6.2 Romania: Asset-to-Income Conversion Coefficients

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Table 6.2 Romania: Asset-to-Income Conversion Coefficients

Gross annual margin

Type of crop/harvest

 1 Common wheat  2 Durum wheat  3 Rye  4 Barley  5 Oat  6 Corn  7 Rice  8 Other grain  9 Potatoes 10 Sugar beet, without seeds 11 Rape 12 Sunflower

13 Soy

... 42 Poor pastures infertile or uncultivated 43 Orchards of apple, pear 44 Orchards of plum, peach, apricot, cherry 45 Walnut orchards, hazelnut, chestnut 46 Orchards of currant, fig, raspberry

47 Grapes for quality wine

48 Grapes for table wine

Gross annual margin

Type of livestock

 1 Horses  2 Calves  3 Cattle 1 to 2 years  4 Breeding heifers  5 Cattle for fattening  6 Dairy cows  7 Rabbits, for females, hoeing  8 Goats, for females, hoeing  9 Sheep 10 Piglets 11 Sows for breeding 12 Pigs for fattening 13 Broilers 14 Hens 15 Other birds

Source: Tesliuc et al (2014). Note: ha = hectare.

(Euro/year/ha)

170 74 75 112 90 237 52 198 1051 720 195 173 244

14 836 836 269 269 672 604

(Euro/year/ha) 57 138 59 87 98 391 25 57 3 24 17 115 9 5 11

374 | Revisiting Targeting in Social Assistance

agricultural season. Similarly, allocating a lump sum income equivalent to the average earnings observed (or known) for the main employment occupation and sectors by regions allows a simple estimation of informal income. Average income can be estimated by age, gender, occupation, sector, and region from household or labor force surveys and applied to the applicants.

In the cases where informal income is derived from many types of sectors and occupations that are difficult to account, estimate, and verify, a more complex variant of the HMT method is occasionally applied. At the most general level, under this variant, applicants are subject to two welfare tests, an HMT and a PMT. Those whose HMT income is below the program threshold and whose PMT score is below the corresponding threshold are eligible for the program. In the first step, using a means test/HMT eliminates inclusion error of people with observable or easily imputed incomes. The reason for the second step is concern that the estimation of informal income in the HMT may be downward biased compared with the true informal income. This could occur because some informal activities are not covered or estimated under the HMT, or because the level of imputed income is set at a lower level than the true value (to encourage selfreporting, as is typically done with assets or occupations taxed based on presumptive income). To reduce inclusion error from this source, the remaining applicants are subject to a full PMT. From the implementation perspective, this variant supposes the development of both HMT and PMT testing capacity. In design and implementation, this variant is more complex than the preceding one for the administration and the beneficiaries, although data sharing and interoperability are reducing these complexities. It is also less transparent than simple income imputation, for reasons related to PMT targeting, which are discussed in the next section.

Two-step HMT eligibility was pioneered in Moldova (Carraro 2014). The Moldovan guaranteed minimum income program (Ajutor Social) uses HMT to provide cash income to eligible families. As with any guaranteed minimum income program, the benefit amount is the difference between the household-specific minimum income threshold and the actual household income. To qualify for the Ajutor Social benefit, the applicants must pass an HMT: an income test based on verifying formal income using governmental databases, plus income imputations for other income sources. Types of income that are not easily verifiable—such as agricultural income— are imputed. Agricultural income is estimated based on the amount of land owned by the household, considering the type of plot (whether the land is close to home or farmland), the different agricultural zones, the fertility of the soil, as well as whether the household has some livestock. The value of the land is assessed at the level of the locality in the land register along with the lot size. The estimated amount of net income that people derive from a hectare of land is updated once a year based on estimates provided

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by the Ministry of Agriculture and the National Bureau of Statistics. For applicants who pass the first filter, a PMT is used. For each applicant family, a score is determined based on age, education, disability condition of the family members, and ownership of assets, durable goods, or consumption items, such as gas consumption. To be eligible for the program, the household has to meet both the income test (formal income plus estimated informal income lower than the program eligibility threshold) and the PMT (PMT score below a predefined threshold).

Turkey is unusual in bringing to bear consumption information in a twostep HMT31 (Ortakaya 2020, 2021; Turkey MFSP and World Bank 2016). The estimated income in Turkey’s HMT includes two components: formal income from wages, social protection transfers, alimony, interest on deposits/savings, or rental income, which is recovered as such from other administrative databases; and estimated income, called equivalent rental rates and defined by Turkey’s Ministry of Finance, for ownership and use of additional dwellings owned, business premises (as example, shops), urban or agricultural land, passenger car or cars, commercial or agricultural vehicles, and livestock. The rental income of the owner-occupied house is disregarded. Households are also asked to self-report their monthly consumption per capita for several expense categories (food, clothing, rent, health, education, transportation, entertainment, and tobacco consumption). If the estimated income falls short of the expenses, the level of expenses is considered. The HMT is used to differentiate the waivers or subsidies to health insurance premia for adults in the informal sector and their dependents, as part of universal health coverage. If the estimated income is less than one-third of the gross minimum wage, the premia is waived; if the estimated income falls between one-third and two times the gross minimum wage, the premia is subsidized; and if the estimated earnings are greater than two times the gross minimum wage, the applicant must pay the full premia, similar to employees in the formal sector.

In practice, the combination of easy-to-verify income and estimated hard-to-verify income generates three stylized situations with different implications for errors: households that earn (1) only easy-to-verify income, (2) only estimated hard-to-verify income, or (3) both. • For the segment of households whose income is derived in full or in large part from formal income sources, the HMT method is as accurate as means testing. For this group of applicants, the HMT method matches their actual welfare level. • For the segment of the population that derives income mostly from informal or hard-to-verify sources, the imputation method results in inclusion and exclusion errors. The level of error is proportional to the dispersion of such earnings around their mean.