to everyone in a slum (as living in that slum is a reasonable proxy for need) than to try and assess the means of every individual in that slum (which will cause the individuals to lie to you, and punishes those who've made an effort to better themselves). The classic formalisation of this argument is due to Akerlof.

Note that these considerations don't only apply in the third world - for example, we give blanket assistance to aboriginals as we assume aboriginality is a reasonable proxy for need.

hc said...

DD, I think that Carter was concerned with developing countries where aid was directed to the absolutely most needy. The moral hazard implications you mention were there but the main issue was medium income people being subject to a catastrophe and falling into extreme poverty.

Carter was suggesting that the established poor were difficult to help and subject to triage problems. Those who recently fell from grace were better development prospects.