The Impact of Conditional Cash Transfer programs from a Risk Management Perspective Research Paper

Introduction

What are conditional cash transfer (CCT) programs: History and mechanism

Conditional cash transfer has become a popular welfare program across the world. The program aims to alleviate poverty and encourage investment in human capital among poor households. Today, many countries have adopted or plan to adopt CCT programs.

The program has become popular in Latin America. In other countries, such as Turkey, South Africa, Indonesia, and Bangladesh, there are extensive applications of CCT programs, including pilot programs by using cash to “incentivize household investments in child schooling” (Fiszbein and Schady 1).

The Conditional Cash Transfer (CCT) is a program that transfers cash to poor households if they meet certain specified investments in the human capital of their children (Fiszbein and Schady 31).

According to Das and colleagues, the definition is broad enough to cover education, health, and other programs, such as consumption transfer and workfare, which are cash contingent for being a part of the program and in-kind transfers respectively (Das, Do and Özler 61).

Further, these authors note that in-kind transfer and workfare have similar concept like conditional cash transfers. People who take occupations as proposed by the CCT usually get workfare whereas those who receive in-kind transfers must buy certain products and commodities relevant to the program. These three types of transfers are similar and share common concepts.

A critical point to note is that the program has ‘conditions’ attached to the cash transfer. This program only focuses on two aims. First, the program seeks to offer cash incentives for poor households with low spending power. Second, the program seeks to enhance the development of human capital and reduce the chain of poverty that affects entire generations among poor households (Fiszbein and Schady 31).

Table 1: Matrix of Program Size and Extent of Conditions

Source: Fiszbein and Schady 2009

CCT programs aim to eliminate poverty by encouraging human capital accumulation among the poorest households. The CCT program in Columbia borrowed the concept from the Oportunidades of Mexico (Attanasio et al 181). The program has conditional subsidies, which eligible households invest into nutrition, education, and health.

These interventions have positive externalities, which justify them because human capital investment may experience liquidity challenges, or other factors associated with the too much “discounting of the future utility of children by parents or myopia” (Attanasio et al 181).

Favorable externalities may offer valid reasons for supporting the transfer conditional, i.e., households only receive their transfers if they meet certain specified conditions. Conversely, an unconditional transfer may be the best option for overcoming immediate liquidity issues among poor households because UCTs do not require households meet prespecified conditions.

In CCT programs, education accounts for the largest investment. Households with children aged between seven years to 17 are eligible for CCT programs under education cash transfer, and enrolled children must attend at least 80 percent of classes in order to receive the cash.

Importance of education for individuals and society as a whole

Among various kinds of CCT programs, this essay focuses on the conditional program on investment in education. Education is the tool for fighting poverty. Poor households cannot afford the cost of education, and they may choose not to forego income that comes from child labor. However, when children lack education of a certain level, their ability to get incomes in the future becomes limited.

As a result, they are unlike to escape the poverty trap. On the contrary, children who receive higher levels of education or get literacy and numeracy skills under the CCT programs are likely to break the intergenerational poverty trap. In addition, education enhances social efficiency through its spillover effect benefits to others in the same environment (Fiszbein and Schady 65).

What is vulnerability, how does it relate to poverty, what are some forms of coping mechanisms?

Vulnerability is an exposure to contingencies and stress and without any means to cope up with such situations (Dercon 1). In this case, vulnerability results into poverty. Poor households lack formal means such as credit market or insurance, which they can use to alleviate poverty.

Hence, they must depend on informal systems in order to control income risks. Any resulting income shocks force vulnerable households to choose low risks low return investments without taking into account long-term effects of such decisions.

How is CCT differed from UCT? What is the role of conditionality?

Whereas UCTs also offer cash to households, they do not attach any conditions to the cash. Previous studies have shown that households do not spend their cash on welfare-enhancing commodities. On the contrary, CCTs enhance behavior among beneficiaries, focus on market failures that cause underinvestment in human capital, which takes place because of mismatch preference factors (Das et al 57-58, 61).

How does CCT help the poor to manage their risks?

Ex ante evaluations of CCT programs have shown improved children enrolment in schools among poor households (Das et al 59, 66). This shows that poor households have chosen child education over child labor because of the cash transfer.

Ex post evaluations have also confirmed similar results (Das et al 66). Hence, in the long-run CCT programs help poor households to manage high investment risks in education and break the poverty trap (Das et al 66).

Organization of the paper

The part II looks at how CCTs serve as a risk-managing tool and reduce households’ vulnerability. This section looks at reducing income risks of children education (Ex-ante) while ex-post acts as safety nets in ensuring children’s school enrollment. In the end, these approaches reduce vulnerability and poverty.

Part III focuses on related issues and concerns, such as relying on solely on CCT programs and the issue of quality and quantity, and other programs that aim at reducing child labor. The paper then concludes by looking at the role of CCTs in reducing risks and vulnerability among poor households.

How CCTs serve as a risk-managing tool and reduce households’ vulnerability

Ex-ante: reduce income risk of children’s education

• Why is investment in human capital, in particular, education, a risky investment to make?

One may expect households to be very willing to invest in education since there are many benefits of education for such household and for society as a whole. Without CCT programs, underinvestment in education in developing countries is common.

The cost of tuition can be a burden for many poor households. In addition, there is opportunity cost associated with letting children spend time at school rather than at income-generating activities. Education is a long-term investment, which implies that households must wait for a considerable period to get pay off for investing in education. All these factors have made investment in education to be risky and high cost.

• Why are the poor “reluctant” to take on high risk, high return investment like education?

The reluctant by the poor to invest in opportunities with high risk and high yield deals like education is not due to being highly risk-averse (Dercon 13). The challenge is controlling for preferences due to lack of insurance.

According to available evidence, uninsured risks facilitate poverty by engaging in ex ante behavioral activities (Dercon 13). These behaviors affect choices and investments too and in the end, they lead to permanent effects. Hence, poor households are likely to select low risk investment, low return investment because they have less access to insurance.

One can conclude that poor households have limited options available to them when making decisions based on risk preferences. The challenge is not risk preference, but rather constraints on available options to poor households as they strive to manage uninsured risks.

Market failure also leads to low investment, low return portfolio among poor households (Das et al 62 – 63). Individual households make decisions, which are best for the society as a whole. When poor households make low investments in education, they fail to account for effects of their low investments on people around them.

Under such circumstances, a cash transfer conditional on education investment has a significant increment on social welfare than an unconditional cash transfer. This is main idea behind conditional cash transfer programs. The CCTs could enhance effectiveness when main causes of the problem are market failures in the economic system of a nation (Das et al 62).

Fairness and redistribution of resources are also major reasons for CCT programs. This rationale is applicable in cases whereby the sponsors would like to support only underprivileged household sections of the residents. However, policymakers contend with challenges of small budgets and difficulties in identifying poor households.

One approach is to screen households so that only poor ones take part in the program (receive cash grant) while rich ones do not. Conditions have been useful in getting similar results. Successful screening will ensure that only eligible poor households participate in the program. For instance, the benefits without costs of the condition will not be the same for all the population.

In other words, conditions would result in loss of utility for being forced to consume certain quantity or buy certain commodities. Specifically, only poor households will derive benefits that exceed conditions attached to the cash grants. This approach results in self-select and eliminates the rich households automatically.

As a result, the underlying principle for applying conditional CCT program is to monitor and indentify eligible, targeted populations in cases where it is difficult to identify specific features of the preferred participants. These two rationales for using conditional cash transfer programs are not similar.

The first instance aims to improve the consumption of the conditioned-on commodities while the second rationale shows that the conditional cash transfer programs are effective tools for self-select into programs.

• How do CCTs serve as an ex ante risk-coping instrument in this situation?

CCTs effectively reduce direct costs of education and at least partially compensate for indirect or opportunity costs education. Attanasio and fellow researchers show that education is the largest component of the conditional cash transfer program (Attanasio et al 184). Mothers of eligible children received subsidies. However, their children must attend at least 80 percent of school classes.

The compensation differed based on the level of education. For instance, parents of children in primary schools received 14,000 pesos (US$6.15) while those parents of children in high school received 28,000 pesos (US$12.30). Relating cash conditional on school enrolment and turnout could reduce the total cost of education.

The grant would partially replace earnings that the poor families would give up if their children enhance engagement in school activities. Children generate incomes for poor households.

However, one must note that any subsequent changes to let children go to school on a normal basis and changes on total costs would not have effects on “the poor households’ decisions to encourage their children to attend schools regularly” (Attanasio et al 184). Hence, the grant is an unconditional transfer that only increases the income of the household.

CCTs lower costs and create short-run returns among poor households who send their children to school. In this manner, such programs make investment in education a less risky investment for poor households. Programs that provide such short-run returns could be in form of cash or in-kind as a conditional cash transfer (Das et al 62-63).

However, children aged between 14 and 17 years may experience significant changes relative to their counterparts in rural areas. Still, the result is not big because the difference is nearly 0.2 hours reduced time, which children spend at incoming generating activities.

This result shows that children would slightly reduce “leisure time they spend, but no empirical data exist to substantiate this claim” (Attanasio et al 202). The result also suggests that the “contribution of child labor to household income is not much because of the low-level of the program on child labor” (Attanasio et al 202).

Finally, cash transfer programs address the issue of market failure that result from mismatch because of limited options for parents and children as they make low risk investment without insurance.

Ex-post: serve as safety nets in ensuring children’s school enrollment

Most poor households in developing countries are highly susceptible to income shock. These shocks pose serious challenges to their well-being. Income shocks among poor families push parents to withdraw their children from school with the intention of making them work in cases where risk-averting strategies are not effective.

Poor households’ reactions to short-run shocks usually have lasting impacts on the intellectual growth and human capital progression in children.

In situations where conditional cash transfer program emphasizes school attendance, the result has been positive on enhancing school attendance and reducing child labor (de Janvry, Finan, Sadoulet and Renos 349).

de Janvry and colleagues study showed that there was strong dependence on school enrolment and conditional cash transfers were effective programs for protecting children school enrollment.

Nevertheless, it did not stop parents from providing additional child labor as a way of coping with income shocks (de Janvry et al 349). Overall, CCT programs could act as safety nets by providing additional benefits to poor households and protecting school enrollment.

Table 2: Prevalence of shocks in Mexico’s poor rural communities

Source: de Janvry et al 2006 p.350

Lack of CCTs would force parents to withdraw their children out of schools as a way of responding and coping with income shocks. High re-entry costs would deter children from poor households to enter schools afterwards. This has a permanent impact on children’s human capital development.

Shocks have different effects on children of various age groups. Obviously, some children are more prone to effects of income shocks than others are (de Janvry et al 367). Specifically, primary school children from “indigenous areas from farming households suffer severe effects of shocks than secondary school children from non-indigenous and non-agricultural backgrounds” (de Janvry et al 367).

Still, boys bear greater magnitude of unemployment in households than girls. On the other hand, girls are likely to suffer effects of natural disasters than boys. In all these cases of shocks and their impacts on both primary and secondary school children, the program was able to lessen negative impacts of shocks on schooling.

This is a notable outcome, which indicates that conditional cash transfer programs are safety nets for creating values and reducing magnitudes of shocks among schooling children (de Janvry et al 367).

Without CCTs, shocks would cause permanent impacts on children’s human capital development. For instance, children who are taken out of school because of income shocks are not likely to enroll again for subsequent schooling. Hence, short-run strategies to increase households’ incomes during shock result in long-term consequences for the development of children’s human capital.

A study by de Janvry and colleagues showed that shocks affected children in different ways (de Janvry et al 371). For instance, the most active children (aged between 15 and 18 years) in the labor market experienced effects of climatic shocks strongly than other age groups. On the other hand, this active age group was not vulnerable to distinctive household shocks.

Children aged between 8 to 14 years old also experienced climatic shock but on a relatively low-level to their older counterparts. However, the participation of these children in the labor market increased as their parents suffered health shocks and siblings’ illness.

Specifically, boys had high rates of responses to shocks than their girl counterparts. The most important outcome to note is that a “Progresa conditional transfer does not mitigate the increased use of child work in response to shocks” (de Janvry at al 372). Moreover, shocks affected all households in poor villages.

However, a person would anticipate that villages with “high-income levels on average would not send their children to work for incomes and manage shocks well than villages with poor incomes on average” (de Janvry at al 372).

Overall, these researchers concluded that incomes from conditional cash transfer programs were not sufficient to prevent parents from sending their children to work in order to reduce negative impacts of shocks. However, an increase in child labor did not have any costs with regard to school attendance because of conditional transfer.

The presence of CCTs had positive impacts for poor households. For instance, the available cash from the program would finance the immediate consumption needs of households if they failed to generate adequate incomes for their needs.

CCTs conditional programs also sustained enrollment rates by reducing high costs associated with dropout because households would lose subsidies in case one of their children dropped out of school. In this sense, CTTs were safety nets for keeping children at schools during shocks. CCT programs have also been effective on improving school achievement among children.

This takes place because the program brings children who would have “not enrolled otherwise, and it prevents children exposed to shocks from dropping out of school” (de Janvry et al 350). The conditional cash transfer program facilitates school enrolment and ensures that children do not suffer from negative effects of shock.

Conditional cash transfer programs also act as safety nets by temporarily increasing the size of benefits for eligible poor households (Handa and Davis 518). Many critics have observed that CCTs focus almost completely on human capital development, which is a long-term project and could take several years before develop successfully.

These programs have neglected the development of human capital and other productive capacity for old people for solving immediate problems. In other words, these programs should also focus on activities that would result in short-term, as well as long-term outcomes for immediate alleviation of poverty. However, CCT programs work well as safety nets during periods of shocks.

Since the poor are likely to become poorer during shocks, additional size of the CCT benefits would prevent these households from severe effects of financial shocks (Handa and Davis 519). Moreover, recession is likely to push a considerable number of middle class and some ‘near poor’ households further into poverty. Normally, these are households, which would not qualify for conditional cash transfer programs.

This implies that transitional poor may not benefit from the program because the current model of CCT does not focus on households, which are on the transitional poverty path. The critical point to note is that CCT programs for combating structural poverty could also be effective in fighting crisis because they have direct roles in fighting a crisis in households by improving coping strategies.

Overall, it is imperative to note that CCT programs are not able to prevent an increment in child work because of shocks (de Janvry et al 351). In other words, it is difficult to substitute time spent at work and school.

In the long run: reduce vulnerability and poverty

Theoretically, investing in human capital has imperative impacts on a person’s ability to generate future incomes. A conditional cash transfer conditioned on school enrollment for children would allow them to attain high standards of education. In most cases, higher level of education potentially leads to higher incomes. Hence, CCTs help poor households to reduce vulnerability because of poverty and income risks.

In this regard, conditional cash transfer programs have abilities to transform intergenerational poverty by allowing poor households to invest in human capital development of their children. A study by Fiszbein and Schady showed that “although there was clear evidence that CCTs have increased the use of education services, evidence on the impact of CCTs on ‘final’ outcomes in education was more mixed” (20).

For example, on the health focus, evaluations have established that children in CCT programs have recorded improvement in height. Moreover, some outcomes have also shown that children in the program have good health than others who are not.

On education achievements and outcomes, adults who have spent more time on the Oportunidades program also achieved schooling than those who did not. However, there were minimal chances that the high number of schooling would result in significant increment in wages (Fiszbein and Schady 20). Moreover, high rates of enrolment in schools have not resulted in improved performances on tests.

This also occurred even after reviewing and accounting for selection during enrolments. The outcome indicates that increased enrolment doe not translate to quality education and achievement. Hence, CCTs may not result in quality education. Analysis of these outcomes shows that the ability of CCTs to improve learning on their own might be constrained.

However, outcomes on effects of CCTs are encouraging because investments in human capital and early childhood education have positive results. Hence, one may conclude that early focus on education may result in good outcomes and payoffs in terms of school enrolment and education achievement.

Handa and Davis notes that a number of factors could explain why conditional cash transfer programs have modest outcomes on health and education (Handa and Davis 519). One major explanation could be that “several constraints affect households, but the current CCTs do not address them” (Handa and Davis 519). For instance, poor parenting habits could affect CCTs outcomes.

Others may include inadequate information or impacts inputs on health and education among the beneficiary households. Another potential explanation could be that the poor receive inferior services, and increased use of health and educational facilities may not provide the desired advantages or positive feedback.

From past studies and empirical evidence, one should not ignore the impact of conditional cash transfer programs in enhancing human capital development. The main challenge is to redesign CCTs or develop new programs to address multiple challenges in poor households.

Benefit structures for most CCT programs are complex (Handa and Davis 519). This happens because of different constraints and challenges in different poor households.

Table 3: Benefit size and structure

Source: Handa and Benjamin Davis 2006, p 520

The complex nature of CCT programs limit benefit structures to family-level cap and a fixed-family level transfer. However, these are conditional benefits based on health check-ups and educational transfer. In PATH, the transfer focuses on an individual basis. This strategy lacks a family-level cap and any eligible family member receives his or her benefit.

However, PATH structure provides opportunities for families to abuse the program through non-compliance with any conditions of health or schooling. In other approaches, families may not comply with all conditions. For instance, families may only send some children to school but not all of them and still collect the per-child subsidy because all members are eligible.

Hence, challenge should be to develop effective conditional cash transfer programs to facilitate developments of human capital among children and reduce immediate effects of income shocks in poor households.

Related issues and concerns

Quantity-quality dilemma: The quality of schooling and the quantity of faculty need to keep up with the increase in enrollment. (Refer to 6:531, 1:74-76)

A number of issues still need evaluation and answers in CCT programs. The first issue involves the quality of education received. The number of enrolment has increased because of conditional cash transfer programs conditioned on education. However, in an attempt to develop the quality of human capital at early stages, the long-term goal of providing quality education for poverty alleviation has suffered.

The qualities of education and overall program success have remained unanswered issues of concerns. Normally, the quantity of enrolment should result in high quality level of schooling among children through cognitive development and high productivity in the labor market and high earnings.

This would provide a complete picture for understanding the relevance of conditional cash transfer programs. However, increased enrolment of children may not necessarily result into quality education if no thorough learning takes place.

Hence, the vicious cycle of poverty in poor households may be difficult to break. One cannot completely hold CTTs to account for educational achievement among its beneficiaries, but it is advisable to account for CTTs investment in education. On this note, different stakeholders in education should work together in order to raise the standard of education.

While available past studies have shown that conditional cash transfer programs have positive impacts on education enrolment and achievement if the conditions are school enrolment and attendance, most researchers do not account for the quality of education that children under the programs from poor households receive in schools.

On this note, it is imperative to understand if children from poor households under CTTs receive low-quality education that affects their performance and educational achievements.

Relying solely on CCTs in solving the problem of inequities in human capital may divert “resources and attention away from essential investments in health and education which may be the only way to sustain the long-term investment in human resources required to reduce poverty” (Handa and Davis 531)

First, stakeholders must recognize that the current model of CCTs cannot solve long-term challenges in education and health. CCTs have challenges of financial sustainability, especially in poorest nations where CCT programs run on loans and grants.

Moreover, sustainability of CCT programs is not clear. Loans and grants for CCTs programs are short-term approaches of managing and encouraging poor households to enroll in schools and go for medical check-ups. However, CCTs do not provide any long-term solutions to issues of education and health. On this note, stakeholders must find for permanent and suitable ways of managing issues in education and health sectors.

It is also unclear whether CCT programs are cost-effective and sustainable programs for poor households in poor countries. The main proof is that CCT programs have facilitated investments in human capital in poor households. One may also recognize spillover benefits to society because of these investments.

While conditionality is necessary for improving consumption of prespecified commodities and enrolment in order to alleviate poverty, scarce evidence exists to support effectiveness of CCT programs on controlling widespread poverty and inequality in societies.

Although CCTs may be effective in harnessing resources for supporting education and health, they are not the suitable tools for tackling inequalities in societies because they are not designed to tackle such massive challenges. Hence, this notion may not work given the focus on CCTs, which are mainly health and education while societies have myriad of challenges.

Programs that aim at reducing child labor

Time spent at work may negatively affect educational outcome

Zabaleta observed that child labor was a major challenge to achievement of the global goal of Education for All (Zabaleta 1527). Hence, child labor leads to poor outcomes in children education achievements. The time a child spends to work “is found to have detrimental effects on subsequent educational achievements, even after controlling for previous human capital accumulation and other factors” (Zabaleta 1527).

Specifically, children who dedicated three hours every day for labor had medium failure in their education achievements. In addition, the type of labor also affected education outcomes differently. For instance, children who spent time in market production had weaker scores than those who spent time doing house chores.

CCT programs have failed to stop parents from responding to financial shocks by taking their children out of school to increase child labor as a method of coping (de Janvry et al 350). Parents from poor households have note that children can serve as risk coping instruments against income shocks.

When poor households have challenges in sustaining daily consumption, parents normally withdraw their children from schools in order to save costs on education and send them to work in order to assist the family in managing shocks. Children could work in market production, do house chores, or in family-based ventures.

The main challenge is that when children withdraw from schools temporarily, they are unlikely to report for subsequent enrolments. Parental behaviors and reactions to shocks show that not even CCT program can substitute child labor and associated incomes during shocks. This affects the development of children’s human capital and its intended future role of alleviating poverty.

Conclusion

Vulnerability and risk management are important dimensions of the poor’s well-being. Vulnerability exposes the poor to poverty. It facilitates the situation of poverty because poor households have limited options and insurance to avert poverty. Informal alternatives are the only means available to them.

Hence, managing risks and vulnerability through human capital investment is the best approach for long-term gains and breaking the poverty chain. It is imperative to manage vulnerabilities and risks through long-term investment, high return portfolio, which involves investing in education.

Education is a long-term investment, high return investment, which poor households consider as risky. However, this is not because of investment risk preference, but rather because of limited choices available to them. Only invest in children’s human capital development would reduce risks and vulnerability of poor households. CCT programs have achieved massive success in facilitating education enrolment.

Conditional cash transfer programs have reduced risks related to ex ante. The program allows poor households, which cannot sustain investment in children education to receive cash transfer for children enrolled and meet certain period in school. As a result, the program has facilitated long-term investment in children’s human capital development among poor households.

Past studies have shown that CCT programs have been effective in facilitating health and education among eligible households. Ex post offers a safety net for poor households in case of income shocks and in the end enhance human capital development, higher potential incomes, and reduce vulnerability to risks.

Both ex ante and ex post evaluations have shown that CCT programs have positive impacts among eligible families. These results could reflect the only true evaluations for a given program (Bourguignon, Ferreira and Leite 230).

While CCT programs have shown remarkable achievements in poor nations, there are many issues that remain unanswered, which could make CCTs more effective. One major outcome is that CCT programs do not prevent parents from withdrawing their children from schools during shocks. This is a drawback to CCTs since they are designed to keep children in school and increase the rate of enrolments.

CCTs do not focus on promoting sustainable productive activities for rural poor households. Moreover, engagement of rural people in certain prespecified activities may not yield desired results because households have different needs. The program focuses on children only, but ignores parents in terms of human capital development.

Moreover, human capital development in children is a long-term project, but households in poor rural areas do not prefer to make long-term investments. CCT programs should focus on both short-term and long-term solutions to households under shocks. It is not clear when some programs would end and developing a sustainable CCT program requires resources.

CCT program strategies have focused on the marginalized and isolated poor rural households. While financial aid is good for the rural communities, policymakers of CCT programs should develop alternative methods of maximizing results in local communities.

The program still experiences difficulties related to inclusion and exist strategies for children who have graduated from the program. In other words, elderly and families, which do not have schooling children, do not qualify for the CCT program. Any contradiction and bias in the system could undermine efforts of CCT programs in human capital investment.

Works Cited

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Das, Jishnu, Quy-Toan Do and Berk Özler. “Reassessing Conditional Cash Transfer Programs.” The World Bank Research Observer 20.1 (2005): 57-80. Print.

de Janvry, Alain, Frederico Finan, Elisabeth Sadoulet, and Renos Vakis. “Can conditional cash transfer programs serve as safety nets in keeping children at school and from working when exposed to shocks?” Journal of Development Economics 79 (2006): 349– 373. Print.

Dercon, Stefan. Vulnerability: a micro perspective, Working Paper Number 149. The United Kingdom: University of Oxford, 2006. Print.

Fiszbein, Ariel, and Norbert Schady. Conditional cash transfers: reducing present and future poverty. Washington, DC: The World Bank, 2009. Print.

Handa, Sudhanshu and Benjamin Davis. “The Experience of Conditional Cash Transfers in Latin America and the Caribbean.” Development Policy Review 24.5 (2006): 513-536. Print.

Zabaleta, Mariela Buonomo. “The impact of child labor on schooling outcomes in Nicaragua.” Economics of Education Review 30 (2011): 1527– 1539. Print.