Ben Turner

MSFS-517, Policies for Poverty Reduction

Policy Analysis of Ecuador's Bono de Desarrollo Humano Program

I. Introduction

Ecuador's large conditional-cash transfer program, Bono de

Desarrollo Humano (BDH, or Human Development Bond), attempts to

accomplish both 1) a reduction in demand-side income inequality through

cash transfers and 2) establish co-responsibilities with poor citizens to keep

their children in school and to keep their children regularly visiting health

services institutions, by using the incentive of cash transfers to their

households. This program is part of a larger policy that is attempting to

build human capital for the poor in the form of better education, nutrition,

and health.1

BDH was an incremental improvement upon prior Ecuadorian social

assistance programs, and it has achieved the two goals above, but has it yet

provided a complete solution towards building human capital? Does BDH

accomplish more than its stated goal of increasing human capital through

increasing attendance in school and at clinics? Will further incremental

1 World Bank, "Bono de Desarrollo Humano", Project Appraisal Document, 2006. http://www-wds.worldbank.org/external/default/main?pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000112742_20060512122806

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reform and fine tuning of a social assistance program like BDH be politically

possible, using prior decisions as a guide?

I.A. Poverty Issue

In 2003, Ecuador sought to make changes to its social assistance and

social inclusion policies so as to more directly address the large problem of

income inequality within the country. And this problem is large; the richest

10% of the population receives three times more income than the poorest

50% and 60 times more than the poorest 10%. Ecuador has a Gini

coefficient of 0.562 and has had a fluctuating economy and budget for social

support systems, human capital investment, and education health services.

This can be seen in budgeting priorities, where Ecuador invested only 5-6%

of its GDP towards social assistance programs while the rest of South

America contributed 12% of their GDPs to the same programs within their

own countries.

Over 70% of the Ecuadorian population is uninsured, while children

drop out of school after primary school because of rapidly increasing costs

for schooling between the ages of 11 to 15.3 The poor are dropping out of

school and out of the health system because they cannot afford it, and these

poor consider themselves better off if they leave such national institutions

2 World Bank, 2006, p. 42.

3 World Bank, 2006, p. 2.Page 2 of 18

in favor of pursuing work. As a result, poverty becomes cyclical across

generations, children grow up malnourished and stunted (to a degree

higher than one would expect from Ecuador's economic development level),

and macroeconomic growth is severely hampered as the poorest

Ecuadorians neither have the physical nor emotional growth to contribute

fully to Ecuadorian GDP.

I.B. Policy Analysis and Previous Efforts at Reducing Poverty

Through Social Assistance and Inclusion

BDH was created to consolidate two previous Ecuadorian programs,

Bono Solidario (an unconditional cash transfer program) and Beca Escolar

plus Programa de Alimentacion Escolar (a conditional cash transfer to

increase school attendance, combined with a meal program). BDH also

used an improved targeting system called SelBen (Sistema de Seleccion de

Beneficiarios) to focus BDH conditional cash transfers towards the poorest

and most-affected Ecuadorians. Thus, BDH was intended to fix known gaps

in targeting while expanding coverage to the poorest citizens, as a reformist

improvement over the older, outdated programs.

Other efforts have been made to help reduce consumption poverty, to

include vouchers for schooling, unconditional cash transfers, and

geographic targeting. The problem with these solutions is not so much that

they may not be successful in reducing poverty and raising human capital,

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but they offer weak targeting of the specific groups most affected by

poverty. Furthermore, they do not imply any conditionality upon receiving

the benefits and so assume good faith usage by those who receive them.

BDH in its implementation remedies both problems with its SelBen

means-based targeting as well as with conditionality of attendance

determining the amount of the cash transfer. So BDH with SelBen is the

most promising among its alternatives in terms of achieving Ecuador's

poverty-reducing policy goals.

I.C. Roadmap of Paper

In order to answer the question of how complete a solution the

conditional cash transfer program BDH will be for Ecuador, this paper will

first describe the context behind the BDH program, and then move on to

analysis of how the program works and what it has accomplished, to include

a look into which areas it has lagged behind in. Finally, recommendations

will be made on how the program can be improved, moving forward, to

further achieve the Ecuadorian government's goals of increasing human

capital and reducing consumption poverty.

II. Background

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A direct catalyst for BDH came from Ecuadorian government findings

that said child cognitive ability had dropped significantly for primary and

secondary students. And the political backdrop for BDH came within the

context of the release of Ecuador's Country Assistance Strategy (CAS) in

2003, which set out to primarily reduce poverty but also promote social

equity and inclusion. The CAS itself was a response to the establishment of

the Millennium Development Goals a few years earlier; most applicable to

Ecuador, according to its government, was reducing poverty (Goal #1),

achieving universal primary education (Goal #2), and reducing malnutrition

through household-based incentives (Goal #4).4

Ecuador's contributions to social support programs used to be worse,

before 2000, totaling only 5-6% of GDP while its South American brethren

contributed about 12%. Even after including social security budgeting,

Ecuador only reached 9%. But since 2000, Ecuador's economy has been

growing rapidly, its budgeting for social programs has increased, and

human capital has increased as a whole, particularly for primary school

enrollment of over 90%.5

Where Ecuador's social system breaks down is in secondary school

enrollment, when the price of going to school becomes too much for many

families, whose children drop out of school at that point and do not return.

4 World Bank, 2006, p. 10.

5 World Bank, 2006, p. 2.Page 5 of 18

Economic growth has also not been distributed equally across the

population spectrum, with an increasing amount of wealth being

concentrated in fewer people (the richest 10% earns more than 60 times the

poorest 10%). Ecuador's children also grow up on average more wasted

and stunted than elsewhere in South America, evidence of malnutrition.

Ecuador has long had social programs. BDH in fact was a

conglomeration of two previous programs. One program was Bono

Solidario (BS), an unconditional cash transfer of $11.50/month to 1.3 million

poor people as a substitute for the gas and electricity subsidies, which

families had been receiving previously but which were later halted. BS

suffered from poor targeting of the correct poor groups, relying on self-

measured results to assess who should get the transfers. BS, originally

created as a temporary stop-gap for the subsidies, however, became

institutionalized as the second largest Ecuadorian social expenditure behind

education, a common outcome for well-intentioned "temporary" initiatives.

The other program was Beca Escolar (BE) in combination with

Programa de Alimentacion Escolar. BE served as a conditional cash

transfer program ($5 per child per month, assuming 90% regular

attendance) to raise school enrollment, having fairly good targeting but only

affecting 150,000 households, a small amount. Programa de Alimentacio

Escolar was a complementary food program to give food to children in

schools.

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Results showed very small gains: BS was found to have improved

child nutrition by 5% in 2001, and a very small but significantly significant

effect on child nutrition.

BE and BS were good programs in theory but by themselves seemed

to be expanding without proper targeting or clarity of purpose. Worse

results in key indicator areas related to education and health made political

action possible.

In 2003, Ecuador began BDH, combining both BS and BE with SelBen

to retarget the most affected poor people in Ecuador. The World Bank

contributed $60 million over 4 years to support Ecuador's plan, offering $5

million in technical assistance and $55 million in funding for transfers.

BDH intended to keep the functions of conditional cash transfer but

extend them directly towards improving children's nutrition and health as

well as their attendance in school. The key difference of the BDH over the

two prior programs was that it relied on SelBen as an independently

verified proxy-means-testing targeting system. In other words, instead of

relying on self-reporting households for targeting, families were required to

meet certain requirements in interviews, segmenting affected children into

age groups of secondary school-age students and pre-secondary school

students.

III. Application

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III.A. Results

BDH showed significant results in the narrow range of metrics it was

designed to improve: according to a Schady and Araujo report in 20066,

children from the age of 6 to 17 had 10% higher class enrollment as

beneficiaries of BDH. They also found that child labor decreased by 17% in

the same study. Ponce in 2008 found that 25% more money was being

spent on food expenditures by beneficiaries of the program. The intended

goal, of using cash transfers to alleviate consumption burdens so that more

money would be spent on food and less child labor would be needed, was

successful.

But positive (and for that matter, negative) externalities did not arise

out of the BDH program. Ponce and Bedi in 2008 found that children's test

scores did not improve in a statistically significant way as a result of more

time spent in school.7 So while class enrollment improved, this did not

mean that the children were learning more simply as a result of being in

school as opposed to somewhere else. Ponce and Bedi also concluded that

this lack of relationship between class enrollment and test scores had

nothing to do with incorrect targeting -- the targeting in itself was fine and

6 Schady, Norbert R., and Araujo, Maria Caridad. "Cash, Conditions, School Enrollment, and Child Work: Evidence from a Randomized Experiment in Ecuador", 2006, p. 10. Unpublished manuscript.

7 Ponce, Juan and Bedi, Arjun S. "The Impact of a Cash Transfer Program on Cognitive Achievement: The Bono de Desarrollo Humano of Ecuador", August 2008, Abstract.

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showed that indeed the beneficiaries of BDH were worse off both

economically and educationally than non-beneficiaries.

Furthermore, it can be concluded that if the main overarching goal of

BDH is to break the cycle of systemic poverty, then BDH by itself is not

succeeding, even if it is reducing consumption poverty. Children are not

getting better results on tests from this program, which means they are not

becoming more economically valuable. Cash transfers help alleviate short-

term burdens and increase demand for services, but do not break longer

patterns of poverty related to lack of education, little accumulation of

human or economic capital, and so on.

II.B. Implications of Results

BDH is designed specifically to reward participants with money for

attending school more often and for routinely visiting medical clinics.

Nothing more is implied, and as results have shown, nothing more has been

borne out. For BDH's human capital metrics, it is working quite well. But

obviously just getting children into clinics and schools is not enough. What

else is there? As Schady in "Evaluating Conditional Cash Transfers", a

World Bank report, puts it, the emphasis should be on outcomes, not so

much inputs:

"There are various reasons why CCTs may have had only

modest effects on 'final' outcomes in education and health. One

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possibility is that some important constraints at the household

level are not addressed by CCTs as currently designed; these

constraints could include poor parenting practices, inadequate

information, or other inputs into the production of education

and health. another possibility is that the quality of services is

so low, perhaps especially for the poor, that increased use alone

does not yield large benefits."8

So BDH's CCT is successful in bringing kids into social services, and

the demand-side part of the equation benefits greatly. But that program is

not enough; a supply-side increase in the number and quality of teachers,

the institutional capacity of the national school system, and:

"... interventions that seek to improve parenting practices

and the quality of the home environment are likely to be

particularly important. Oportunidades and some other CCTs

attempt to expose parents to new information and practices by

conditioning transfers on participation in talks (known as

platicas). The conditioned cash helps ensure that parents attend

and participate in the platicas. However, the cash-condition

package offered by CCT programs may not be enough, and a

8 Schady, Norbert. "Evaluating Conditional Cash Transfers", World Bank Policy Research Reports, Washington, DC, 2009. p. 38.

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comprehensive program that relies on more active participation

by social workers and others may be needed."9

Could there not be a conditional cash transfer for teachers as well, to

keep their attendance up? This would also require better schooling for

teachers and more incentives to keep them within the country, as they and

other human capital jobs such as doctors are being recruited heavily to

leave for jobs in other countries.

II.C. Political Considerations

Such a large increase in scope for a program to combine social

programs for children's education, health, decrease in child labor, and

decrease in poverty will require a large increase in accompanying funds.

While targeting has been shown to be effective through SelBen in Ecuador,

inevitably those not benefitting from the cash transfers will complain to

policymakers, and these people also happen to have more influence within

the political system than those who are the poorest in Ecuador.

Initially, CCTs are very popular politically because they 1) help poor

people (which all parties claim to support) and 2) place conditions on

handing out money, making it more palatable for the middle and upper

classes to support, since they tend to believe more in the idea of self-

determination. But as the programs get more complicated to account for all

9 Schady, p. 26.Page 11 of 18

the insufficient human capital inputs, they begin to be seen more as drains

upon the nation's coffers and resistance increases.

To explain, Schady states:

"The political economy family of arguments centers

around the notion that targeting tends to weaken the support

for redistribution because it reduces the number of beneficiaries

relative to the number of those who are taxed to finance the

program. Whereas the response most commonly considered in

the literature is to establish broad-based redistribution that

includes the middle class, an alternative is to appeal to the

altruistic motive of voters: the same people who object to

targeted transfers as “pure handouts” might support them if

they are part of a “social contract” that requires recipients to

take a number of concrete steps to improve their lives or those

of their children."10

But such social programs are also easier to implement in Latin

America than in other parts of the world, as Schubert and Slater quoted

Handa and Davis in reference to African CCTs versus Latin American CCTs:

"… public support for safety-nets in general and the

provision of cash in particular is a function of the values of the

10 Schady, p. 10.Page 12 of 18

society as well as the characteristics of the poor. Support will be

less in countries where citizens feel that poverty is due to

individual lack of effort or responsibility, for example, or when

the poor are easily identified as ‘different’. In Latin America the

‘face’ of the poor is typically different from mainstream society,

and the poor are often geographically marginalised."11

III. Complements to CCTs

One significant problem for funding more human capital inputs both

on the demand side and on the supply side is that evidence of which

programs would work for those strategies is scant and it is still unclear to

researchers and practitioners what all those human capital inputs are.

Some are obvious, such as having enough excellent teachers to teach all of

a nation's children, who are being fed enough for them to learn efficiently

and who are being schooled in buildings comfortable and safe enough for

those children to learn with clear minds.

But what programs can be instituted to help with cultural taboos or

biases towards work and not education or gender roles or religion? What

sort of school building is sufficient for children to adequately learn? What is

the proper mix of all these different factors in greatly increasing a nation's

human capital? These answers just aren't clear and CCTs have been a

11 Schubert Bernd and Slater, Rachel. "Social Cash Transfers in African Countries: Conditional or Unconditional?", Development Policy Review, Edition 24, 5, 2006. p. 576.

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bright spot in something that produces predictable and observable results;

but CCTs clearly aren't the norm.

IV. Conclusionary Recommendations

Ecuador, in response to rising income inequality, lower demonstrative

cognitive ability in children ages 6-15, and above-average wasting and

stunting among youths, created Bono de Desarrollo Humano (BDH). While

BDH increased household food expenditures by 25% through its conditional

cash transfers, and generated $9 spent on education for each $15 transfer,

and increased school attendance among primary school students, the

program was less effective in increasing cognitive ability as demonstrated

through test scores (where it was found to have no effect either negatively

or positively).

BDH, as it has been successful in achieving these demand-side goals

as stated above, should be kept and should continue to be improved. BDH

is solely a short-term demand-side solution and must be complemented with

other programs in order to achieve Ecuador's stated goals of reducing

systemic, long-term poverty. Some attempts to build human capital are:

1. Exploit the Simplicity of CCTs. For political reasons, keeping

the size and affected pool of beneficiaries the same might be best for

BDH so as not to alienate popular support for funding. BDH has also

shown itself to have reduced short-term consumption poverty and has

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changed poor families' consumption habits towards allocating more

money towards food (25%) and education (for $15 transferred, $9 is

spent on education).

Schubert and Slater, analyzing whether CCT programs would be

successful if transferred over to Africa, recommend:

"Taking these basic conditions into account, the

organisation and procedures for social cash transfer

schemes have to be kept as simple and as undemanding as

possible. The focus should be on a clear definition of

objectives and target groups, on effective targeting and on

reliable delivery. To achieve this country-wide and in a

cost-effective way is already a mammoth task. The

additional workload required to apply conditions, to

monitor compliance and to respond in cases of non-

compliance would overburden the implementation

capacities of the social welfare services in low-income

African countries."12

2. Pre-Schooling and Parent Education. Research into CCTs

(particularly by the World Bank) has found that much of the positive

effect of BDH and similar programs affects children in their earliest

stages of growth. So instead of increasing the size of the program,

12 Schubert, Slater, p. 575.Page 15 of 18

Ecuador should implement complementary programs for preschooling

and early home stimulation programs, both as teaching for children

not yet in school and for their parents. This would have a more

positive and efficient effect than increasing secondary school

enrollment which is more prone to labor market fluctuations as

children's labor value increases with age -- if the cash transfer cannot

offset the loss of income of older children not working, then the cash

transfer is less likely to be effective.

3. Retain Institutional Capacity. CCTs address incentives but they

do not fix cultural or institutional attitudes about the importance of

health and education for children at an early age for forming human

capital and reducing long-term poverty.

Schubert and Slater wisely point out,

"Capacity-building interventions to strengthen the

social welfare services involve more than supplying them

with computers, vehicles, administrative budgets and

training courses. They require behavioural changes at

national, provincial and district levels, through public-

service reform combined with long-term development

assistance for organisational change. Even given the

political commitment to such reforms and appropriate

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donor assistance, it would still take years for the social

welfare services to be able to run cost-effective and

reliable social cash transfer schemes covering all regions

of the relevant countries."13

4. Extend CCTs to Supply-Side Solutions. Shortages of

classrooms, inspired and intelligent teachers, schoolbooks, and other

resources quickly escalate as problems once more students are

attending school. If students don't get adequate schooling in

exchange for attending, this dilutes the effect of cash transfers

because motivation and outcomes are seen as significantly

disappointing and students will drop out to go back to work.

5. Improvements in Nutrition and Health Care Delivery.

Ecuador still suffers from a higher degree of wasting and stunting

than other South American countries, despite its having a nutritional

food program for students through Programa de Alimentacion Escolar

and now within BDH. This indicates that research must be done to

deliver more calories and nutrition to schoolchildren and to provide

better cheap solutions for quick medical care when the children come

in for their periodic clinic visits.

None of these additions are as simple and straight-forward and

politically powerful as CCTs are (except perhaps supply-side CCTs), so they

13 Schubert, Slater, p. 575.Page 17 of 18

will be harder to implement, but they provide the most promise for moving

Ecuador forward and breaking the cycle of poverty that a significant

amount of its population faces.

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