Empowering the poor: Abandon the broken model
Cash transfers and vouchers empower the beneficiary rather than the provider, and they reduce leakage
Arvind Panagariya
Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy
Columbia University
THE TIMES OF INDIA
Aug 25, 2012, 12.00AM IST
Large increases in revenues, made possible by accelerated growth, have allowed the UPA government to rapidly expand redistribution programmes — distribution of subsidised foodgrain, free elementary education, rural health and the National Rural Employment Guarantee Scheme (NREGS).
But only a small fraction of the benefits of these programmes actually reaches the intended beneficiaries. Leakages along various elaborate government distribution chains are endemic. In sharp contrast to China, the government in India is hopelessly ineffective and inefficient at the delivery of social benefits.
Thus, for example, according to the 11th five-year Plan (Table 4.1.8), 54% of the offtake from the stocks of the Food Corporation of India (FCI) never made it to the beneficiaries in the year 2004-05. On top of that, a large volume of FCI grain stored in the open was washed away by rains, devoured by pests or stolen.
Similar leakages characterise NREGS, with one-third to a half of the stipulated wages skimmed off in bribes paid to whole hierarchy of staff going as far up as the block level. In public healthcare, providers are often absent from sub-centres, public health centres and community health centres, forcing 80% of the patients to seek private providers for non-hospitalised healthcare. Rampant teacher absenteeism in public schools is leading to a similar exit to private schools.
Decades of efforts to plug the leakages along government supply chains have failed to improve matters. Indeed, evidence points to increased, not reduced, leakage over time. Therefore, the time has come for the government and many NGOs, who themselves materially benefit from being a part of the corrupt and inefficient distribution chains, to drop the pretense that the system can be made functional by fixing this or that flaw.
Fifty years of misery borne by the public in the hope that the system can be fixed should be enough. Genuine alternatives that do justice to the beneficiaries and taxpayers whose valuable income the government and NGOs squander must now be tried.
There are at least two delivery mechanisms that can potentially deliver goods and services at a lower cost. The first is a voucher that allows its holder to buy the specified good or service at subsidised price from a public or private provider of his choice. The second is direct cash transfer.
Under the first option, the government gives the beneficiary a voucher that he or she can use to buy the specified commodity (foodgrain) or service (enrolment in school or healthcare) from a provider of his choice at subsidised prices. The provider can then exchange the voucher for cash to the extent of the subsidy from the government. The key to fostering efficiency under this scheme is to require the public providers to fully recover their costs and compete against private providers. This is not unlike public sector companies in civil aviation and telecommunications and banks that must compete with their private sector counterparts.
Under the second option, the government gives cash directly to the beneficiary who decides precisely how he will spend the income so received. The transfer can, of course, be conditioned on certain actions by the recipient such as sending children under 14 to school and regular health check-ups.
Critics often deride cash transfers on the ground that the beneficiary might not spend them on the goods and services for which they are intended and may even shell them on alcohol and gambling. But this same fate can also meet in-kind transfers as currently practised. Subsidised foodgrain received through public distribution system can be sold for cash in the open market and the cash used to buy alcohol. Subsidised services are not subject to similar conversion but they too free up the other income of the beneficiary, allowing him to indulge into his favourite consumption. Transfers to individuals are just as fungible as foreign aid to governments.
Two factors make cash transfers and vouchers superior to the current system. First, they empower the beneficiary rather than the provider. Today, the beneficiary is at the mercy of the public distribution shop. Even under NREGS, he must play to the tune of this or that official. Just calling something "guarantee" or "right" does not turn it into one. But cash transfer and vouchers make the beneficiary truly the king with the provider, whether private or public, playing to his tune.
Second, cash transfers and vouchers reduce leakage. At least the evidence from the rare existing cash transfer schemes in India is highly encouraging. A careful recent study finds that 96% of the benefits intended for widows and elderly women in Karnataka and 93% of those in Rajasthan went to the intended beneficiaries. Leakages involving bribes were tiny. With the proliferation of banking and modern technology, cash transfers can be put from a central government office literally directly into the hands of the beneficiary with virtually no leakages.
If the UPA and NGOs are serious about their rhetoric of empowering and enriching the poor rather than themselves, they should wholeheartedly go for cash transfers for food, shelter, clothing and routine healthcare; vouchers for elementary education; and subsidised insurance, which is a form of voucher, for treatment of major illnesses.
These measures can curb corruption and benefit the poor as no Lokpal or super Lokpal can. Our past experience with the end to the licence-permit raj supports this inference.
Arvind Panagariya is the Jagdish Bhagwati Professor of Indian Political Economy in the Department of International and Public Affairs and of Economics. He was formerly the chief economist of the Asian Development Bank. He has also advised the World Bank, IMF, WTO, and UNCTAD in various capacities. Panagariya has written or edited more than a half-dozen books, including The Economics of Preferential Trade Agreements with Jagdish Bhagwati (1996); The Global Trading System and Developing Asia with M.G. Quibria and N. Rao (1997); and Lectures on International Trade with J. Bhagwati and T.N. Srinivasan (1998). He is currently an associate editor of Economics and Politics. His technical papers have appeared in the American Economic Review, Quarterly Journal of Economics, Review of Economic Studies, Journal of International Economics, and International Economic Review, while his policy papers have appeared in the World Economy, Journal of International Affairs and Finance and Development.
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