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 reform and fine tuning of a social assistance program like BDH

be politically possible, using prior decisions as a guide?

1
World Bank, "Bono de Desarrollo Humano", Project Appraisal Document, 2006. http://www-
wds.worldbank.org/external/default/main?pagePK=64193027&piPK=64187937&theSitePK=5
23679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000112
742_20060512122806
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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 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

2
World Bank, 2006, p. 42.
3
World Bank, 2006, p. 2.
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 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, 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
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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

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

4
World Bank, 2006, p. 10.
5
World Bank, 2006, p. 2.
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 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. 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

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 2006 6, children from the age of 6
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.
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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

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.

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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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 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:

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

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,
9
Schady, p. 26.
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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 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 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

10
Schady, p. 10.
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 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 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
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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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 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

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 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, 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,

12
Schubert, Slater, p. 575.
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 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 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.

13
Schubert, Slater, p. 575.
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 None of these additions are as simple and straight-forward and politically

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