Essay 3: What Is the Rationale for Targeting by Welfare or Other Metrics?

46 | Revisiting Targeting in Social Assistance

opportunity for poorer households in the Antyodaya card holders category to purchase seven times as much subsidized food grain per month as the amount for other claimants (Drèze et al. 2018).

The share of programming that differentiates eligibility and benefits within the overall architecture of social protection varies greatly depending on the program mix, the shape of the economy, the degree to which the state is seen as provider of first resort or last resort, the tax structure, the maturity of the social protection system, and so forth. In general, the higher are the coverage and benefits of the insurance and universal programs, the smaller is the role of programs designed for only the poor or extreme poor. However, even in countries with a full range of programs, the role of poverty-targeted programs can vary. In the European Union, for example, the share of means-tested programming in the overall nonpension social protection sector varies from about 75 percent in the Netherlands and Portugal to less than 10 percent in the Baltics. And coverage of the poorest 40 percent is not as linked as might be expected. The Netherlands covers virtually all the poorest, while Portugal and Latvia cover about 30 and 35 percent, respectively, of the bottom two quintiles (Bussolo et al. 2018). In the Organisation for Economic Co-operation and Development (OECD) countries with universal child allowances, they account for an average of about 15 percent of the poverty reduction brought about by the transfer system (UNICEF–ODI 2020, figure 6).

The share and characteristics of the target population for each kind of program may vary. Eligibility levels can be set to cover only the extreme poor, encompass many who are not poor but may be at risk of poverty, or extend to the middle class. Indeed, sometimes thresholds are set so high that the term “affluence testing” is used, although the notion of granting or customizing benefits according to the welfare of the recipient is similar. Over the next decade, as countries work to accelerate progress toward universal social protection, governments may raise the eligibility thresholds for social assistance programs that are currently very narrowly focused, and they may broaden eligibility for subsidies for enrollment in insurance programs. The switch to programs covering relatively higher shares of the population may have implications for the choice of mechanisms to determine eligibility or customize benefits and the delivery systems that support them.

Essay 3: What Is the Rationale for Targeting by Welfare or Other Metrics?

Economics is “the science of scarcity”; thus, it focuses on how to get the maximum impact from any expenditure. In the traditional economic formulation, thinking about whether to focus resources on a particular group

Targeting within Universal Social Protection | 47

can be posed as a problem of the efficient use of constrained resources (whether in mathematical formulae or more narrative or graphical form). Various authors have written about this topic over the years (see Besley and Kanbur [1990] for a much-cited formulation and Coady, Grosh, and Hoddinott [2004]; Coady and Le [2020]; and Devereaux et al. [2017] for more recent contributions).

The advantage of differentiating eligibility and benefits according to welfare is the power of focusing resources on those who need them most. For example, if reducing poverty is the objective, imagine an economy of 5 million people, of which 1 million are poor, each in need of an additional $30 per month to reach the poverty line. Poverty could be eliminated with a budget of $30 million per month if the funds could be perfectly directed to the poor with no costs. If, instead, funds were distributed equally across the whole population, it would take $150 million per month to eliminate poverty. Or if the budget remained at $30 million with funds distributed equally to the whole population, the poor would receive only $6 per month, much less than what is needed to get them to the poverty line. The power to have a bigger impact on poverty, or to reduce poverty at lower cost, is the main driver for differentiating benefits in social assistance programming.

Figure 1.1 provides a graphic generalization of the power to do more, or to make do with less. The figure is an adaptation of the expositions in Besley and Kanbur (1990) and Coady and Le (2020). This version assumes that it is simple to measure welfare and that there is a set poverty line7 (topics taken up with more realism in chapters 3 and 6). People are arranged from poorest to richest along the x-axis, and with no policy, their pre- and post-transfer incomes are the same, so their welfare falls along the 45-degree line, AD. The figure shows the contrast between three policies:

• Perfect differentiation of benefits, as in a perfectly implemented guaranteed minimum income program, would give a transfer to each person who has an income less than Z, equal to the difference between the height of line Z and their individual income. For the poorest person, the transfer is AZ. For a person who is just at the threshold of poverty, shown at H, the benefit becomes zero. In this perfect targeting case, welfare would fall along ZHD. The budget of the transfers is the triangle AZH, shaded in dark blue. (This is a generalization of the case in which each poor person needed the same $30 to reach the poverty line, but it is analogous in that simplified example to paying $30 each to the 1 million poor and nothing to the nonpoor, with a budget of $30 million.) • A universal benefit and the same budget as used in the perfect targeting scenario would result in welfare along line BC, where the area of budget