Poverty and Social Assistance Priorities in the Western

Poverty and Social Assistance Priorities in the Western Balkans What Kind of Social Agenda for the Western Balkans? Sarajevo, May 25 -26, 2011 Boryana Gotcheva The World Bank

Objectives of the presentation and outline Poverty trends before and after the crisis Renewed role of social assistance Performance (targeting accuracy and coverage) of social assistance The reform of social assistance for more effective poverty reduction 2

Positive developments before the crisis 12 High growth 10 Albania Bosnia and Herzegovina 8 Kosovo Percent 6 Macedonia, FYR 4 Montenegro Serbia 2 ECA 0 2002 -2 2003 Headway 2008 poverty on reduction 2003 2004 2005 2006 2007 2008 Euro area 50 45 40 35 30 25 20 15 10 5 0 Overall ($5 a day) Urban ($5 a day) Headcount -4 3 Rural ($5 a day)

But the crisis stalled progress 31. 0 The crisis hit 10. 0 30. 0 More people at risk of poverty 8. 0 7. 0 6. 0 28. 0 2009 2010 2011 Percent 2008 27. 0 4. 0 3. 0 25. 0 -2. 0 5. 0 26. 0 2. 0 -6. 0 Albania Bosnia and Herzegovina 24. 0 Kosovo Montenegro 4 1. 0 Headcount $2. 5 a day, crisis scenario (Millions) Macedonia, FYR Serbia Headcount $5 a day, crisis scenario (Millions) 23. 0 Headcount, $5 a day (%) Base scenario Headcount, $5 a day (%) Crisis scenario 2010 2008 2009 0. 0 Millions 29. 0

In the aftermath of the crisis, the countries have to cope with higher poverty risks … in a worsening fiscal environment, and unresolved structural problems, where Labor force participation rates remain some of the lowest in Eastern Europe … è Activation as a policy priority … while households continue to rely heavily on migration and foreign labor markets Agriculture’s contribution to growth is decreasing while poverty remains disproportionally rural è Turning agriculture into an engine of growth è Sustaining poverty reduction in rural areas Some groups such as the Roma are at distinct disadvantage (‘pockets of poverty’) è Forwarding the poverty reduction and social inclusion agenda 5

… and need to prevent and offset crisis-inflicted negative changes in behavior of households With long-term negative impact on the quality of human 6 capital, such as: Cutting on health care expenditures: preventive medical examinations, prescription drugs; dental medicine Cutting on certain education expenditures: extra-curricular activities and lessons, book and magazine subscriptions Purchase of cheaper but lower quality food Cutting on expenditures for cultural and recreational activities (Summary findings from crisis surveys in the Western Balkan region, 2009 -2010)

The crisis evoked a renewed role for social assistance in poverty reduction PREVENT from falling into chronic and multigenerational poverty (risk mitigation) PROMOTE human development (invest in human capital) for long-term poverty alleviation PROTECT * alleviation of longterm chronic poverty * helping the poor in coping with shocks and transient poverty 7 COVERAGE TARGETING GENEROSITY FLEXIBILITY

A comprehensive mix of social assistance programs already existed when the crisis hit Disability benefits Last Resort Social Assistance War Veteran Benefits 8 Family and Child Allowances

However, specific program design and implementation characteristics limited the capacity of social assistance to reduce poverty Low and, more importantly, inequitable spending on 9 different types of social assistance programs Mixed performance in protecting the poor Low flexibility for immediate crisis response Implementation drawbacks Built-in work disincentives in LRSA

Low and contracting social assistance spending envelope • Considerable and increasing spending on pensions • Only Croatia and Serbia managed to increase spending on social assistance as share of GDP • Overall, social assistance spending remains lower than the ECA average of 1. 7% of GDP • Bi. H and Croatia are exceptions, with high SA spending as share of GDP, mostly due to the proliferation of war veteran related benefits 10

… and inequitable, with growing share of spending on categorical programs 11

Mixed performance of social assistance Impressive targeting • The percent of benefits going to the poorest consumption quintile is high; targeting accuracy differs a lot across programs and countries Low coverage Generosity: moderate overall, but low for LRSA 12 • The percent of poorest quintile who receive benefits, is low • Contribution to consumption: average transfer amount as a fraction of average consumption for beneficiary households in poorest quintile • Unit transfers as a fraction of minimum wage

Standardized methodology for performance measurement indicators Welfare indicator Harmonized consumption aggregate 1 Individuals ranked on Per capita consumption before cash transfer 2 ADe. PT SP 3 Standardized software to compute indicators 1. Developed by ECSPE (ECA Databank) – a standard basket of goods and services across all countries, and all expenses are similarly deflated across countries and expressed in per capita terms 2. Individuals are sorted into quintiles for each transfer using "per capita consumption - per capita transfer“ 3. Developed by DECRG 13

Impressive targeting accuracy, masking accuracy regressive veteran benefits 14

Low coverage of the poor, and high rate of exclusion of deserving poor 15

Coverage is especially low for the last resort social assistance programs • As low as 5% of Q 1 in Bi. H and 7% in Serbia • Only in Kosovo is close to 40% of Q 1 • Due to rigorous means test, and • Low income thresholds, and • Presence of binary filters that overrule the means test and increase exclusion error 16

Implementation characteristics also limit coverage Home visits before determining eligibility with high discretionary power, not standardized Rigorous enforcement of eligibility rules 17 Limited outreach efforts to identify deserving poor High cost of application; no unified registries Key implementation characteristics Leakage due to weak internal audit, errors and fraud detection arrangements

Work disincentives in the design of LRSA Registration as unemployed is required when applying for last 18 resort social assistance Additionally earned incomes are 100% deducted from the due benefit When making a transition from SA to work, much of the incremental income from work is taxed away (work does not pay, as per OECD tax-benefit model calculations) Absence of institutional structures for joint support for income smoothing (passive cash transfers) and job brokerage services (‘one-stop’ shops) No incentives for social workers and job brokers to deal with ‘hard-to-serve’ cases Limited supply of active labor market programs specifically designed for last resort social assistance beneficiaries

Reform priorities: second generation reforms in social assistance “Second generation” reforms of safety nets: promoting links of cash transfers to Ø Jobs / activation agenda Ø Social services and human capital development Increase coverage Ø Focus on the errors of exclusion rather on the errors of inclusion Ø Reduce spending on rights-based programs and increase spending on means-tested ones with good targeting accuracy Ø Consolidate small and duplicative programs Ø Introduce smart design features that do not exclude working poor from eligibility for social assistance 19

Reform priorities: second generation reforms in social assistance Target better, strengthen and standardize eligibility criteria Ø Eliminate the use of Yes/No filters in LRSA program designs Ø Introduce single, simple scoring formula, with objective weights (AL, Bi. H) formula Design taxation and benefit rules in a way that encourages the transition from social assistance to work – ‘make work pay ’ Ø Lower taxes on low earned incomes Ø Gradual benefit reduction as recipients’ earned income increases Ø Introduce earned income disregards (up to a certain level) Ø Increase the ‘exit threshold’ for means tested programs, compared to the entry thresholds Track / measure targeting accuracy and coverage Ø Regular HBS, LSMS, SILC modules Ø Improved questionnaires Ø MIS, unified registries 20

The World Bank social protection engagement in the Western Balkan countries Budget support in coordination with the EU and IMF SBAs Investment lending Analytical and advisory services at regional and national level Ø Poverty analyses Ø Poverty and social impact assessments Ø Public expenditure reviews Ø Pension actuarial analyses Ø Social assistance smart safety nets, activation, breaking the welfare traps and dependence on social transfers Ø Numerous cross sectoral analyses on labor markets, skills and competitiveness 21

The World Bank social protection engagement in the Western Balkan countries Country / instrument Policy dialogue and Investment lending related lending Analytical and advisory services Albania X X X Bosnia and Herzegovina X X X Croatia FYR Macedonia X X X Kosovo X X X Montenegro Serbia 22 X X