Increasing public expenditure in favour of the poor

Targeting subsidies to the poor
The economic crisis and the ensuing adjustment programmes in the 1980s are estimated to have imposed a heavy cost on the poor and other vulnerable groups such as women and children. Moreover, the reduction in expenditure on subsidies has often undermined their consumption and those on health and education have affected their current welfare and future human capital. The recognition of this heavy cost has led to the consideration of measures that could mitigate these costs as an integral part of structural adjustment programmes.

There is a need to consider the extent to which reductions and stagnation in social expenditure can directly harm the poor and, more important, whether policy reform can correct the inequities in the allocation of government social expenditure. For example, the UNDP Human Development Report, 1991 estimates that social expenditure need 25 to 30 percent of the total development allocations to maintain a proper balance between economic and social progress. Many developing countries still fall short of this level. This is particularly serious in countries that have a legacy of neglect in the social sector. Experience also shows that, as with most other subsidies, health and education subsidies are rationed, so that a large number of potential users do not have access to them. Moreover a disproportionate share of the rationed social service subsidies tends to be allocated to urban areas and better-off households. The few budget surveys that are available show that the poor are often served by charities and privately run institutions, be it the Catholic-run health posts as in Senegal or the traditional village healers. Government-run programmes are either absent or often of such low quality as to discourage utilization.

Intra-sectoral allocations of government expenditure have a profound impact on the welfare of the poor. In the education sector, the issue is the competition between primary and higher schooling. In the case of health and related services, the important distinction is largely between primary health care and more expensive hospital-based curative medicine. Primary health care facilities are more beneficial to the poor than expensive hospitals which tend to benefit a few; likewise, cheaper or free universal education as opposed to highly subsidized university education that reaches a small proportion of the population. In most developing countries it is not always certain that the poor derive as much benefit as the rich from public expenditure. The evidence from most developing areas is that secondary education and hospital-based health care have been receiving considerably higher levels of government financial support than primary education and primary health care.

In many cases, moving to a system of cost recovery is likely to have advantages for the poor. Such a system affords the opportunity for increasing revenues and thus enabling governments to expand services and improve their quality. Since the major barrier to the poor's use of public services is usually not the monetary cost but rather unavailability and inaccessibility, user fees might release funds to finance expenditure, for example on immunization and AIDs control, externalities that would probably be of special benefit to the poor. A caveat is that the poorest of the poor, if faced with user charges, will not seek help until the ailment is far advanced.

Brazil has created a special fund for its programmes in health, nutrition and education and for the support of small-scale farmers, financed by 0.5% surtax on sales and a 5 percent surcharge on corporate income tax. Pakistan levied a 5 percent surcharge on its imports to finance high priority projects in education.

Subsidies directed to people are more effective than intervention in the price of goods which they consume. In additon, policies targetted to certain social groups, such as women-headed housholds, those with many dependants, the aged and the disable, should be more effective.
Type Classification:
E: Emanations of other strategies