Targeted Transfers in Poor Countries: Revisiting the Trade Offs and Policy Options

Abstract

Two trade-offs have been widely seen to severely constrain the scope for attacking poverty using redistributive transfers in poor countries: an equity-efficiency trade off and an insurance-efficiency trade off. This article argues that recent economic theories and evidence call into question the view that these trade-offs seriously constrain the scope for fighting poverty using transfers. The extent of the trade-offs is often exaggerated, and they may not even be binding constraints in practice given market failures. There appears to be scope for using carefully designed transfer schemes as an effective tool against both transient and chronic poverty. However, for the same factors that weaken the trade-offs also suggest that efficient redistributive policies might look rather different to the programs often found in practice.

Keywords: policy, growth, social protection, inequality, targeting