Efficiency of Targeting of Social Transfers in Bosnia and Herzegovina

1. Efficiency of Targeting of Social Transfers in Bosnia and Herzegovina Edin Šabanović, Agency for Statistics of Bosnia and Herzegovina Fahrudin Memić, Federal Institute for Statistics Dino Đipa, CEPOS

2. Definition and reasons for targeting of resources The targeting of social transfers is a mean of increasing the effectiveness of the distribution of assistance to the poor population in the framework of the available, and usually limited, budget. • Objectively - the desire to maximally decrease poverty or improve social wellbeing • Budgetary constraints – the resources available for social transfers are always limited • Opportunity costs – compromise between the number of program beneficiaries and level of transfer.

3. Situation in Bosnia and Herzegovina • 17.8% of the population or approximately 680,000 people are poor (LSMS, wave 4, 2004) • Significant resources provided in budgets for the alleviation of poverty through social programs (about 669 million KM in 2004 or about 5% of GDP) • general impression is that targeting of these resources is fairly ineffective • only 4% of the poor population receive some form of targeted social assistance* • 75% of beneficiaries are not poor* *Bosnia and Herzegovina: Poverty Assessment, Vol. I: Main Report, 2003., World Bank,Washington DC, p. 103-109.

4. Situation in Bosnia and Herzegovina, cont.

5. Goals of the new social policy • Achieving economic growth that would be more «pro-poor» oriented • Decreasing of the poverty by 20% by the end of 2007. • The identicifation of the most vulnerable categories of the population • Focus of the system of social protection more significantly on the most vulnerable population categories.

6. Situation in B&H in 2006 • Introduction of VAT in January 2006 • Negative effects of price increases most felt by the poorest categories of the population • The Council of Ministers of B&H created a social program just prior to the introduction of VAT that was based on the calculation of price increases on staple items by the VAT rate • The budget planned for this program was 50.44 million KM annually

7. New social program • The inflation rate in January 2006 in comparison with January 2005 was 7.15%, i.e. less than expected. The rate of price change in January 2006 in comparison with December 2005 was 3.96% mainly due to the VAT • On the other side, the VAT has resulted in an increase of budget resources that has even exceeded the expectations • The Council of Ministers of B&H in cooperation with the entity governments, on the basis of the first effects of VAT on the poverty of the population, has defined a new social program • New program based on the existing categoryapproach to targeting of social transfers

8. Caracteristics of the category approach in targeting od social transfers • Implemented through the Centers for Social Work, pension funds, Employment Bureaus, Child Protection Funds, and Healthcare Funds • Based on the principle that every individual or household that belongs to a certain category becomes a beneficiary of social assistance • Based on the characteristics of individuals or households that are readily evident and difficult to manipulate and are believed to be related to poverty. (age, sex, land ownership, demographic structure, etc.) • Directed primarily to pensioners with income of less than 200 KM per month, but also to other categories of poor

9. Constraints in implementing of the category approach • Non-existence of a state law • Differences in definition of individual categories of social assistance beneficiaries • Insufficient number of poor covered by social assistance programs • Authority of cantons in FB&H in the field of social protection that results in inequalities in targeting and level of benefits that depend directly on the economic power of the canton.

10. Constraints in implementing of the category approach, cont. • Within individual cantons in FB&H municipalities do not pay out benefits for the same rights • In RS there is a unitary entity law but it is not implemented consistently in all municipalities as payment is made out of municipal budgets and some do not do so • Sources of funding of social transfers vary by entity.

11. Effects of the category approach LSMS, wave 4, 2004.

12. New methods for effective targeting New approach in targeting of social transfers should be directed toward the poor and that means primarily households who are outside the net of existing recipients Two possible methods were proposed: • Means-Income Testing (Direct Method of Income Estimation) • Proxy means test

13. Means Income Testing The method is based on the direct proving of the economic standing of a household or individual that applies for a social transfer This can be conducted in a number of ways: • Applicants present documents that prove their economic status; • Simple interviews for the purpose of gathering relevant information; • A third party, e.g., employer or pension fund, contributes to the verification of incomes. On the basis of LSMS, wave 4 panel survey we did the quadratic regression on ln Consumption (total expenditure of households as a function of all kind of incomes)

14. Expected Effects of Means Income Testing

15. Proxy Means Test The method uses a relatively small number of householdcharacteristics in order to obtain results that are an indicator of the economic standing of ahousehold. The questions that are selected for inclusion as inputs in thismethod need to have the following characteristics: • The number of questions needs to be very small in order for it to be possible to apply thismethod on a significant part of the population that can apply for these programs (at least 1/3of the population) • Variables need to be readily measurable • Variables need to be relatively difficult to manipulate by the household

16. Proxy Means Test, cont. In the aim of simulating this method on the survey data from the2004 LSMS we have estimated aregression model that measures the economic status of households through their expenditures (dependent variable was the total annual household expenditures and a list of predictive discrete and dummy variables was used). The model resulted in regression equations at the entity levels with mostly variables that have asignificant effect of household expenditure.

17. Proxy Means Test-Expected Effects

18. Findings and Conclusions • An analysis of under coverage and leakage was made by entity, areas andtargeting method under observation • Under coverage: The percentage of true eligible excluded using the analyzed method as a percentage of true eligible • Leakage: the percentage of false participants admitted to the program as a percentage of those found eligible using the analyzed method • Very high percentage of non-coverage of the poor bythe category approach-all beneficiaries • Means testing method halves the under coverage • Proxy means test improves the results modestly • Leakage decreases in the same direction, i.e. thepercentage of non-poor covered by the program.

19. Findings and Conclusions, cont.

20. Findings and Conclusions, cont. • Based on these findings, we suggest the following major conclucsions and recommendations: • The current Government's proposal is a poor choice and a different targeting approach should be taken • The proxy means and means tests seem to be a more effective alternative approach • The proxy means tests or means tests are administratively feasible (based on the experience of other countries and discussions with BiH program administrators). The cost of their implementation should be explored in the feasibility study in order to estimate its share in total program costs. • All concerned with improving targeting in BiH (the State, Entities and lower governments; the donors' NGOs, etc) all should agree to replace this program before it goes any further.