Key Elements for Hybrid Means Testing

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information in general, more countries have/will have the minimum conditions to start planning the transition to use at least partially verified means testing as a targeting method. As chapter 5 discusses, some countries are moving in this direction. Investments in improving systems, improving their interoperability, and building the capacities for client interface in-person and remotely can speed the transition. Thus, means testing is both the gold standard and a method that is increasingly feasible (to one degree or another) in many countries.

Key Elements for Hybrid Means Testing

When much but not all of a family’s or individual’s income and assets can be observed and verified against independent sources, programs can impute or predict the remainder using an HMT. This solves a common dilemma for the administrators of social programs: placing on households unrealistic expectations of being able to know/disclose their welfare or dealing with large measurement error in assessing household income. Officials may ask the households to report all their incomes, knowing that informal incomes may be underreported and thus pushing some beneficiaries into committing fraud; or they can impute this income based on some verifiable information, such as asset ownership or the branch of activity of an informal worker. When imputing some values, the means testing becomes an HMT. Relatively few developing countries have adequate formality and information sources to conduct fully verified means tests that are valid over the entire population. However, many countries have only moderate informality and well-developed databases covering the formal part of the economy. HMT is designed for such circumstances, as it takes advantage of the information available on formal incomes in administrative databases and imputes some of what is not.

To assess whether to use an HMT, Tesliuc et al. (2014) suggest classifying income based on the country’s administrative capacity level as follows: • Easy-to-verify incomes are those from formal employment, earnings associated with formal entrepreneurship or asset ownership, and social protection transfers. They typically include the following: ° Wages earned in the formal sector (subject to social security) ° Nonwage benefits earned in the formal sector (bonuses and so forth) ° Social transfers or social assistance (unemployment allowance, veterans’ allowance, and so forth) ° Retirement pensions ° Dividends, interest received, and so forth.