A deeper look into the cash for poor program<\/p>\n
Arianto A. Patunru, Jakarta<\/p>\n
My main skepticism of the current cash transfer program (CTP)
\nfor the poor to offset the impact of the fuel price increase is
\ndue to the failure of the government in identifying who is
\neligible. As with most other social safety programs, the CTP
\nsuffers from adverse selection and moral hazard problems.<\/p>\n
Evidence for all these are widespread. Pick any local
\nnewspaper today, you will find stories about people running amok
\nbecause they have been deemed ineligible. Some old, thin person
\nwill inevitably be pictured with his extremely poor house in the
\nbackground, looking at the camera with empty eyes.<\/p>\n
The caption will say it all: \"Pak XYZ from village ABC earns
\nfifty thousand rupiah ($5) a month from scavenging around. With
\nthat, he has to feed his family of five. Yet, he is not on the
\nlist\". Or, there are news bits about how local government
\nofficials have manipulated the system by directing the CTP to
\ntheir relatives and friends; who are certainly not eligible.<\/p>\n
If the government's objective is to improve income
\ndistribution, however, it deserves some credit. The government
\nknows nothing about what the average citizen really needs. It has
\nno information whatsoever whether Family A is in desperate need
\nof rice, or a motorcycle, or for health services at one
\nparticular moment. So, giving away cash is preferable than
\nproviding in-kind assistance: It gives freedom to the recipient
\nto spend it anywhere he or she wants.<\/p>\n
But where does the cash come from? It is from the oil subsidy
\ncut. The government claims that the subsidy has been benefiting
\nthe rich rather than the poor. It is now time to \"give justice to
\nthe poor\": Transfer the money from the rich to the poor.<\/p>\n
The CTP now being undertaken, is financed through a reduction
\nin distorted oil subsidy expenses. People, regardless of the
\nincome group from which they hail, have been enjoying oil
\nsubsidies for years. And that is not sustainable; unless
\neverybody agrees to give up other development targets such as
\ngood infrastructure, education and health facilities. (Or, if
\neverybody accepts a tax increase). Yet, demand for development
\nincreases over time.<\/p>\n
With limited financial resources, the subsidy should be
\nremoved gradually and let the \"saved\" resources be devoted to
\nother development targets. Surely this is painful. The government
\nis required to provide a pain reliever; hence the CTP. To put it
\nsimply, CTP is a means to take back some amount of subsidy from
\neverybody and give it back in cash to the poor, not to the rich
\n(for lack of a better dichotomy). This is a form of
\nredistribution.<\/p>\n
In its ideal, the CTP aims to leave the poor at least as well
\noff as before the change. This is what welfare economists used to
\ncall \"compensating variation\", measured by the \"willingness-to-
\naccept\" the change. What about the rich? What is the compensation
\nfor them? The government uses statistics: Even though everybody
\nenjoyed the subsidy, it is the rich who enjoyed it more. The rich
\ndeserves no cash back. Fair enough.<\/p>\n
As a side note, however, the compensating variations argument
\nabove may be shaky on theoretical grounds. John Hicks, who first
\nproposed the compensating variations as a measure of welfare
\nchange in 1943 defined it as the minimum amount a person would
\nrequire as a compensation for welfare loss. We have yet to hear
\nclearly how the government was able to come up with the amount of
\nRp 100,000 per month per family. Is it really the minimum amount
\nrequired? Or is it simply a back-of-the-envelope calculation
\nsubject to concern, regardless of people's willingness-to-accept?
\nIf the latter is true, we should not claim it as a \"compensating
\nvariation\".<\/p>\n
The fact that people stand in long lines to receive cash
\nsuggests that they are willing to accept it. However, the
\nwillingness to accept -- as the name suggests -- should be based
\non voluntary exchange between both parties. In the absence of
\nnegotiations the long lines do not reflect on the true minimum
\nwillingness-to-accept. It is a reflection of involuntary
\nsubmission -- \"better than nothing\".<\/p>\n
In fact, it might be perceived as a pure \"bribe\". At the very
\nleast, a public bribe can be explained using a political
\neconomics framework: the government has to cut down on the
\nsubsidy. People will suffer, so bribe them, then they will not
\nreact harshly. If \"bribe\" is too harsh a word, replace it with
\n\"compensation\" (note the sarcasm).<\/p>\n
Speaking of bribes leads us squarely to the issue of
\ncorruption. And this is where again my skepticism builds.
\nImplicit in the first paragraph above, a smooth transmission
\nmechanism is a necessary condition to ensure the effectiveness of
\nany wealth transfer. But the coast is far from clear for a smooth
\nlanding. We have read evidence where aid does not work well in
\ncountries with severe corruption. Jeffrey Sach's humanitarian
\neffort for Africa will not work if all the aid he mobilized ends
\nup in the pockets of corrupt government officials. Nick Kristof
\nwrites in the New York Times (Oct. 18, 2005) how Nigerians are
\nstarved by red tape, not just by malaria and measles.<\/p>\n
Cash transfer programs work in a similar mechanism as foreign
\naid. It is supposed to transfer some wealth from rich to poor. It
\nis fair to say, therefore, that failure factors in aid programs
\nmight as well be existent in cash transfer programs.<\/p>\n
Alas, we too live in a corrupt country. Many studies,
\nincluding those by LPEM-FEUI (the Economic and Management
\nResearch Institute of the Economics Faculty, University of
\nIndonesia in Depok) have found evidence of severe corruption in
\nthe Indonesian economy. For example, in 2000, a typical business
\nin Indonesia had to pay extortion \"fees\" as high as 10 percent of
\nits total production costs (LPEM-FEUI, 2001). In 2003, the
\naverage size of bribes vis-a-vis annual production costs was 4
\npercent (LPEM-FEUI, 2003).<\/p>\n
Finally, the logistical inefficiency in export industries is
\nalmost 6 percent of total production costs (LPEM-FEUI, 2005), due
\nmostly to poor infrastructure conditions and bad government
\nregulations. Having listed just a few of them, it might be a
\nbetter idea to direct the resources from subsidy cuts to combat
\nthe \"high cost economy\". This includes establishing a solid set
\nof rules of law.<\/p>\n
Such a Robin Hood policy might look good in the very short
\nrun. But in due time, it is nearly useless if economic
\nsustainability is taken into the equation. There are ways around
\nthe budget problem other than cutting the subsidy. The artificial
\ndomestic fuel price has been the root of all economic evils: it
\ncreates \"triple-distortions\". Distortions between domestic prices
\nand international prices, between industry prices and household
\nprices; and between products (e.g. gasoline vs. kerosene).<\/p>\n
This is not to claim that a cash transfer program cannot be
\nsuccessful at all.<\/p>\n
In conclusion, the current CTP might end up to be a waste, if
\nit is not managed well. The government has two options: Leave it
\nand use the money for other development targets or make it
\nbetter. As usual, either way is costly. But both options would
\nrequire better PR skills, which have been lacking from the
\ngovernment.<\/p>\n
The writer is the Research Director at LPEM-FEUI. He can be
\nreached at patunru@gmail.com.<\/p>",
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