In an earlier column, I had distinguished between three types of poverty based on their causes: mass structural poverty, destitution, and conjunctural poverty. I had argued that there was convincing evidence to show that efficient and rapid growth of per capita income was the only way of eradicating mass structural poverty. But to deal with destitution, where the relevant individuals had no means of support or with conjunctural poverty, when for conjunctural reasons people fall through the poverty floor, direct transfers of income were needed. I had also noted that there is a movement amongst socialists to rhetorically conflate this clear case for income transfers "" presumed to be public with the dubious one for alleviating mass structural poverty through the creation of western-style welfare states. As growth not transfers is the only way to alleviate mass poverty, the question remains whether the income transfers required to alleviate destitution and conjunctural poverty should be public or private.
Evidence collected by the World Bank shows that, for most Third World countries, private inter-household transfers are quantitatively large and of great significance in dealing with these two types of poverty. Thus, 93 per cent of a rural south Indian sample received transfers from other households. Furthermore, as these transfers are based on local and personal knowledge of the recipients they are well-targeted towards the relevant poor.
Similarly, in many western countries, before their welfare states were established, private transfers were a major means for alleviating the poverty of their deserving poor, and from recent research appear to have been fairly efficient. But these private systems of welfare, notably the friendly and mutual societies that had grown in Victorian Britain, were soon replaced by public charity in the form of the welfare state.
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These welfare states are, however, currently in trouble because of the dynamic costs associated with their inevitable enlargement in majoritarian democracies. Under factional pressures, politicians bid for votes by offering transfers of income to some sections of the populace at the expense of others. With the inevitable universalisation of benefits, the welfare state comes to be captured by the middle classes with a tendency for net transfers of income from both the rich and the poor to the middle-income groups. The same tendency is observed in those developing countries (Uruguay, Costa Rica, Sri Lanka, Jamaica) which have created welfare states. Unlike in the West, these were financed by taxing the rents from exports of their primary products. With the expansion of revenues during upturns in the primary product price cycle, political pressures led to commitments to entitlements which could not be repudiated when revenues fell during the downturn. The increased tax burden on the sector producing primary
products led to a retardation of its growth, and in some cases to the killing of the goose that laid the golden eggs.
Similar fiscal pressures have also accompanied the universalisation of welfare benefits in the West. Not surprisingly, the reform of the welfare state "" and in some cases its dismantling "" is at the forefront of public policy debates in the First World, just when many dirigistes are seeking their establishment or expansion in the Third.
Nevertheless, ways to deal with the poverty caused by the inevitable vagaries of life (conjunctural poverty) and of the persistent poverty of those of nature's victims who are incapable of earning a living (destitution) remain. No ideal public transfers are available to achieve this end. Ideally, public transfers should be targeted. The most successful have been those like the Indian famine code and the Maharashtra employment guarantee scheme, which involve forms of self-targeting. It is not surprising that the most efficient poverty redressal programmes in the Third World were instituted in Pinochet's Chile and Lee Kwan Yew's Singapore. But these are hardly relevant or desirable examples for India.
Not only does empirical evidence support the relative efficiency of private transfers in alleviating poverty, it also shows that the public provision of so-called merit goods like health and education also tends to be regressive: by favouring the middle classes. There is overwhelming evidence that where, for instance, non-governmental organisations (NGOs) compete with public agencies in providing these goods, they are not only more efficient in delivering these services but also in reaching the targeted beneficiaries.
Finally, there is considerable evidence from a number of developing countries that public transfers tend to crowd out private transfers. One study of the Philippines "" which has widespread private transfers "" estimated that if public transfers were introduced to raise every Filipino above the poverty line"" by giving them the difference between their current income and the poverty line"" 46 per cent of urban and 94 per cent of rural households would still rem-ain below the poverty line as existing private transfers were cut back.
It would seem, therefore, that in countries like India where private transfers still provide the main social safety net for destitutes and the conjuncturally poor, nothing should be done to discourage them. This means in particular that the social and fiscal policies which have eroded the family in the West must be avoided. A radical proposal may be worth considering. All domestic public expenditure (and foreign aid) on social programmes should be channelled through NGOs. But, to avoid the crowding out of private by public transfers, the funding should only be provided on a matching basis "" with the charity having to raise a dollar for every dollar of public funds it receives. This offers more hope for the deserving poor than the welfarist panaceas being touted. The welfare state is one western import we can safely ban.
The author is James S Coleman Professor of International Development Studies, University of California.