Debate about the most effective way to help the lower-income group

AS Malaysian households face increasing costs with the rise in inflation, a debate rages on about what the most effective or impactful way of helping lower-income families cope with the cost of living is.

With headline inflation (which includes volatile food and energy costs) up 3.5% year-on-year in February after rising 3.4% in January, the plight of lower-income families become ever more tenuous.

Bank Negara expects inflation to average between 3% and 4% this year due to further fuel subsidy cuts while prices will remain elevated going into 2015 with the implementation of the goods and services tax before tapering off in 2016.

These price rises come on the back of a 20-sen fuel subsidy cut together with the abolition of the sugar subsidy last year and the higher electricity tariff imposed from Jan 1.

Most economists believe there will be an additional 10-sen cut in fuel subsidy this year.

Given the politically sensitive nature of subsidy cuts, the Government has, since 2012, given out cash to eligible households and individuals under the 1Malaysia People’s Aid (BR1M) programme as part of efforts to help the people deal with the higher costs.

But there are those who question the effectiveness of the cash handout, saying that it will go to unproductive spending since this aid does not come with conditions attached while others, in support of the aid, point out that the most recent criteria announced for the aid disbursement (mostly disbursed in mid-February) means that as many as 7.9 million people are eligible for the programme this time around and in a more targetted manner compared to subsidies.

Furthermore, they argue that money saved from subsidy cuts should go to those most in need as in the first place, subsidies have not benefitted the lower-income households and individuals as much.

They say that people know best how to allocate the cash.

However, given that BR1M payouts may increase to RM1,200 per eligible household from the current RM650, economists have called for fine tuning its implementation in order that the goals of the programme be met.

The case for conditional cash transfers

Both conditional and unconditional cash transfers have their advocates and both forms of aid have seen improvements in their recipients’ lives although the literature out there show that conditional programmes are more effective albeit more expensive since it involves monitoring.

Among the better known conditional cash transfer programmes is Brazil’s Bolsa Familia, which was modelled after Mexico’s Oportunidades programme.

According to Foreign Policy magazine, the Bolsa Familia programme, which targeted 3.6 million families when it started in 2003, now has over 12 million families.

There is also evidence that conditional cash transfers are better at long-term goals with children who are required to go to school and who are healthier doing better later in life.

The Economist, in an Oct 26, 2013 issue, says although conditional and unconditional schemes are not always comparable, the results are emerging that where broad definitions of poverty reduction such as health and education are concerned, conditional cash transfers do better.

In the case of Brazil, the cash transfers are conditional upon children regularly attending school, being vaccinated and getting regular medical check-ups.

According to a study which The Economist cited, Brazil has managed to reduce extreme poverty by 89% over the decade to 2013, lifting 36 million families above the US$1.25 threshold (the World Bank’s measure for what an individual need to have at minimum in a day) during that time, infant mortality rates have fallen by 20% and high school completion rates for poor families is higher than the national average.

Alliance Research chief economist Manokaran Mottain, who supports a more structured aid programme for lower-income families, says that should Malaysia choose to adopt a conditional cash transfer programme, the conditions attached to the aid must be relevant to local conditions.

“We can take from different programmes out there to fit the programme here, while Bolsa Familia has been successful for Brazil, the conditions here are different,” he says.

Manokaran tells StarBizWeek that the Government should look into the possibility of introducing a combination of discount/debit cards to lower-income families rather than a direct cash handout credited into the bank accounts of heads of households with a certain income threshold.

He believes this is a better and more effective form of aid and can be tied to the 1Malaysia People’s Grocery Stores (KR1M) programme, which started operations in 2011 offering cheaper basic necessities on a mini-market format.

“The Government can incorporate a discount or debit feature into the MyKad identity card for basic neccessities and have it used in government-owned stores such as those under the KR1M programme or at any stores compared to the current system of crediting cash into the bank accounts of heads of households,” Manokaran says.

While stopping short of saying that cash transfers should be conditional, he suggests that the discount/debit card may be a longer-term solution to help such households compared to BR1M.

Manokaran is also more concerned about leakages and wastage in the BR1M disbursement. “If implemented correctly, this system should be able to resolve the weaknesses seen in BR1M while ensuring help to those who need it the most,” he says.

While BR1M, like most unconditional cash transfer programmes, are immediate measures for alleviating poverty, there is no reason why it cannot be a long-term programme for lifting people out of poverty, but the policymakers must make the first move in ensuring that this can be done, if BR1M or its successor programmes are to morph into a more lasting legacy in poverty eradication.