Apresenta

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Think Global, Act Local Social Credit based on
MDGs
Marcelo Neri Social Policies Center CPS/FGV and
EPGE/FGV Marcelo Xerez EPGE/FGV and Brazilian
Central Bank
International Poverty Center, August 2005
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Theory

• Principal-Agent Model

Principal
Federal Government
UF GF NP. v(YP)
Government Budget YF
T Government Transfer
Agent
Municipality
UM GM NP.?.v(YP)
Municipality Budget YM
YP Poors Welfare Level
Poor
References Besley (1997), Gelbach and Pritchett
(1997), and Azam and Laffont (2001)
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Autarchy (A)
Max GM NP .? . v(YP) YP s.a GM NP . YP ?
YM
The larger the coefficient of the local
governments aversion to poverty, the larger will
be the poors welfare level.
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Unconditional Transfer (I)
The government does not establish any social
target, it transfers unconditionally a fixed
amount, TI.
FOC
Proposition 1 If the federal government perfoms
unconditional transfers to the local governments,
the poors situation does not change.
Crowding-out Effect

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Poverty Incentives (IP)
The government always helps more the
municipalities where the poor are poorer.
Transfer
Max GM NP .? . v(YP) YP s.a GM NP . YP ?
YM (K YP).NP
The smaller the poors income, the greater is the
income per capita transfer carried out by the
government to the municipality gtpoverty
incentives
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Social Credit
Transfer Conditional on the Fulfillment of Social
Targets (MS)
FOC
Proposition 2 the establishment of a social
credit mechanism increases poors income.
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Social Credit
Transfer Conditional on the Fulfillment of Social
Targets (MS)
Linear Contract
Proposition 3 The coefficients belonging to a
linear contract of social targets are
where
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Social Credit
Furthermore, a social credit contract leverages
locally funded social investments.
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Static Models

• Poverty Incentives (IP)
• Autarchy (A)
• Unconditional Transfer (I)
• Social Credit (MS)
• Political Favoritism without Transfer
• (FA)Favoritism with Social Credit (FSC)

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Dynamic Models

• Complete Contracts
• Full Commitment
• Long term commitment
• No commitment or spot commitment
• Incomplete Contracts

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Dynamic Model

• Full Commitment

Governments Problem
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Non Deterministic Models

• Idiosyncratic Shocks ? Insurance Provision.
• Aggregate Shocks ? Performance Comparison.

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Conclusion Theory

• Unconditional Transfer does not change poors
  situation
• The smaller the poors income, the greater is
  the income per capita transfer carried out by the
  government to the municipality gtpoverty
  incentives
• Social Targets increase the efficiency in the
  use of public money and help to reduce the social
  difference among the different groups
• The existence of a commitment mechanism, when
  there is not the possibility of any type of
  renegotiation among the parties, makes possible
  greater efficiency in the dynamic problem (with
  complete contracts)

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Main Lesson It is not enough to know the social
budget employed it is necessary to measure
social results. But how we do it?
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How? through Social Credit mechanisms that
transform poverty emancipation into financial
resources.
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Why? to reduce Moral Hazard problems in social
transfers to local governments.
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Why use MDGs as numeraire in performance based
contracts?

• Exogenous for a Given Country (credibility)
• Coordinate actions across different government
  levels from different political parties (spatial
  consistency)
• Long-Lasting (time consistency)
• Smooth transitions between different political
  mandates.

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Care with MDGs Contracts

• Advantage Time and Spatial Consistency
• Pratical Issues
• Not use the value of the indicator at a given
  date but its discounted present value along its
  path.
• 1st MDG should be based on P2 (squared poverty
  gap) and not on the proportion of poor (P0).