Last week I attended INDEF's mid-year evaluation on government policy, titled "Oil, Food and Poverty." One thing I particularly noted was their prediction that poverty rate will increase by around 1.3 percentage points next year. The main reason was the fuel price hike will create inflation, especially in the food, food products and transportation categories. They also predicted that inflation will rise to around 12 percent.
I've never been a big fan of economic predictions (though in my past job I had to do that). Among different indicators, I wonder if we can make a good prediction for poverty rate. Nevertheless, I wondered why they would predict poverty is to increase by 1.3 percentage points when, at the same time, they predict inflation will rise to 'only' 12 percent. In 2005, when the fuel price increased by 130 percent, inflation jumped to 18 percent, and headcount poverty rate increased by 1.8 percentage points. Now, with lower increase in both fuel price and inflation rate, they predict more or less the same magnitude of increase in poverty rate. Unless if we are facing a very difference situation between now and then, which, I think, is very hard to justify.
Their explanation in the Q&A session revealed that they didn't take the effect of BLT (cash transfer) into account. Well, perhaps because they, at least my colleague Ikhsan Modjo, one of the panelists, belong to the 'BLT is useless' school of thought. For sure, much to be done to improve BLT, and BLT is not a desirable long-term safety-net policy. However, discounting the impact of BLT in providing cushions for the poorest households is unfair.
In case you are interested, here is my comment and further elaboration on this issue.
Showing posts with label Cash transfer policy. Show all posts
Showing posts with label Cash transfer policy. Show all posts
Monday, July 14, 2008
Thursday, June 22, 2006
Money or rice? Money or diamond?
Consider a poor family. The father works as a peasant in his uncle's paddy land, for a sack of rice every week. He still has to make money by working as tukang becak. 1 The money is barely enough to buy fish or vegetable, not to mention schooling or even decent clothing for the children and their mother.
According to BPS (Office of Statistics), the family is eligible for raskin. 2 That is, the father can buy 20 kgs of rice at price sixty percent lower than the market price every month. Sounds good.
But probably not too good. Remember, this family gets rice from someone (the father's uncle). So they don't need rice from the raskin program. What does the family need? I don't know, you might not know, and for sure the government doesn't know. It's probably medicine, books, kid's toys, we don't know. It's the family members who know for sure what they need.
Assuming they need medicine. They don't have enough money, but now, thanks to the raskin program, they have more than enough of rice. What would they do? Sell the surplus and use the money to buy medicine.
Now if the government wants to help the family, is it better to give it rice or ... money? Bear in mind, converting the rice into money might require transaction costs (looking for buyer, bargaining, etc). If the family gets the money, not the rice, they can avoid the costs and they can save time (imagine if the medicine is of urgency).
The government does have another program that gives away money -- hard cash. It is called the "BLT" (bantuan langsung tunai -- direct cash transfer). I was skeptical to this idea, but I heard the problems have been reduced, albeit gradually. 3 So if I had to choose between the two: money or rice, it would be the former.
You might think now that I'm a welfare statist. No, I'm just trying to compare the effectiveness of two welfare programs. Any such program should be temporary, if really needed. I raised the idea above in a meeting with officials from BPK (Supreme Audit Agency) who were requested by the Ministry of Finance to audit Bulog's (State Logistics Agency) performance. Raskin was a well-intentioned program. However, it's been a playground for corruption.
Now, let's think about another situation -- this time without the government. There are two lovers. The guy wants to impress the girl. Conventional wisdom tells him: buy her diamond. But is it better to give her ... money? So she is free to choose whatever she wants to buy: diamond, fancy car, Bottega Veneta, ...
1 Rickshaw driver.
2 Stands for "beras untuk orang miskin" (rice for the poor) Government's rice subsidy program started in 1998. The initial name was OPK (operasi pasar khusus, special market operation).
3 From conversation with Sudarno Sumarto of SMERU.
raskin | BLT | corruption | Free Choice
According to BPS (Office of Statistics), the family is eligible for raskin. 2 That is, the father can buy 20 kgs of rice at price sixty percent lower than the market price every month. Sounds good.
But probably not too good. Remember, this family gets rice from someone (the father's uncle). So they don't need rice from the raskin program. What does the family need? I don't know, you might not know, and for sure the government doesn't know. It's probably medicine, books, kid's toys, we don't know. It's the family members who know for sure what they need.
Assuming they need medicine. They don't have enough money, but now, thanks to the raskin program, they have more than enough of rice. What would they do? Sell the surplus and use the money to buy medicine.
Now if the government wants to help the family, is it better to give it rice or ... money? Bear in mind, converting the rice into money might require transaction costs (looking for buyer, bargaining, etc). If the family gets the money, not the rice, they can avoid the costs and they can save time (imagine if the medicine is of urgency).
The government does have another program that gives away money -- hard cash. It is called the "BLT" (bantuan langsung tunai -- direct cash transfer). I was skeptical to this idea, but I heard the problems have been reduced, albeit gradually. 3 So if I had to choose between the two: money or rice, it would be the former.
You might think now that I'm a welfare statist. No, I'm just trying to compare the effectiveness of two welfare programs. Any such program should be temporary, if really needed. I raised the idea above in a meeting with officials from BPK (Supreme Audit Agency) who were requested by the Ministry of Finance to audit Bulog's (State Logistics Agency) performance. Raskin was a well-intentioned program. However, it's been a playground for corruption.
Now, let's think about another situation -- this time without the government. There are two lovers. The guy wants to impress the girl. Conventional wisdom tells him: buy her diamond. But is it better to give her ... money? So she is free to choose whatever she wants to buy: diamond, fancy car, Bottega Veneta, ...
1 Rickshaw driver.
2 Stands for "beras untuk orang miskin" (rice for the poor) Government's rice subsidy program started in 1998. The initial name was OPK (operasi pasar khusus, special market operation).
3 From conversation with Sudarno Sumarto of SMERU.
raskin | BLT | corruption | Free Choice
Tuesday, November 08, 2005
Dazed and Confused
Not only are there some confused politicians in Jakarta
Economists and public policy makers usually pride themselves on understanding the unintended consequences of human actions (and government policies). While arguing their case to lift the oil subsidy, the government and even SBY himself showed that they do have this expertise. In months leading to the fuel price hike, they succesfully pointed out the numerous unintended consequences of distorting the market to the general public (e.g, who were enjoying the subsidy, why the subsidy encourages smuggling, what the environment impacts are, etc.). Although their case was solid, convincing the public was not an easy task, so they should be applauded for the efforts.
Yet following the price hike, and within weeks of implementing the cash transfer program that were meant to cushion the impact for the poor, we have seen some of the unintended but entirely foreseeable consequences the program. For example, there were households that split in order to be able to receive more than one transfer payment. News reports told stories of households hiding their motorcyles to be eligible for the transfer. Now, news reports are just that, until we have a systematic way to evaluate the program objectively, we won’t know how widespread the problem is, so I won’t even think of chalking this up as evidence of failure of the program. [Aside: This being 2005, a program evaluation mechanism should have been designed even before the program takes place. Dare we hope?]
However, the apparent absence of any mechanism in the program that could minimize these “second order” effects, and even worse, the refusal of the government to even admit that they should at least have anticipated these effects, is astounding. Cases of mis-targeting or misidentifying the poor are inevitable in any cash transfer programs, but over time the problems may get worse as households and individuals adjust their behavior to meet the criteria. Anyone who understands how oil subsidy would distort the market and create unintended incentives should also be able to anticipate that a cash transfer program would create incentives for people to make themselves eligible.
Perhaps a best summary about how the program was flawed can be represented by a statement of a BPS official who lamented that some households were not being honest in answering BPS or RT’s officials' questions. Herein lies the problem. For a program of this scale, to hinge too much on people’s honesty is just a lazy way to pass down the responsibility from the policy makers down to BPS officials, RT officials, and ultimately the poor households. And that is simply dishonest.
Economists and public policy makers usually pride themselves on understanding the unintended consequences of human actions (and government policies). While arguing their case to lift the oil subsidy, the government and even SBY himself showed that they do have this expertise. In months leading to the fuel price hike, they succesfully pointed out the numerous unintended consequences of distorting the market to the general public (e.g, who were enjoying the subsidy, why the subsidy encourages smuggling, what the environment impacts are, etc.). Although their case was solid, convincing the public was not an easy task, so they should be applauded for the efforts.
Yet following the price hike, and within weeks of implementing the cash transfer program that were meant to cushion the impact for the poor, we have seen some of the unintended but entirely foreseeable consequences the program. For example, there were households that split in order to be able to receive more than one transfer payment. News reports told stories of households hiding their motorcyles to be eligible for the transfer. Now, news reports are just that, until we have a systematic way to evaluate the program objectively, we won’t know how widespread the problem is, so I won’t even think of chalking this up as evidence of failure of the program. [Aside: This being 2005, a program evaluation mechanism should have been designed even before the program takes place. Dare we hope?]
However, the apparent absence of any mechanism in the program that could minimize these “second order” effects, and even worse, the refusal of the government to even admit that they should at least have anticipated these effects, is astounding. Cases of mis-targeting or misidentifying the poor are inevitable in any cash transfer programs, but over time the problems may get worse as households and individuals adjust their behavior to meet the criteria. Anyone who understands how oil subsidy would distort the market and create unintended incentives should also be able to anticipate that a cash transfer program would create incentives for people to make themselves eligible.
Perhaps a best summary about how the program was flawed can be represented by a statement of a BPS official who lamented that some households were not being honest in answering BPS or RT’s officials' questions. Herein lies the problem. For a program of this scale, to hinge too much on people’s honesty is just a lazy way to pass down the responsibility from the policy makers down to BPS officials, RT officials, and ultimately the poor households. And that is simply dishonest.
Yes, it's the HOW
Indeed, Ape's points below are well taken. I gave a talk in Media Indonesia two weeks ago, on 2006 Economic Outlook. They asked me what is actually the most urgent agenda for the government to do. As my other blog's visitors might have known, my priors shifted. On the very top of my list now is not cabinet reshuffle. It is a "data project": devote enough resources to conduct extensive ID-ing of the people. We have seen how good ideas meet stonewall just because we fail to identify the targets. It happens in the cash transfer program. It will happen in the implementation of the new tax law. Are we so far from having an "SSN"-type of ID? There's been discussion about this ("nomor identifikasi tunggal" -- single ID number), actually. However, I won't be surprised if people will confront that idea with privacy issue (or skepticism like: "why do the poor need to be ID-ed? -- and it's expensive"). Now, your options are to give up some uncertainty or to be uncertain on who gets what.
Beyond cash transfer
As an aside of Aco and Sjamsu's discussion on cash transfer below, I argued in Kompas a few months ago that the whole debate on fuel subsidy vs. direct subsidy just reminds us on one thing: we don't have a systematic policy to protect the poor. In the artictle, I argued that we must shift our debate from the pros and cons of cash subsidy to providing mechanisms for the poor in managing risk. Hence, the issue is "risk management for the poor."
Note: the Kompas article is in Indonesian. A working paper version (in English) can be downloaded here.
Note: the Kompas article is in Indonesian. A working paper version (in English) can be downloaded here.
Monday, November 07, 2005
Cash Transfer
While co-host Sjamsu likes the idea of the current cash transfer program in Indonesia, I have some reservation. I agree with giving people money, not in-kind assistance. But I'm a little reluctant to call what the government is doing now as compensation (or, more precisely, "compensating variation"). Here's my take in Jakarta Post -- but, please read the uncut version, as the newspaper has left some important points in the editing so as to fit the space. Among other things got cut by the Editor is my position that cutting oil subsidy, pursuing efficiency, mobilizing other sources of fund, and combating rent-seeking activities are complements, not substitutes. Also, in the end of the original writing I skecth some examples of cash transfer programs that have been known as successful.
Addendum: Reading Sjamsu's comment (below), it appears, we're not in disagreement. We both agree with with the idea of cash-giving (as opposed to in-kinds). I am skeptical to the implementation. It seems, Sjamsu does, too.
Addendum: Reading Sjamsu's comment (below), it appears, we're not in disagreement. We both agree with with the idea of cash-giving (as opposed to in-kinds). I am skeptical to the implementation. It seems, Sjamsu does, too.
Saturday, November 05, 2005
confused politicians
Media Indonesia on-line 4 Nov '05 reported that Amien Rais and Soetardjo (both are high profile politicians) thought that direct cash transfer would not educate the poor, have caused horizontal tension, and wrong. They also concluded that fuel price increase have worsen people's misery and therefore, in the name of the people, government should: (i) stop the cash transfer programme and (ii) bring fuel prices to the original level.
What they observe about peoples' misery may be right. In a short-term, except oil companies, who gains from higher fuel price anyway. But they are wrong about the long-term economic effect of fuel price increase . They are confusing the idea of direct cash transfer with results from its practical implementation.
There are solid reasons to increase fuel price which I will not bother to elaborate further (please visit Aco's other blog site on this issue). My point here is that resources are stuck in the short term and therefore price will only adjust upward causing temporary inflation. But forcing to bring the oil price to originial level will be more disastrous as deficit would soar, attack on currency would gone wild, and would certainly kill any debate on alternative energy (let alone conserving energy).
On cash transfer programme, my first take on this is that it is a pure compensation program, not an education program. It is based on a simple static economic reasoning (see ca$h and carry) to address adverse income shocks. The real wage decreases after price increase and one would not able to consume the same amount of goods from the same amount of working hours. Thus cash transfer compensates for the drop in income i.e. negative income effect as economist would say.
Second, compensation program through cash transfer does not solve poverty. The key link between compensation program and poverty alleviation lies with the ability of the program to gear poor people's incentive to break out from of poverty by improving their: education, work, and health. Many countries have done the so called conditional cash transfer (Mexico, Brazil). Their cash transfer are conditioned upon poor household taking action to participate in education or work programme. For example, cash support is given if poor household: sends kids too school; perform healthy life-style; or do wage earning work.
Thus real challenges for us and our often confused politicians are to (i) fix the implementation of the current cash transfer and (ii) come up with bright ideas on conditional cash transfer.
What they observe about peoples' misery may be right. In a short-term, except oil companies, who gains from higher fuel price anyway. But they are wrong about the long-term economic effect of fuel price increase . They are confusing the idea of direct cash transfer with results from its practical implementation.
There are solid reasons to increase fuel price which I will not bother to elaborate further (please visit Aco's other blog site on this issue). My point here is that resources are stuck in the short term and therefore price will only adjust upward causing temporary inflation. But forcing to bring the oil price to originial level will be more disastrous as deficit would soar, attack on currency would gone wild, and would certainly kill any debate on alternative energy (let alone conserving energy).
On cash transfer programme, my first take on this is that it is a pure compensation program, not an education program. It is based on a simple static economic reasoning (see ca$h and carry) to address adverse income shocks. The real wage decreases after price increase and one would not able to consume the same amount of goods from the same amount of working hours. Thus cash transfer compensates for the drop in income i.e. negative income effect as economist would say.
Second, compensation program through cash transfer does not solve poverty. The key link between compensation program and poverty alleviation lies with the ability of the program to gear poor people's incentive to break out from of poverty by improving their: education, work, and health. Many countries have done the so called conditional cash transfer (Mexico, Brazil). Their cash transfer are conditioned upon poor household taking action to participate in education or work programme. For example, cash support is given if poor household: sends kids too school; perform healthy life-style; or do wage earning work.
Thus real challenges for us and our often confused politicians are to (i) fix the implementation of the current cash transfer and (ii) come up with bright ideas on conditional cash transfer.
Wednesday, November 02, 2005
ca$h and carry
The act of compensating Indonesian poor family from their slashed fuel subsidy is currently taking the hot seat in the arena of public debate. The idea of giving cash money in helping out poor family may not jive well with the average person’s sense. Average person would often think that this cash compensation is useless or stupid. Some would go as far as to question the logic of compensating individual and what does that have anything to do with helping the poor.
First, average view is relative and affected by any person lack of knowledge. Second, more importantly, the rationale behind the act of compensating is often forgettable. Almost every individual has some experience on taking compensation from certain grief. When we were a child, our parents would compensate us with toys, ice cream, a ride around town, and even cash, from their ill promises. You also often have to compensate you spouse for your negligence toward her/him.
Compensation is meant to reduce loss or heal wounds. The compensated individual should be offset from his/her undesirable misfortune, or at least, endure les s suffering. This is the basic for thinking about the economics of compensation.
Poverty is not an easy subject. People like Amartya Sen of Harvard University got a Nobel prize for defining and sharpening the idea about being poor. However, the idea of injecting cash to compensate a poor person's income should not be difficult to grasp. We all have needs and most of them are measurable in monetary terms. Therefore, giving cash is one way to compensate misfortune individuals in helping them to achieve their needs. A child will be happy to forgive their parents forgotten promise in exchange of a new toy car. A stranded airline passenger will be less pissed after receiving a free long-distance call and meal vouchers. Finally, a poor person can maintain his consumption bundle even at a higher price level after receiving cash.
Most poor Indonesian family spend most of their money on food, particularly rice. Increase in fuel price will also have an indirect effect through increase in the price of food and other goods. Therefore, a cash transfer for the poor can help alleviate suffering from inability to fulfill their needs.
Simple eh..
First, average view is relative and affected by any person lack of knowledge. Second, more importantly, the rationale behind the act of compensating is often forgettable. Almost every individual has some experience on taking compensation from certain grief. When we were a child, our parents would compensate us with toys, ice cream, a ride around town, and even cash, from their ill promises. You also often have to compensate you spouse for your negligence toward her/him.
Compensation is meant to reduce loss or heal wounds. The compensated individual should be offset from his/her undesirable misfortune, or at least, endure les s suffering. This is the basic for thinking about the economics of compensation.
Poverty is not an easy subject. People like Amartya Sen of Harvard University got a Nobel prize for defining and sharpening the idea about being poor. However, the idea of injecting cash to compensate a poor person's income should not be difficult to grasp. We all have needs and most of them are measurable in monetary terms. Therefore, giving cash is one way to compensate misfortune individuals in helping them to achieve their needs. A child will be happy to forgive their parents forgotten promise in exchange of a new toy car. A stranded airline passenger will be less pissed after receiving a free long-distance call and meal vouchers. Finally, a poor person can maintain his consumption bundle even at a higher price level after receiving cash.
Most poor Indonesian family spend most of their money on food, particularly rice. Increase in fuel price will also have an indirect effect through increase in the price of food and other goods. Therefore, a cash transfer for the poor can help alleviate suffering from inability to fulfill their needs.
Simple eh..
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