An Automatic Safety Net?

• Author: Martin Ravallion
• Position: Research Manager in the World Bank's Development Research Group

A series of World Bank case studies suggests that the poor bear the brunt of government spending cuts. Better safety nets that can provide more automatic protection are needed.

When countries cut total public spending as part of macroeconomic adjustment programs, the standard policy advice is to alter the composition of spending to protect the poor. Aid donors have been strongly supportive of public programs-such as "social funds"-that are designed to provide extra assistance to the poor during fiscal contractions.

However, there is remarkably little evidence to draw on in assessing the case for such policies and their likely impact. Most important, we don't know how much the poor would be hurt by cuts in public spending in the absence of any intervention. To shed light on this question, a World Bank research project has looked at how the incidence of spending-how much goes to the poor relative to the nonpoor-varies with aggregate outlays. The findings confirm that special measures are needed to protect the poor.

Spending cuts and the poor

A clue to the incidence of budget cuts can be found by studying aggregate time-series data on the composition of public spending during government cutbacks. In the case of Argentina, for example, time-series data reveal that spending on social programs was generally not protected from budget cuts. Indeed, during the large fiscal contractions in the 1980s, social spending took a disproportionate hit (Chart 1).

However, social spending in Argentina (as elsewhere) is a heterogeneous category that includes spending on items such as pensions, formal unemployment insurance, and higher education, which tend to benefit the nonpoor more than the poor, as well as more pro-poor spending on basic education and health care, social assistance, and active labor market programs.

To throw more light on the success of social programs in reaching the poor, we need data that directly link public spending with its beneficiaries. The Bank's research project has tried to do this in three case studies, for Argentina, Bangladesh, and India.

[ SEE THE GRAPHIC AT THE RTF ]

The striking finding of all three studies is that, as programs expand, they tend to do a better job of reaching the poor. Conversely, when total spending falls, the poor tend to be less well targeted. In the India study, this was evident from how the participation rate of the poor relative to the nonpoor in various social programs varied across regions according to differences in the average participation rate. For the Bangladesh case study, a similar comparison was made between villages. In both cases, a higher average participation rate meant that relatively more of the...