Efficiency and Equity in Welfare Schemes

Some welfare schemes are good, some are OK, and others are bad, writes Karthik Muralidharan in Accelerating India’s Development. He suggests using Efficiency (efficient or not?) v/s Equity (reduces inequality or not?) metric to evaluate different welfare schemes in the country, split among the 4 quadrants, R1 to R4.


 

Some schemes are good only on one count (Efficiency or Equity), others on both, and yet others hurt on both counts.

 

Take free electricity for farmers (#10, in R3). It is bad on both counts. How? The richest farmers (5%) account for 50% of the subsidy money. The poorest in farming, the landless labourers, get absolutely nothing from the scheme. Further, free electricity encourages cultivation of water intensive crops (since borewells become practically free), which reduces the water level progressively and aggravates the water problem. (The Delhi smog connection to free electricity is also well known). There are more indirect negative impacts of this free electricity policy. Someone has to foot the electricity bill. In India, it is not the state (or central) government. Rather, it is the power distribution companies (DISCOMs). They try to recover the money by over-charging industrial users. Who then pass increase the prices of their products. The higher prices then make many industries globally uncompetitive.

 

On the other side of the spectrum (#1, in R1) is a scheme like NREGS (National Rural Employment Guarantee Scheme). It improves Equity by providing employment to all rural folks. It is especially relevant to the landless labourers, whose employment is seasonal. In addition, it gives such people an option in employment, which can result in increased wages for them (that’s just how competition works). When the scheme is used for activities that genuinely add value (e.g. rural road construction), NREGS helps improve economic growth of the country.

 

A scheme like NYAY (#9, in R4) is about giving ₹72,000 p.a. to the poorest 20%. This is an obvious good from the Equity perspective. But on the Efficiency side, it fares poorly. How? It incentivizes people to forge their way into the beneficiaries list. Plus, the genuinely needy folks are the ones who struggle the most to produce the relevant paperwork to prove their eligibility. And it reduces incentives to work – an increase in income might disqualify you from NYAY!

 

Merit based scholarships (#2, in R2) are Efficient. But they would end up going to kids who are already better-off, thus violating Equity.

 

His point in citing examples from each quadrant was to drive home certain general points: (1) Often there is a tradeoff between Equity and Efficiency; (2) But not always, some schemes are good on both; others are bad on both; (3) Schemes with the same intent can fall into different quadrants based on the details; (4) It is key to collect data and evidence of how schemes fare, and update and improve accordingly. Conversely, it is impossible to know upfront all possible consequences a scheme may have.

 

The key therefore is in continuously evaluating schemes to see how they fare and their consequences. Then improve or scrap them as appropriate.

 

He also says that benefits should be provided reliably and predictably. Because those two attributes allow people to plan what they will do and when. Uncertainty and unpredictability paralyze any planning (and thus outcomes).

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