Research examines efficiency of income transfer programs at reducing poverty

Brazil’s income transfer programs have generated debate over time about their effectiveness at reducing poverty. However, a new study by Fundação Getulio Vargas’ Brazilian School of Economics and Finance (FGV EPGE) found that this type of program, especially if it imposes conditions, has a strong capacity to reduce poverty, improve education indicators and boost people’s purchasing power in the long term.

Pedro Cavalcanti Ferreira, a researcher at FGV EPGE and the FGV Center for Economic Growth and Development Studies, coordinated the study, titled Universal Basic Income in Developing Countries: Pitfalls and Alternatives. He points out that the main difference between this study and others on the same subject is the fact that it analyzes numerous variables with long-term effects. According to the professor, in the jargon of economists, this research used a general equilibrium methodology.

“Many other studies show how the “Bolsa Família” (“Family Grant”) Program has reduced poverty, the risk of teenage pregnancy, and so on. However, we carried out dynamic analysis, looking to the future instead of the past and demonstrating the social and economic impacts of investing in a program like this, compared to other types of welfare programs,” Ferreira says. “We didn’t just investigate one channel and one final effect, but numerous channels and effects.”

Building one of the largest Brazilian studies on income transfer programs

The study, funded by the Rio de Janeiro State Research Foundation (FAPERJ) and National Council for Scientific and Technological Development (CNPq), compiled data from the 2022 Brazilian census and National Household Sampling Survey (PNAD), both conducted by the national statistics agency (IBGE). Income data from the World Bank was also used.

“We started with a modern macroeconomic methodology, which involves solving a very complex theoretical model and simulating it on a computer. In this methodology it is possible to vary and change different aspects and parameters of the model, in what we call an artificial economy, as if it were a laboratory, but for economic scientists, our laboratory is our computer,” Ferreira explains.

The professor adds that it is possible to simulate different situations using the model created. “We collected data from the Family Grant Program, along with the respective conditions for participating in it, and added this information to our artificial economy model. We calibrated this model with the appropriate parameters in order to simulate and carry out computer experiments,” he says.

These experiments included a simulation that was crucial to this study, which asked what would happen if the Family Grant Program were to be replaced by a universal basic income program.

“To do this, we calibrated our model with a representation of Brazil in 1997, using demographic and economic data from that time, before the Family Grant Program was created. Making these pretexts, our experiment simulated what would happen in the following 40 years, if a universal basic income program had been implemented in Brazil instead of the Family Grant Program,” Ferreira says.

The study also analyzed what would have happened if the Family Grant Program had been implemented at the same time and under the same socioeconomic conditions as the universal basic income program. “Both experiments were carried out and compared, assuming that the universal income and Family Grant payment were both R$150 per month,” the researcher says.

Income transfer program versus universal basic income

Ferreira says that, at first glance, the effects of both programs may seem similar, because in the short term the impacts of both are similar. However, as time goes by, in the medium and long term, it becomes clear that conditional income transfer programs such as Family Grant have a lower cost for the government while reducing poverty more effectively.

“In terms of coverage, a universal basic income program would obviously cover 100% of the population, while an income transfer program would only cover the poorest 20%. However, the cost of the universal basic income program is almost 10 times higher, amounting to around 5% of Brazil’s gross domestic product, while programs like Family Grant cost 0.55% of GDP,” the researcher says.

Ferreira adds that, in fact, by implementing the Family Grant Program, it is possible to see a long-term increase in GDP of around 18%, while the universal basic income program cuts GDP by 11%. According to him, this phenomenon is due to the virtuous cycle that encompasses income transfer programs such as Family Grant and their respective conditions.

“In programs that give citizens a fixed and lifelong income without any conditions, individuals are less incentivized to save money and at the same time they are not helped to get out of poverty, such as through participation in education, which we predict will fall slightly with a universal basic income program. In addition, the higher taxes needed to finance a universal basic income program have a very strong negative impact on investment and savings, which also reduces GDP,” Ferreira explains.

According to the researcher, one of the greatest benefits of the Family Grant Program involves education. “By requiring children to be enrolled in school as a condition, this type of program increases elementary and also high school attendance rates. With more schooling, these individuals can have better access to job opportunities and, consequently, greater access to income, helping the family itself break the cycle of poverty,” he says.

The study also found that a guaranteed basic income would reduce the average Brazilian person’s level of schooling by 5% in the long term, and poverty would only fall one percentage point, and in some contexts it would even increase. On the other hand, the Family Grant Program would reduce the share of people living in poverty from 20% to only 5%. “In addition, programs like Family Grant provide a greater indirect incentive to save money, which increases investment levels for people and the country,” the researcher says.

Importance of conditions

Ferreira reiterates that these results demonstrate how conditional income transfer programs are much more effective, have more positive impacts, and show that investing efforts in a universal basic income program is a bad idea.

“In this type of program, individuals save less and educate themselves less, which means they have fewer assets and less income. In the short term it may bring about some benefit, but our analysis shows that this result is only temporary and we need to be aware of the long-term effects on the population,” he says.

According to him, conditional income transfer programs have already proven to be a much more effective idea than other types of welfare programs, not only in Brazil but in many other countries. “Various international studies analyzing universal basic income initiatives show that, as well as being expensive, they generate very small socioeconomic benefits,” Ferreira warns, adding that there is a cheaper and more viable way to fight poverty.

“It’s important to keep in mind that the Family Grant Program’s conditions are the main thing making it effective at reducing poverty. We also carried out experiments simulating the implementation of the Family Grant Program, but without some of its main conditions, such as income and schooling,” he says.

In one of these experiments, it was found that if the Family Grant Program didn’t have an income limit condition, coverage would increase to 40% of the population but the share of people living in poverty would fall less, to 11% of the population, while the tax burden would be almost three times higher, totaling 1.3% of GDP. The researcher explains that a higher tax burden harms poverty.

“In addition, if the Family Grant Program only had an income condition but no schooling condition, the share of people living in poverty would increase 0.5% and GDP would drop 11%,” Ferreira says.

Impact on public policies

Through this type of economic simulation, Ferreira says it is possible to identify that a program without the proper conditions, even if aimed at transferring income, would be very expensive and ineffective at achieving the goal of reducing poverty.

“If a country sets aside 5% of its GDP to invest in a public policy, it needs to ensure that it is as effective as possible. We have a long-term validation, analyzing many aspects, which shows how the Family Grant Program is able to reduce poverty by more than 75% in the long term, at a lower cost than other programs. We have also shown where we should continue to invest, in what way, and what shouldn’t even be considered,” he says.

He concludes by recommending that the government “ought to retain public policies similar to the Family Grant Program and seek to build these policies in the most effective way, which according to this research means strengthening conditions such as school attendance".