Lessons from cash transfer programs in Indonesia

Authors: Vita Febriany and Asep Suryahadi, SMERU Research Institute

Cash transfer programs, which provide regular time-limited payments to poor households, are becoming an increasingly popular tool for reducing poverty in developing countries.

Cash transfers raise the income of poor households and consequently increase their consumption, reducing poverty at least in the short term. As a social protection program, cash transfers are considered more efficient and more effective than in-kind transfers. Unlike in-kind transfers, cash programs do not require large storage or transportation costs, provide beneficiaries with choices on how to spend their money, boost the local economy by increasing the local cash supply and generate employment through trade multipliers. The shortcoming of cash transfers is that recipients may use the money for buying ‘bads’, such as cigarettes or alcohol, which do not contribute to household welfare.

There are three types of cash transfers: unconditional cash transfers (UCT), conditional cash transfers (CCT), and cash for work. UCT has no conditions attached to the transfer, so beneficiaries have complete autonomy on how they spend the money they receive. By contrast, CCT imposes conditions on beneficiaries to determine whether they are eligible to receive the transfer. These conditions are usually directed at promoting longer-term human capital growth. In 2007, 29 developing countries had some kind of CCT program in place. The third type of cash transfer — cash for work programs — provide temporary employment opportunities while building infrastructure.

Indonesia has implemented both UCT and CCT programs. A large-scale UCT program, the Bantuan Langsung Tunai (BLT), was implemented to mitigate the impact of fuel subsidy reductions for over 19 million poor and near-poor households in 2005–06 and in 2008–09. Meanwhile, a pilot CCT program, the Program Keluarga Harapan (PKH), was started in 2007 and has now been implemented in all 33 provinces, covering around 1.5 million very poor Indonesian households.

Whether conditionality is necessary for cash transfer programs to be effective has become a subject of intense debate among academics and practitioners. Conditionality makes cash transfers more politically acceptable to non-beneficiaries, because middle- and upper-class voters may believe the poor do not deserve a ‘free’ cash transfer unless it is tied to an improvement in specific indicators or behaviours. In Indonesia, the introduction of the BLT in 2005 generated a much higher level of public attention and scrutiny compared to other social protection programs. In some areas it led to community conflict, widespread protests and even riots. The BLT was heavily criticised on the grounds that it would be ineffective in the long term because it would create dependency and reduce incentive to work.

Though CCT is more politically acceptable, its downside is that conditionality involves substantial administrative costs to monitor beneficiaries’ compliance. For example, conditional transfers might require monitoring of whether a beneficiary’s child attended school regularly or was brought to a health clinic for regular check-ups. In Indonesia, the administrative costs for UCT were about 8 per cent of the program budget. By contrast, the cost of CCT is much higher, totalling about 18 per cent of the program’s budget. For CCT, around half of the total administrative costs come from monitoring compliance. The total monitoring costs are more or less equal to an additional 100,000 beneficiaries.

The key question here is whether CCTs have a greater impact on the wellbeing of beneficiaries compared to UCT, despite the substantially higher administrative costs? Studies in other countries have shown that both UCT and CCT do benefit beneficiaries. An evaluation of a UCT program (Bono de Desarrollo Humano) in Ecuador shows that students from beneficiary households reduced their involvement in paid labor and unpaid activity in their homes. The CCT Bolsa Familia program in Brazil has been effective in increasing school enrolment and decreasing dropout rates. In Indonesia, beneficiary households spent UCT and CCT funds in a similar pattern: the money was mostly spent on basic necessities and little was saved for education or health expenditure. It was only when the transfer arrived shortly before school fees were due, or when the household needed to visit a health care centre, that some of the money was spent to access these services.

Both UCT and CCT in Indonesia have been found to have a significant impact on reducing the working hours of school children. Both programs have also improved access to outpatient health services. Yet most educational indicators were not significantly affected by cash transfer programs because schools are much less accessible in remote areas, particularly at secondary school level, and most cash payments are insufficient to cover the cost of enrolment. Interestingly, neither of these problems relate to conditionality.

Vita Febriany is Senior Researcher at the SMERU Research Institute, Jakarta.

Asep Suryahadi is Director at the SMERU Research Institute, Jakarta.