While most of us would prefer to see less inequality and poverty, individually we do not have much of an incentive to act as a large share of the benefits go to others. Thus, an important case can be made for public intervention to help improve distributional outcomes. The right public spending can help, but budgets are limited. Other things besides equity will be underprovided without public action. Governments therefore face competing demands, as well as intense scrutiny of whether distributional objectives are indeed being met by expenditure practices.

The following is a brief summary of the issues and some selected references.

1. What are the key distributional objectives of public spending?

(a) Promote pro-poor growth. There is clearly a role for government to provide certain types of physical and human infrastructure that would otherwise be underprovided and yet are key to assuring that economic growth fully includes those among the poor who are capable of participating.

(b) Assist those left behind during the process of economic growth. It may take a long time for some sub-groups in society to participate in economic growth; some, such as the elderly and disabled, may never participate directly. Others may well be hurt in the short run by policy reforms which are pro-poor in the longer term. There may be related concerns about regionally unbalanced growth.

(c) Help deal with vulnerability. Incomes can be highly variable over time, particularly in poor rural economies; consumption smoothing is also imperfect. So, the poor can be vulnerable to uninsured risk caused by uncertain weather, relative price shifts or the collapse of community-level support systems during a crisis.

Suggested readings on this sub-topic:

• Anand, Sudhir and Martin Ravallion. 1993. "Human Development in Poor Countries: On the Role of Private Incomes and Public Services," The Journal of Economic Perspectives, 7: 133-150.
  

• Lipton, Michael and Martin Ravallion. 1995. "Poverty and Policy." In Handbook of Development Economics 3, ed. Behrman and T.N. Srinivasan, pp. 2551-2657. North-Holland: Amsterdam.
  
  
• World Bank. 1990. World Development Report 1990: Poverty, Oxford University Press.

2. How can public spending best meet these objectives with limited resources?

The answer often given to this question is "targeting." Those left behind, or vulnerable to risk, can arguably be reached most cost effectively by concentrating limited public resources on narrowly defined "target" groups within society.

In practice, approaches to targeting fall under two categories. The first is broad targeting. This approach does not target poor directly as individuals. Rather, the poor are reached by targeting services or commodities consumed heavily by the poor. Targeting basic social services--such as primary education and primary health care--and on basic infrastructural services--such as safe water and sanitation--are common examples. Another is targeting rural development activities.

The second approach, narrow targeting, targets benefits to specific individuals or families explicitly identified as poor. Examples include food-based schemes such as foodstamp schemes targeted to poor mothers; cash transfers such as family allowances and means-tested social assistance; micro-credit schemes targeted to rural landless women; public employment schemes and poor area development programs focused on poor geographical areas.

Each approach has costs and benefits. The approaches differ on how much reliance is made on administrative targeting versus self-selection -- which is based on the behavioral response to the incentives built into program. The costs of targeting stems from administrative demands, behavioral responses by beneficiaries and non-beneficiaries and political economy characterizing the environment in which these programs are implemented.

There are no hard and fast rules about which specific policies to pursue or whether broad or narrow targeting is better. A combination is usually most effective. Within each, the appropriate policies depend on the poverty profile, the policy objective, and on country specific circumstances such as the degree of administrative capacity, infrastructural development, political economy, and other constraints on policy instruments.

Suggested readings on targeting:

Experience with a wide array of targeted schemes is reviewed by Subbarao et al. (1997). The same is done by Grosh (1994) in the context of Latin America and focusing on the administrative costs of targeting policies to the poor. Ravallion and Datt (1995) provide a useful discussion of the issues in using public employment schemes to reduce poverty, as well as how to evaluate their impact allowing for behavioral costs. Alderman and Lindert (1998) review the potential for reducing poverty through self-targeted food subsidies, while Tuck and Lindert (1996) provide a detailed case study of the reform of a universal food subsidy to a more pro-poor policy through self-targeting. Numerous chapters in van de Walle and Nead (1995) examine broad and narrow targeting, the costs of targeting, and impacts of specific schemes.

• Alderman, Harold and Kathy Lindert. 1998. "Self-Targeting of Food Subsidies: Potential and Limitations." World Bank Research Observer, forthcoming.
  
• Besley, Timothy and Ravi Kanbur. 1993. "Principles of Targeting." In Michael Lipton and Jacques van der Gaag, eds., Including the Poor. World Bank, Washington, D.C.
  
• Grosh, Margaret. 1994. Administering Targeted Social Programs in Latin America: From Platitudes to Practice, World Bank Regional and Sectoral Studies, World Bank, Washington, DC.
  
• Ravallion, Martin and Gaurav Datt. 1995. "Is Targeting Through a Work Requirement Efficient? Some Evidence from Rural India." In van de Walle and Nead.
  
• Subbarao, K., Aniruddha Bannerjee, Jeanine Braithwaite, Soniya Carvalho, Kene Ezemenari, Carol Graham, and Alan Thompson. 1997. Safety Net Programs and Poverty Reduction: Lessons from Cross-Country Experience. Directions in Development Series, World Bank, Washington, D.C.
  
• Tuck, Laura and Kathy Lindert. 1996. From Universal Food Subsidies to a Self-Targeted Program: A Case Study in Tunisian Reform. World Bank Discussion Paper 351, World Bank, Washington, D.C.
  
• van de Walle, Dominique and Kimberly Nead. 1995. Public Spending and the Poor: Theory and Evidence. Baltimore and London: The Johns Hopkins University Press.
  
• van de Walle, Dominique. 1998b. "Targeting Revisited," World Bank Research Observer, forthcoming.

3. How do we assess the welfare impacts of public spending?

Information on distributional impacts, particularly the extent to which the poorest strata benefit, can help in making public spending choices. Economists and others routinely evaluate the distributional impacts of public spending policies. Many policy decisions are now based on quantitative assessments of the impacts of public spending on living standards, particularly of the poor. How reliable are such assessments? The methods most often found in practice can be classified into "benefit incidence studies" (see Demery 1997, van de Walle 1998a) and "behavioral approaches" (see Grossman 1994, and van de Walle 1998a for reviews). Hammer et al. (1995) provide an example of using the two approaches in a complementary way.

Both approaches have strengths and weaknesses. For example, benefit incidence analyses focus on average benefits of public spending whereas policy conclusions on spending reform are based on impacts at the margin. Lanjouw and Ravallion (1998) propose one way to get around this problem using the benefit incidence method. Comparisons of incidence over time also provide information on marginal impacts (see Hammer et al., and van de Walle 1995). Behavioral approaches use either econometric or experimental methods. Econometric evaluations are often plagued by program endogeneity issues leading to biased estimates of program impacts. Strauss and Thomas (1995) provide a review. Jalan and Ravallion (1998) discuss the issue as it arises in assessing impacts of geographically targeted development programs in China.

Suggested readings on this sub-topic:

• Demery, Lionel. 1997. "Benefit Incidence Analysis," PREM Poverty Anchor Group, World Bank, Washington, DC.
  
• Grossman, J. B., 1994. "Evaluating Social Policies: Principles and U.S. Experience," The World Bank Research Observer 9(2): 159-180.
  
• Hammer, Jeffrey, Ijaz Nabi and James Cercone. 1995. "Distributional Impact of Social Sector Expenditures in Malaysia." In van de Walle and Nead.
  
• Jalan, Jyotsna and Martin Ravallion. 1998. "Are there Dynamic Gains from a Poor-Area Development Program?" Journal of Public Economics.
  
• Lanjouw, Peter and Martin Ravallion. 1998. "Does Program Participation Reveal Benefit Incidence?: Evidence for Rural India, 1993-94." World Bank, Washington, DC.
  
• Strauss, John and Duncan Thomas. 1995. "Empirical Modeling of Household and Family Decisions." In Handbook of Development Economics 3, ed. Behrman and T.N. Srinivasan, pp.1883-2023. North-Holland: Amsterdam.
  
• van de Walle, Dominique. 1998a. "Assessing the Welfare Impacts of Public Spending." World Development 26(3).
  
• van de Walle, Dominique and Kimberly Nead. 1995. Public Spending and the Poor: Theory and Evidence. Baltimore and London: The Johns Hopkins University Press.
  
• van de Walle, Dominique. 1995. "The Distribution of Subsidies through Public Health Services in Indonesia, 1978-87," in van de Walle and Nead.