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Why may government transfers to the poor have modest effects on reducing rural inequality?

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  • Christian Lehmann

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

High levels of inequality are a persistent feature of many rural areas in the developing world. Rural inequality is correlated with major impediments of rural development, such as crime, elite-capture, and lack of collective action. Government transfer programs, such as conditional cash transfer, unemployment insurance, old-age pension or similar programs that target the lower tail of a village's cumulative welfare distribution function have become a very popular public policy to tackle poverty and inequality in rural areas. While the poverty impacts of those programs are well documented in the literature less attention has been given to the redistributive capacity of such policies at the village level. Among the main reasons for the neglect is a common belief that monetary transfers to the lower tail of the village welfare distribution (i.e. ‘the poor'), while excluding the upper tail (i.e. ‘the rich') from the program, must lead to a reduction in inequality. In this paper we show that the impact of such programs on reducing rural inequality may be lower than previously thought. This is because program-eligible lower and program-ineligible upper tail do not behave in isolation from each other. They are linked via interactions in credit & insurance, as well as factor & commodity markets. If, consequently, a government transfer triggers the lower tail to shift then the upper tail follows, leading to modest reductions in local inequality.

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Paper provided by HAL in its series PSE Working Papers with number halshs-00564924.

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Date of creation: Oct 2010
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Handle: RePEc:hal:psewpa:halshs-00564924

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Keywords: evaluation of public policies ; inequality ; poverty ; microsimulation ; externalities;

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  1. Jeff Dayton-Johnson and Pranab Bardhan., 1996. "Inequality and Conservation on the Local Commons: A Theoretical Exercise," Center for International and Development Economics Research (CIDER) Working Papers C96-071, University of California at Berkeley.
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