Public transfers and poverty: A global perspective

Several countries in Latin America and East Asia are on the verge of making a transition from middle-income to high-income societies. It is doubtful whether economic growth alone is sufficient for accomplishing the final steps of this transition. One obstacle might be the general absence of effective mechanisms to allocate and redistribute parts of the financial surpluses. In order to effectively combat extreme poverty it may suffice to use well designed cash benefits targeted to the poorest of the poor. However, in the new period of transition any ambitions to combat extreme poverty and raise income of the absolute poorest segments of the population should also be complemented by an emphasis on mitigating income inequalities in wider population segments, not least in terms of relative income poverty. The purpose of this study is to assess the link between public transfer programs and relative income poverty in a global perspective. The redistributive impact of income gradients and levels of public transfer programs are tested with Luxembourg Income Study (LIS) income survey data covering up to 36 middle- and high-income countries. The multilevel framework of the empirical analysis makes it possible to analyze the contribution of public transfers in reducing relative income poverty after controlling for confounding factors. Results indicate that redistributive government programs explain parts of the differences in poverty rates across countries. Public transfers with less targeted income gradients are most effective to reduce poverty, something that is related to the size rather than the gradient of redistribution. One interpretation is that policy makers in transitional economies need to widen the focus of social reform by complementing existing targeted low-income benefit programs and increasing the financial resources spent on universal and earnings-related entitlements. Thereby prospects for further social development in Latin America and East Asia could be substantially improved.