THE IMPACT OF PUBLIC TRANSFERS ON INEQUALITY AND SOCIAL WELFARE: COMPARING MEXICO’S PROGRESA

Confronted with rising poverty after an economic crisis in 1995, the Government of Mexico changed its social policy. It terminated universal subsidies for tortilla and funded new investments in human capital through PROGRESA, an innovative program providing school stipends to poor children as well as health and nutrition benefits. After reviewing the main features of PROGRESA, we use the Gini income elasticity to compare the marginal impact of PROGRESA on income inequality with the impact of other social programs. PROGRESA’s impact appears to be larger than the impact of these other programs. The Gini income elasticity for each program is decomposed into two components to measure the targeting performance of each program (i.e. who is participating and who is not), and the impact of the allocation rules for the distribution of the benefits among program participants. Sensitivity analysis is performed with the extended Gini income elasticity. Beyond the impact on inequality of the cash transfers provided by PROGRESA and other programs, we also discuss the programs’ long-term impact on social welfare. Finally, we propose some areas of improvement in the design of PROGRESA and similar programs.