About Nick: i am an economist based in malaysia. I write about development economics, while sneaking in a pop culture reference or two.

Should BR1M Become a Conditional Cash Transfer?

Published in The Edge Malaysia, 2 Dec – 8 Dec 2013.

Conditional cash transfers (CCTs) have become en vogue in many developing countries across the world. CCTs are essentially transfers of cash from a given body – government, aid agency, corporate CSR agency – to recipients conditioned on the recipient fulfilling some behavioral goal such as school enrolment, vaccination, nutrition and so on. Pioneered in Mexico, CCTs have spread to countries like Brazil, Chile, Jamaica, Peru, Bangladesh and even to our Southeast Asian neighbors Indonesia, Philippines and Cambodia.

The idea behind CCTs is that it aims to shift behavioral patterns among low-income households towards ‘good’ behavior which will, it is hoped, lead to a shift out of poverty. It is quite easy to see the appeal behind the idea. One can easily imagine taxpayers being quite comfortable with their taxes being used to induce lower-income households to send their children to school and to get vaccinated against common diseases. Moreover, giving people cash allows them to make choices as cash is fungible; this is in contrast to in-kind transfers that provide households with vouchers that can only be used for a given purpose such as purchasing food or books.

Malaysia has its own form of cash transfers or, for those who prefer it, handouts. This is the Bantuan Rakyat 1Malaysia or, affectionately, BR1M. BR1M was first introduced in the 2012 Budget, where a cash transfer of RM500 was to be given to households with monthly income of below RM3,000. This was extended further in the 2014 Budget, where BR1M 3.0 has that RM650 would be given to households with monthly incomes below RM3,000, RM450 to households with incomes between RM3,000 and RM4,000 and RM300 to individuals with a monthly income of RM2,000 and below.

For those in the target group, BR1M is essentially an unconditional cash transfer (UCT). Before and upon receiving the one-off cash transfer, recipients can do whatever they want with the money. There are strong reasons as to why this is not the optimal form of distribution policy. First, it can be argued that a simple unconditional handout does nothing to alter behavior and thus may create more dependents (which, in fairness, is something politicians like whether they will admit it or not). Second, as mentioned earlier, it is politically more palatable to pass through a CCT than it is a UCT.

Third, a UCT may not refine the targeting mechanism for these handouts the same way a CCT does. Ideally, a targeting mechanism should capture everybody who needs the handout while excluding those who do not. In practice, this rarely ever happens; policy designers have to balance between a leakage rate – people who get the handout despite not needing it – and an under-coverage rate – people who do not get the handout despite needing it. A CCT could identify households who really need the transfer as we can argue that only households that really need the money would seriously alter their behavior over an extended period of time. While this is a concern over the targeting mechanism of the policy rather than the policy itself, it is, I think, a warranted argument.

Given the inherent weaknesses in the UCT system, should BR1M be, in the spirit of the Barisan Nasional government, transformed into a CCT-type program? After all, it might alter behavior, it might be more politically supportable and it might better target those who need the handouts. As is common in most policy debates, the answer is, “Not so fast.”

The arguments for UCTs are also strong. First, and my personal favorite argument, it is not paternalistic in nature; there is no condition that forces people to act a certain way or not. Second, the standard ‘conditions’ used in CCTs around the world are not really applicable in Malaysia – primary enrolment is nearly universal, preventative healthcare is not a big issues. Of course, one could always find new conditions such as school attendance or exercise but then this is linked back to the first argument. Conditions imposed are almost always necessarily a function of what policymakers think is “good” for others despite not really being in the shoes of others. We should not assume that the poor are inherently different decision-makers than the non-poor but rather both groups face a different set of circumstances in their decision-making (for a fantastic insight on this, check out Sendhil Mullanaithan’s new book, “Scarcity”).

Empirically, there are also studies that provide evidence of the success of UCTs. A randomized control trial study conducted in Uganda found that youths who were given an unconditional year’s worth of average income received substantial long-term benefits from the cash transfer. Those who received the cash ended up 65% more likely to practice a skilled trade and acquired much larger stocks of business capital and thus earn more money relative to those who did not get the cash (the control group). In another study, which directly compared a CCT versus a UCT in Malawi, the researchers find that while the CCT scheme, conditioned on school attendance, increased enrollment rates and improved regular attendance for those in school, teenage pregnancy and marriage rates, on the other hand, were substantially lower in the UCT scheme. An important lesson, the authors suggest, is that CCTs may overlook the effects of denying benefits to those who fail to satisfy the conditions.

Therefore, whether to shift the BR1M cash transfer from its current UCT form to a CCT form really depends on the answer to the following question. Are outcomes strongly affected by compliance with conditions or are there many non-compliers who might experience strong and socially beneficial effects from regular income support? If the answer is the former, a CCT is probably the better choice. If the answer is the latter, a UCT is probably the way to go. In the case of the BR1M, it is therefore worth asking what outcomes are intended from the BRIM program and if these outcomes are currently being met. Moreover, what are the social returns to BR1M and are they well-captured in data for impact evaluation? Knowing the answers to these questions could help the government better target the BR1M recipients and thus, be fiscally prudent in the dissemination of the BR1M cash transfers.

 

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