The events of the past three years have put low- and middle-income countries in Latin America and the Caribbean in a bind. They need to ensure that their citizens can recover from the devastating effects of the COVID-19 pandemic. But they also need to do it in the most cost-effective way so that public coffers are not drained. With this dilemma in mind, IDB researchers and their partners have studied the recent crisis and government initiatives to rapidly deliver social programs to extract some key lessons on the degree of vulnerability of the households in the region, on how social protection helps them, and on efficient ways to scale up the social safety net.
Lesson 1: Years of progress on poverty reduction can quickly vanish.
It took only a couple of months of the pandemic for gains in poverty reduction achieved over years of social protection investments to disappear. Those were the findings of the IDB-Cornell Coronavirus Survey that measured the effects of the pandemic on households across Latin America and the Caribbean in near real-time. Between March and May 2020, researchers collected approximately 250,000 responses across 17 countries in the region. The results, later published in PLOS One, found that in a matter of weeks, 45% of respondents reported that a household member had lost their job, and that among households that owned a small business, 59% had to close it.
These impacts were large and unequal across economic classes. Many middle-income households lost considerable wealth and fell into the bottom of the income distribution, suggesting that wide- social programs with broad coverage or social registries that serve as a platform for scaling up the safety net can make a real difference.
Lesson 2: Pre-existing social programs stepped up during the crisis.
Social programs with broad coverage that deliver resources to non-poor families may add pressure to tight public budgets. But an IDB study, published in the Journal of Development Economics, demonstrates that there are significant benefits to households when they face a crisis with a basic guaranteed income.
The authors took advantage of a natural experiment in Bolivia to study how entering an economic crisis with a basic, guaranteed income helped families maintain a minimum level of food security. A person becomes eligible for Bolivia’s universal non-contributory pension program upon turning 60, regardless of their income. The researchers compared the availability of food and the prevalence of hunger between households in which the oldest member just turned 60 a couple of months before the onset of the crises and thus had access to a basic pension and households whose oldest member was slightly too young to receive it. They found that those with access to a basic income were less likely to report being hungry and more likely to have enough food to cover a week’s worth of necessities during the onset of the pandemic.
These effects were larger among the poorest households. But they also could be seen among households in the middle of the income distribution, underscoring their vulnerability to poverty. This shows that programs with broad coverage can assume an added importance for non-poor households that are often excluded from the safety net, transforming the drawbacks of broad coverage programs into an asset during crises.
Lesson 3: The fight against poverty is not a one-way street; expanding the safety net can ensure that middle-income households stay middle-income.
Low-income households typically receive a guaranteed income stream from social programs, and high-income households have savings and credit. Middle-income households, however, are more vulnerable to economic shocks because they depend on their labor to finance their consumption. Indeed, roughly 37% of households in Latin America are vulnerable to poverty despite being above the poverty line.
A recent study by IDB researchers in partnership with Colombia’s National Planning Department shows that when experiencing economic shocks, middle-income households without access to social protection reduced non-food spending and delayed their utility payments. In other words, they borrowed, not directly from banks, but indirectly from their utility companies. These effects were offset for middle-income households that benefited from the expansion in the social safety net, demonstrating the potential of social programs to prevent their slide into poverty.
Lesson 4: Social protection can be a platform for expanding access to formal credit
The expansion of the safety net in Colombia also helped increase the resilience of the middle-class in the long term through access to formal credit markets from which they are often excluded. The program encouraged households to open digital savings accounts and receive their payment through direct deposit. Households benefitting from the program were 16% more likely to have a bank account, and, as a result, provided potential lenders with important data on money they received from the government as well as spending and withdrawals. Indeed, households benefitting from the expansion of the safety net were more likely to borrow from formal lenders, and in the longer run, to substitute predatory loans for formal ones when experiencing economic shocks. Social programs, it appears, can help households build resilience through credit markets, and thus reduce the need for future or permanent expansions of the safety net.
Lesson 5: Investing in tools to quickly scale up social programs and deliver benefits is crucial
Expanding the safety net requires developing efficient methods to disburse resources. An ongoing study of IDB’s Research Department finds that promoting the disbursement of cash transfers into bank accounts in Colombia reduces the number of failed payments. Delivering transfers through simple financial products can be more efficient for the government. But not all people are prepared to adopt digital modes of payment. Policies should strive to increase trust and digital skills among less educated and older people.
Finally, any social safety net depends on infrastructure that allows governments to verify the identity of beneficiaries and keep record of their economic situation. In our region, most people own an ID card. But IDs expire periodically and not all citizens are able to renew them on time. One IDB study shows how a simple intervention that used text messages to encourage people to do so, increased renewals and thus provided the government with updated information to better identify and target beneficiaries of a social program. It also helped lower-income people to use the QR code of their new ID to seamlessly access their benefits. Indeed, something as simple as getting people to renew an ID on time can be crucial for ensuring that lower-income households receive their much-needed benefits.
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