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GREAT insights Magazine

Cash Transfers and Poverty in Latin America

May 2012

Lustig, N. 2012. Cash Transfers and Poverty in Latin America. GREAT Insights, Volume 1, Issue 3. May 2012. Maastricht: ECDPM

Although in Latin America cash transfers (also called Social Assistance) are still much smaller in scale than in advanced countries, in the last fifteen years they have become quite widespread. At the end of last decade, Brazil, Argentina, Bolivia, Mexico and Peru spent 4.2, 3.0, 2.2, 0.8 and 0.4 % of GDP, respectively, on cash transfer programs.(1) How much is extreme poverty reduced by cash transfers in Latin America?(2)

Standard benefit incidence analysis shows that cash transfers can reduce extreme poverty significantly especially if the per beneficiary transfer is of a certain magnitude and the coverage of the poor is large. Figure 1 shows the decline in pre-transfers extreme poverty caused by transfers, as measured by the percentage change in the headcount ratio between pre-transfers and post-transfers income. The pre-transfers and post-transfers incidence of extreme poverty is shown in Table 1. Extreme poverty here is defined as the proportion of individuals whose income falls below the international poverty line of US$2.50 per day in purchasing power parity.(3) Note that, for simplicity, poverty, extreme poverty and indigence are used interchangeably.

Comparing cash transfer programmes in Latin America

Flagship cash transfer programs such as Bolsa Familia in Brazil, Oportunidades in Mexico, Jefes y Jefas in Argentina, Bono Juancito Pinto in Bolivia and Juntos in Peru have become household names in their respective countries.(4) In the case of Bolsa Familia and Oportunidades, they have gained international recognition as well. Except for Oportunidades in Mexico, these are neither the only cash transfer programs nor necessarily the largest in terms of resources. 

Argentina’s largest program is the 
Pension Moratorium (2.3% of GDP)—a special non-contributory pension that increased the proportion of women in retirement age who receive a pension by almost 30 percentage points (more than 90 % of women of eligible age now receive a pension). In Brazil, the largest is the Special Circumstances Pension (2.3% of GDP), a transfer designed to support, for example, widows and workers who become disabled (resources spent on Bolsa Familia equal 0.4%). In Bolivia, Renta Dignidad—a universal minimum pension—is the largest (1.4% of GDP). In Peru, food transfer programs cost 0.2% of GDP–twice as much as Juntos

Although Argentina and Mexico are similar in terms of per capita GDP (measured in purchasing power parity the latter was around 14,000 dollars per year), Argentina spends more on cash transfers (3.0 % versus .75 % of GDP) and a larger percentage of the extreme poor are transfer beneficiaries in Argentina than in Mexico (92.5 versus 66.8 %). Unsurprisingly, transfers in Argentina reduce extreme poverty by a considerably larger amount. This is true, however, in the short-run. Since the pension moratorium program may incentivize informality, the formal social security system could face sustainability issues in the future. Also, public revenues in Argentina have been particularly high due to the commodity boom. The government may be unable to support generous cash transfers under more adverse conditions.

Interestingly, although Brazil spends the most on cash transfers of all five countries (4.2 % of GDP), the extent of poverty reduction is smaller than in Argentina because the share of transfers going to the poor is smaller in Brazil: 10 % versus 36 % in Argentina. In Brazil, the largest cash transfer—the Special Circumstances Pension—is not a program targeted to the poor.

Although Bolivia spends almost three times as much as Mexico on transfers as a share of GDP, Bolivia’s GDP is lower so the per capita transfers are smaller than in Mexico. However, what makes Bolivia’s redistributive machine less effective is that more than 60 % of the benefits of its largest transfer program —Renta Dignidad, a non-contributory universal pension (1.4 percent of GDP)—go to the nonpoor; meanwhile, only 43 % of the extreme poor are beneficiaries of any of Bolivia’s flagship transfer programs. Bolivia’s emphasis on more universal transfers (as opposed to targeted transfers) substantially diminishes its capacity to reduce extreme poverty through transfers.

Peru spends a fifth of Bolivia in transfers as a share of GDP, but because the transfers are better targeted to the poor and the coverage of the extreme poor is higher, the reduction in extreme poverty in Peru exceeds Bolivia’s. The poor in Peru receive 47 % of the benefits while the poor in Mexico, Argentina, Bolivia and Brazil receive 38, 36, 32 and 10 % of transfers, respectively. In Peru, 58 % of the poor receive transfers while in Bolivia only 43 % do.

Policy lessons 

For cash transfers to significantly reduce extreme poverty:

i. The transfers per beneficiary have to be of an order of magnitude not too distant from the average poverty gap (i.e., the difference between the poverty line and the per poor person income/consumption). 
ii. The existing range of transfer programs must be designed and implemented in such a way as to cover as close to the universe of the extreme poor as possible. 

These conditions imply that indicators such as the share of transfers as a proportion to GDP or the percentage of benefits going to the poor, by themselves, can be misleading. 

If poorer countries such as Bolivia have large transfer programs but that are not targeted to the poor–everything else equal (e.g., the resources as a share of GDP allocated to the cash transfer)–they will reduce poverty by less. This is one of the important disadvantages of universal programs versus targeted ones. When resources are scarce universal programs get stretched too thinly.

On the other hand, even if programs are well targeted but the government devotes a small amount of resources to cash transfers, the reduction in poverty will be small as well. This is the case of Peru and—to a lesser extent—Mexico. This happens because–with very limited budgets–either the transfer per beneficiary is too small (compared to the poverty gap), a sizeable proportion of the extreme poor can’t be covered by the programs, or because of both.

Coverage may be limited not because of budget constraints only, however. If the targeting criteria/mechanisms of cash transfer programs leave out important sections of the poor (for example, the indigent in urban areas or living in nonpoor regions, single persons without children, or the temporary unemployed), a significant proportion of the extreme poor are likely to be left uncovered by design. This situation can happen even in countries with programs whose scale is similar to the number of people living in extreme poverty. For example, Bolsa Familia in Brazil (which covers around 11 million households) and Oportunidades in Mexico report having 11 and 5 million households as beneficiaries, respectively, figures that are similar to the countries’ population in extreme poverty. However, in both countries the proportion of indigent not covered by any of the existing cash transfer programs is close to one third.(5)

Of course, to reduce poverty on a permanent basis, transfers have to be designed in such a way that households are not incentivized to increase fertility or work less. If existing programs have negative effects on adult labor supply or crowd-out private transfers, for example, in the medium-term the poor may become even poorer. Also, if anti-poverty programs do not emphasize improving the human capital of poor children or empower adults to become more self-reliant, they will not address the more fundamental causes of poverty. In contrast, when cash transfer programs are designed so that opportunities for poor children get more equalized and adults learn how to improve their livelihoods on a more permanent basis, poverty reduction policies can also be good for economic growth. 

This article is an (adapted) excerpt of the relevant section in Lustig, Nora, coordinator, 2012. “Fiscal Policy and Income Redistri- bution in Latin America: Challenging the Conventional Wisdom,” Argentina: Carola Pessino; Bolivia: George Gray Molina, Wilson Jimenez, Veronica Paz and Ernesto Yañez; Brazil: Claudiney Pereira and Sean Higgins; Mexico: John Scott; Peru: Miguel Jaramillo. Tulane University, Economics Department, Working Paper 1202, New Orleans, Louisiana.

Nora Lustig is Samuel Z. Stone Professor of Latin American Economics, Tulane University and Nonresident Fellow, Center for Global Development and Inter-American Dialogue.

This article was published in GREAT Insights Volume 1, Issue 3 (May 2012)

1. By definition, these cash transfers exclude contributory pensions funded through a formal social security system but include non-contributory pensions funded by government tax revenues. 
2. This poverty line is close to the median of national poverty lines in middle-income Latin America.
3. This poverty line is close to the median of national poverty lines in middle-income Latin America. Extreme poor and poor are used interchangeably.
4. The most important cash transfer programmes in Argentina include: Asignacion Universal Por Hijo, Jefes y Jefas, Familias, Food program , Pension Moratorium (non-contributory pensions), Scholarships and Unemployment Insurance. In Bolivia: Bono Juancito Pinto, Renta Dignidad (previously known as Bonosol), PAN and School Feeding. In Brazil: Beneficio de Prestacao Continuada (BPC), Bolsa Familia, Special Circumstances Pension, and Unemployment Benefits. In Mexico: Oportunidades (previously known as Progresa), Procampo and Adultos Mayores. In Peru: Juntos and food transfers. For a detailed description see Lustig, coord., 2012.
5. The number of beneficiaries in Brazil and Mexico is similar to the population living in extreme poverty.

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Economic Transformation and TradeBusiness and DevelopmentDevelopment Finance and TaxationCash transfersDomestic resource mobilisationPovertyLatin America

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Nora Lustig