Article

To Reduce Poverty, Namibia could Explore Conditional Grants

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2006
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Although Namibia is a resource-rich, lower-middle-income country, one-third of its population is poor. To address one of the most unequal income distributions in the world, a coalition of nongovernmental organizations has proposed a universal income grant for all Namibians under age 60. But such a program may jeopardize economic stability and compromise the country’s fiscal policy stance. According to a recent IMF staff report, a better approach to social assistance may be a conditional cash transfer program.

Namibia has a high incidence of HIV/AIDS and other diseases, high unemployment among the unskilled, instances of food insecurity, an inadequate education system, and a limited social safety net. The extreme inequality in incomes is largely the consequence of the economic and social structures inherited from the apartheid period and of the country’s dependence on the diamond industry.

Battling poverty on myriad fronts, Namibia is not on track to meet the Millennium Development Goals (MDGs) for child nutrition, under-5 and maternal mortality, and net primary school enrollment. The government has spent more (in relation to GDP) on health care and education than most other sub-Saharan African countries but has not always allocated expenditures efficiently. Although it has made strides in treating those with HIV/AIDS, this epidemic is still the country’s greatest challenge to human development. Moreover, the incidence of tuberculosis is increasing rapidly and is now among the highest in the world.

Weak safety net

In sub-Saharan Africa, Namibia is one of very few countries with a social safety net for vulnerable groups. It provides welfare grants to the elderly, the disabled, orphans and vulnerable children, and war veterans. The Social Security Act provides for maternity leave, sick leave, and medical benefits. The old-age pension—Namibia’s most extensive program—provides citizens over the age of 60 with a pension of $45 a month and covers most eligible pensioners. The social safety net is, however, inadequate: there are too few social workers for the size of the population, application procedures for grants are demanding and time-consuming, and the poor are not well targeted.

According to the United Nations, unless Namibia introduces specific growth policies to help the poor, it will have to achieve average real per capita GDP growth of 5V percent a year to cut poverty in half by 2015. This is significantly higher than the average growth of less than 3 percent a year experienced between 2000 and 2004, and growth is not expected to rise above this rate. Prospective growth alone is clearly too low to enable Namibia to meet the target for poverty reduction.

Income grants

Recently, a coalition of nongovernmental organizations pro-posed the introduction of a universal income grant under which all Namibians under age 60, regardless of income, would receive a monthly cash grant of $15. This grant, the coalition argues, would reach 93 percent of the population, cost 2¼–3¾ percent of GDP and be paid for through taxes, move the majority of the population above the poverty line and reduce income inequality, and be less prone to abuse than a targeted grant. Moreover, it would not, according to the coalition, discourage people from looking for work.

However, the IMF staff analysis suggests that the income grant may jeopardize Namibia’s economic stability and compromise its prudent overall fiscal policy stance. The cost of the proposal, according to the analysis, could reach 5V percent of GDP and require a doubling of the current value-added tax (VAT) rate to 30 percent, assuming that consumption patterns do not change and tax evasion does not increase. Such a large increase in the VAT rate could be highly distortionary, given the narrow tax base. The IMF study indicates that the financing of the grant is likely to offset part of the distributional benefits of the scheme, because VAT taxes typically fall more heavily on poorer households.

In addition, according to the IMF staff analysis, if all citizens are entitled to a cash grant, incentives to have children may be distorted, increasing fertility rates and conflicting with other health policies that Namibia is pursuing. A universal grant may also have an adverse effect on labor markets, with the reservation wage—the wage offered for low-paying jobs in the informal sector—increasing along with the grant amount. Another concern is that communities that depend largely on subsistence farming may use the cash for unproductive consumption (such as alcohol), thereby neutralizing the intended stimulus for local economic activity.

A better solution

Approaches tried elsewhere in the world may offer superior options. The IMF staff study suggests a conditional cash transfer (CCT) program as an alternative to the universal income grant. Starting with Brazil in the 1990s, several Latin American countries have launched such programs. The region’s two largest programs, those of Brazil and Mexico, have been found to help improve the welfare of 15 percent of the population in Latin America.

CCT programs provide cash to poor families conditional on behavior, usually investment in human capital (that is, education, job training, and health), thereby helping prevent both current and future poverty. They address existing poverty by providing income support to smooth consumption and inequity by targeting resources to the poor; they restore efficiency by providing incentives for parents to invest in their children’s health and education. Political support for the programs in Latin America is strong, and administrative costs have been low.

Namibia, with its high incidence of poverty and limited social safety net, appears to be a good candidate for a CCT program, which could help it make progress toward the MDGs. By targeting the two most vulnerable population groups—poor children and HIV-affected individuals—a CCT program could reduce poverty and improve the distribution of income.

Cash grants could be targeted to young children (through the female head of household) and nursing and pregnant women contingent on, for example, visits to health centers, health and nutrition workshops, yearly checkups, and prenatal health care. Separate grants could be targeted to older children (also through the female head of household) who attend school regularly to help them pay school fees, which are prevalent in Namibia.

To reduce poverty among those with HIV/AIDS, Namibia could provide them with cash grants on the condition that they visit a health center regularly. Such grants, which would enable them to eat regularly, would make treatment more effective and would thus benefit society as a whole. This approach would combine an investment in future health with immediate poverty reduction.

The Namibian authorities would do well to consider conditional cash transfers as an alternative to the recent proposal for universal income grants. They would need to think carefully about who the potential beneficiaries should be and what conditions should apply to the transfers. If Namibia introduces a CCT program, the authorities should take into account other grants and streamline other welfare programs to free up resources. Finally, the IMF study recommends that such a program be rolled out gradually so that fiscal costs, quality of services, and targeting can be monitored.

This article is based on “Dimensions of Poverty and Social Policy Toward the Poor,” in Namibia: Selected Issues and Statistical Appendix (IMF Country Report No. 06/153). Copies are available for $15.00 each from IMF Publication Services; see page 192 for ordering details. The full text is also available on the IMF’s website (www.imf.org).

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