Ecuador's Bono De Desarrollo Humano Conditional Cash Transfer Program

Ben Turner MSFS-517, Policies for Poverty Reduction Policy Analysis of Ecuador's Bono de Desarrollo Humano Program

I. Introduction Ecuador's large conditional-cash transfer program, Bono de Desarrollo Humano (BDH, or Human Development Bond), attempts to accomplish both 1) a reduction in demand-side income inequality through cash transfers and 2) establish coresponsibilities with poor citizens to keep their children in school and to keep their children regularly visiting health services institutions, by using the incentive of cash transfers to their households. This program is part of a larger policy that is attempting to build human capital for the poor in the form of better education, nutrition, and health.1 BDH was an incremental improvement upon prior Ecuadorian social assistance programs, and it has achieved the two goals above, but has it yet provided a complete solution towards building human capital? Does BDH accomplish more than its stated goal of increasing human capital through increasing attendance in school and at clinics? Will further incremental reform and fine tuning of a social assistance program like BDH be politically possible, using prior decisions as a guide?

1

World Bank, "Bono de Desarrollo Humano", Project Appraisal Document, 2006. http://wwwwds.worldbank.org/external/default/main?pagePK=64193027&piPK=64187937&theSitePK=5 23679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000112 742_20060512122806

Page 1 of 15

I.A. Poverty Issue In 2003, Ecuador sought to make changes to its social assistance and social inclusion policies so as to more directly address the large problem of income inequality within the country. And this problem is large; the richest 10% of the population receives three times more income than the poorest 50% and 60 times more than the poorest 10%. Ecuador has a Gini coefficient of 0.562 and has had a fluctuating economy and budget for social support systems, human capital investment, and education health services. This can be seen in budgeting priorities, where Ecuador invested only 5-6% of its GDP towards social assistance programs while the rest of South America contributed 12% of their GDPs to the same programs within their own countries. Over 70% of the Ecuadorian population is uninsured, while children drop out of school after primary school because of rapidly increasing costs for schooling between the ages of 11 to 15.3 The poor are dropping out of school and out of the health system because they cannot afford it, and these poor consider themselves better off if they leave such national institutions in favor of pursuing work. As a result, poverty becomes cyclical across generations, children grow up malnourished and stunted (to a degree higher than one would expect from Ecuador's economic development level), and macroeconomic growth is severely hampered as the poorest Ecuadorians neither have the physical nor emotional growth to contribute fully to Ecuadorian GDP. I.B. Policy Analysis and Previous Efforts at Reducing Poverty Through Social Assistance and Inclusion 2

World Bank, 2006, p. 42.

3

World Bank, 2006, p. 2.

Page 2 of 15

BDH was created to consolidate two previous Ecuadorian programs, Bono Solidario (an unconditional cash transfer program) and Beca Escolar plus Programa de Alimentacion Escolar (a conditional cash transfer to increase school attendance, combined with a meal program). BDH also used an improved targeting system called SelBen (Sistema de Seleccion de Beneficiarios) to focus BDH conditional cash transfers towards the poorest and most-affected Ecuadorians. Thus, BDH was intended to fix known gaps in targeting while expanding coverage to the poorest citizens, as a reformist improvement over the older, outdated programs. Other efforts have been made to help reduce consumption poverty, to include vouchers for schooling, unconditional cash transfers, and geographic targeting. The problem with these solutions is not so much that they may not be successful in reducing poverty and raising human capital, but they offer weak targeting of the specific groups most affected by poverty. Furthermore, they do not imply any conditionality upon receiving the benefits and so assume good faith usage by those who receive them. BDH in its implementation remedies both problems with its SelBen means-based targeting as well as with conditionality of attendance determining the amount of the cash transfer. So BDH with SelBen is the most promising among its alternatives in terms of achieving Ecuador's poverty-reducing policy goals.

I.C. Roadmap of Paper In order to answer the question of how complete a solution the conditional cash transfer program BDH will be for Ecuador, this paper will first describe the context Page 3 of 15

behind the BDH program, and then move on to analysis of how the program works and what it has accomplished, to include a look into which areas it has lagged behind in. Finally, recommendations will be made on how the program can be improved, moving forward, to further achieve the Ecuadorian government's goals of increasing human capital and reducing consumption poverty. II. Background A direct catalyst for BDH came from Ecuadorian government findings that said child cognitive ability had dropped significantly for primary and secondary students. And the political backdrop for BDH came within the context of the release of Ecuador's Country Assistance Strategy (CAS) in 2003, which set out to primarily reduce poverty but also promote social equity and inclusion. The CAS itself was a response to the establishment of the Millennium Development Goals a few years earlier; most applicable to Ecuador, according to its government, was reducing poverty (Goal #1), achieving universal primary education (Goal #2), and reducing malnutrition through household-based incentives (Goal #4).4 Ecuador's contributions to social support programs used to be worse, before 2000, totaling only 5-6% of GDP while its South American brethren contributed about 12%. Even after including social security budgeting, Ecuador only reached 9%. But since 2000, Ecuador's economy has been growing rapidly, its budgeting for social programs has increased, and human capital has increased as a whole, particularly for primary school enrollment of over 90%.5 4

World Bank, 2006, p. 10.

5

World Bank, 2006, p. 2.

Page 4 of 15

Where Ecuador's social system breaks down is in secondary school enrollment, when the price of going to school becomes too much for many families, whose children drop out of school at that point and do not return. Economic growth has also not been distributed equally across the population spectrum, with an increasing amount of wealth being concentrated in fewer people (the richest 10% earns more than 60 times the poorest 10%). Ecuador's children also grow up on average more wasted and stunted than elsewhere in South America, evidence of malnutrition. Ecuador has long had social programs. BDH in fact was a conglomeration of two previous programs.

One program was Bono Solidario (BS), an unconditional cash

transfer of $11.50/month to 1.3 million poor people as a substitute for the gas and electricity subsidies, which families had been receiving previously but which were later halted. BS suffered from poor targeting of the correct poor groups, relying on selfmeasured results to assess who should get the transfers. BS, originally created as a temporary stop-gap for the subsidies, however, became institutionalized as the second largest Ecuadorian social expenditure behind education, a common outcome for wellintentioned "temporary" initiatives. The other program was Beca Escolar (BE) in combination with Programa de Alimentacion Escolar. BE served as a conditional cash transfer program ($5 per child per month, assuming 90% regular attendance) to raise school enrollment, having fairly good targeting but only affecting 150,000 households, a small amount. Programa de Alimentacio Escolar was a complementary food program to give food to children in schools.

Page 5 of 15

Results showed very small gains: BS was found to have improved child nutrition by 5% in 2001, and a very small but significantly significant effect on child nutrition. BE and BS were good programs in theory but by themselves seemed to be expanding without proper targeting or clarity of purpose. Worse results in key indicator areas related to education and health made political action possible. In 2003, Ecuador began BDH, combining both BS and BE with SelBen to retarget the most affected poor people in Ecuador. The World Bank contributed $60 million over 4 years to support Ecuador's plan, offering $5 million in technical assistance and $55 million in funding for transfers. BDH intended to keep the functions of conditional cash transfer but extend them directly towards improving children's nutrition and health as well as their attendance in school. The key difference of the BDH over the two prior programs was that it relied on SelBen as an independently verified proxy-means-testing targeting system. In other words, instead of relying on self-reporting households for targeting, families were required to meet certain requirements in interviews, segmenting affected children into age groups of secondary school-age students and pre-secondary school students. III. Application III.A. Results BDH showed significant results in the narrow range of metrics it was designed to improve: according to a Schady and Araujo report in 2006 6, children from the age of 6 6

Schady, Norbert R., and Araujo, Maria Caridad. "Cash, Conditions, School Enrollment, and Child Work: Evidence from a Randomized Experiment in Ecuador", 2006, p. 10. Unpublished manuscript.

Page 6 of 15

to 17 had 10% higher class enrollment as beneficiaries of BDH.

They also found that

child labor decreased by 17% in the same study. Ponce in 2008 found that 25% more money was being spent on food expenditures by beneficiaries of the program. The intended goal, of using cash transfers to alleviate consumption burdens so that more money would be spent on food and less child labor would be needed, was successful. But positive (and for that matter, negative) externalities did not arise out of the BDH program.

Ponce and Bedi in 2008 found that children's test scores did not

improve in a statistically significant way as a result of more time spent in school.7 So while class enrollment improved, this did not mean that the children were learning more simply as a result of being in school as opposed to somewhere else. Ponce and Bedi also concluded that this lack of relationship between class enrollment and test scores had nothing to do with incorrect targeting -- the targeting in itself was fine and showed that indeed the beneficiaries of BDH were worse off both economically and educationally than non-beneficiaries. Furthermore, it can be concluded that if the main overarching goal of BDH is to break the cycle of systemic poverty, then BDH by itself is not succeeding, even if it is reducing consumption poverty. Children are not getting better results on tests from this program, which means they are not becoming more economically valuable.

Cash

transfers help alleviate short-term burdens and increase demand for services, but do not break longer patterns of poverty related to lack of education, little accumulation of human or economic capital, and so on.

7

Ponce, Juan and Bedi, Arjun S. "The Impact of a Cash Transfer Program on Cognitive Achievement: The Bono de Desarrollo Humano of Ecuador", August 2008, Abstract.

Page 7 of 15

II.B. Implications of Results BDH is designed specifically to reward participants with money for attending school more often and for routinely visiting medical clinics. Nothing more is implied, and as results have shown, nothing more has been borne out. For BDH's human capital metrics, it is working quite well. But obviously just getting children into clinics and schools is not enough. What else is there? As Schady in "Evaluating Conditional Cash Transfers", a World Bank report, puts it, the emphasis should be on outcomes, not so much inputs: "There are various reasons why CCTs may have had only modest effects on 'final' outcomes in education and health. One possibility is that some important constraints at the household level are not addressed by CCTs as currently designed; these constraints could include poor parenting practices, inadequate information, or other inputs into the production of education and health. another possibility is that the quality of services is so low, perhaps especially for the poor, that increased use alone does not yield large benefits."8 So BDH's CCT is successful in bringing kids into social services, and the demandside part of the equation benefits greatly. But that program is not enough; a supply-side increase in the number and quality of teachers, the institutional capacity of the national school system, and:

8

Schady, Norbert. "Evaluating Conditional Cash Transfers", World Bank Policy Research Reports, Washington, DC, 2009. p. 38.

Page 8 of 15

"... interventions that seek to improve parenting practices and the quality of the home environment are likely to be particularly important. Oportunidades and some other CCTs attempt to expose parents to new information and practices by conditioning transfers on participation in talks (known as platicas). ́ The conditioned cash helps ensure that parents attend and participate in the platicas. ́

However, the cash-condition

package offered by CCT programs may not be enough, and a comprehensive program that relies on more active participation by social workers and others may be needed."9 Could there not be a conditional cash transfer for teachers as well, to keep their attendance up?

This would also require better schooling for teachers and more

incentives to keep them within the country, as they and other human capital jobs such as doctors are being recruited heavily to leave for jobs in other countries. II.C. Political Considerations Such a large increase in scope for a program to combine social programs for children's education, health, decrease in child labor, and decrease in poverty will require a large increase in accompanying funds. While targeting has been shown to be effective through SelBen in Ecuador, inevitably those not benefitting from the cash transfers will complain to policymakers, and these people also happen to have more influence within the political system than those who are the poorest in Ecuador. Initially, CCTs are very popular politically because they 1) help poor people (which all parties claim to support) and 2) place conditions on handing out money, 9

Schady, p. 26.

Page 9 of 15

making it more palatable for the middle and upper classes to support, since they tend to believe more in the idea of self-determination.

But as the programs get more

complicated to account for all the insufficient human capital inputs, they begin to be seen more as drains upon the nation's coffers and resistance increases. To explain, Schady states: "The political economy family of arguments centers around the notion that targeting tends to weaken the support for redistribution because it reduces the number of beneficiaries relative to the number of those who are taxed to finance the program. Whereas the response most commonly considered in the literature is to establish broad-based redistribution that includes the middle class, an alternative is to appeal to the altruistic motive of voters: the same people who object to targeted transfers as “pure handouts” might support them if they are part of a “social contract” that requires recipients to take a number of concrete steps to improve their lives or those of their children."10 But such social programs are also easier to implement in Latin America than in other parts of the world, as Schubert and Slater quoted Handa and Davis in reference to African CCTs versus Latin American CCTs: "… public support for safety-nets in general and the provision of cash in particular is a function of the values of the society as well as the characteristics of the poor. Support will be less in countries where citizens feel that poverty is due to individual lack of effort or responsibility, for 10

Schady, p. 10.

Page 10 of 15

example, or when the poor are easily identified as ‘different’. In Latin America the ‘face’ of the poor is typically different from mainstream society, and the poor are often geographically marginalised."11 III. Complements to CCTs One significant problem for funding more human capital inputs both on the demand side and on the supply side is that evidence of which programs would work for those strategies is scant and it is still unclear to researchers and practitioners what all those human capital inputs are. Some are obvious, such as having enough excellent teachers to teach all of a nation's children, who are being fed enough for them to learn efficiently and who are being schooled in buildings comfortable and safe enough for those children to learn with clear minds. But what programs can be instituted to help with cultural taboos or biases towards work and not education or gender roles or religion? What sort of school building is sufficient for children to adequately learn? What is the proper mix of all these different factors in greatly increasing a nation's human capital? These answers just aren't clear and CCTs have been a bright spot in something that produces predictable and observable results; but CCTs clearly aren't the norm. IV. Conclusionary Recommendations Ecuador, in response to rising income inequality, lower demonstrative cognitive ability in children ages 6-15, and above-average wasting and stunting among youths, created Bono de Desarrollo Humano (BDH). While BDH increased household food 11

Schubert Bernd and Slater, Rachel. "Social Cash Transfers in African Countries: Conditional or Unconditional?", Development Policy Review, Edition 24, 5, 2006. p. 576.

Page 11 of 15

expenditures by 25% through its conditional cash transfers, and generated $9 spent on education for each $15 transfer, and increased school attendance among primary school students, the program was less effective in increasing cognitive ability as demonstrated through test scores (where it was found to have no effect either negatively or positively). BDH, as it has been successful in achieving these demand-side goals as stated above, should be kept and should continue to be improved. BDH is solely a short-term demand-side solution and must be complemented with other programs in order to achieve Ecuador's stated goals of reducing systemic, long-term poverty. Some attempts to build human capital are: 1. Exploit the Simplicity of CCTs. For political reasons, keeping the size and affected pool of beneficiaries the same might be best for BDH so as not to alienate popular support for funding. BDH has also shown itself to have reduced shortterm consumption poverty and has changed poor families' consumption habits towards allocating more money towards food (25%) and education (for $15 transferred, $9 is spent on education). Schubert and Slater, analyzing whether CCT programs would be successful if transferred over to Africa, recommend: "Taking these basic conditions into account, the organisation and procedures for social cash transfer schemes have to be kept as simple and as undemanding as possible. The focus should be on a clear definition of objectives and target groups, on effective targeting and on reliable delivery. To achieve this country-wide and Page 12 of 15

in a cost-effective way is already a mammoth task. The additional workload required to apply conditions, to monitor compliance and to respond in cases of non-compliance would overburden the implementation capacities of the social welfare services in lowincome African countries."12 2. Pre-Schooling and Parent Education. Research into CCTs (particularly by the World Bank) has found that much of the positive effect of BDH and similar programs affects children in their earliest stages of growth.

So instead of

increasing the size of the program, Ecuador should implement complementary programs for preschooling and early home stimulation programs, both as teaching for children not yet in school and for their parents. This would have a more positive and efficient effect than increasing secondary school enrollment which is more prone to labor market fluctuations as children's labor value increases with age -- if the cash transfer cannot offset the loss of income of older children not working, then the cash transfer is less likely to be effective. 3. Retain Institutional Capacity. CCTs address incentives but they do not fix cultural or institutional attitudes about the importance of health and education for children at an early age for forming human capital and reducing long-term poverty. Schubert and Slater wisely point out, "Capacity-building interventions to strengthen the social welfare services involve more than supplying them with computers, 12

Schubert, Slater, p. 575.

Page 13 of 15

vehicles, administrative budgets and training courses. They require behavioural changes at national, provincial and district levels, through

public-service

reform

combined

with

long-term

development assistance for organisational change. Even given the political commitment to such reforms and appropriate donor assistance, it would still take years for the social welfare services to be able to run cost-effective and reliable social cash transfer schemes covering all regions of the relevant countries."13 4. Extend CCTs to Supply-Side Solutions.

Shortages of classrooms,

inspired and intelligent teachers, schoolbooks, and other resources quickly escalate as problems once more students are attending school. If students don't get adequate schooling in exchange for attending, this dilutes the effect of cash transfers

because

motivation

and

outcomes

are

seen

as

significantly

disappointing and students will drop out to go back to work. 5. Improvements in Nutrition and Health Care Delivery. Ecuador still suffers from a higher degree of wasting and stunting than other South American countries, despite its having a nutritional food program for students through Programa de Alimentacion Escolar and now within BDH. This indicates that research must be done to deliver more calories and nutrition to schoolchildren and to provide better cheap solutions for quick medical care when the children come in for their periodic clinic visits.

13

Schubert, Slater, p. 575.

Page 14 of 15

None of these additions are as simple and straight-forward and politically powerful as CCTs are (except perhaps supply-side CCTs), so they will be harder to implement, but they provide the most promise for moving Ecuador forward and breaking the cycle of poverty that a significant amount of its population faces.

Page 15 of 15