Executive summary

IV . Protecting the Most Vulnerable: Toward Effective Social Protection in Panama

As in most countries in Latin America, social protection spending in Panama is mainly limited to social insurance (SI) programs, which are typically aimed at mitigating unemployment, health and old age poverty risks (e.g., health insurance, unemployment insurance and old age pension). Eligibility to SI in Panama requires participation in the formal labor market through which some contribution to fund these programs is made via payroll taxes.⁵

Because of the low coverage of the poor in SI programs, Panama, as most Latin American countries, has developed and expanded social assistance (SA) programs aimed at relieving the distress of the poor. These range from untargeted price subsidies and/or food-based programs, to the more recently developed targeted conditional cash transfers (CCTs). CCTs provide cash assistance to poor families in exchange for beneficiary compliance with key human development actions such as school attendance, vaccines, prenatal care and child growth monitoring.

Panama’s total spending in social protection (i.e., SP=SI+SA) is relatively high when compared to other countries in Latin America, and even when compared to the United States. It spends 6.7 percent of GDP in social protection, with 5 percent spent in SI and 1.7 percent on SA. The average in Latin America is 5.7 percent of GDP for total SP, 4.7 percent for SI, and 1 percent for SA (see Table 1). The United States spends 8.3 percent of GDP in total SP, but has a much larger elderly population (12 percent aged 65 or above) that absorb much more resources per capita than the younger population in Panama, where only 7 percent of the population are elderly citizens. More impressive perhaps is the 1.7 percent of GDP that Panama spends on social assistance. This is 70 percent higher than the Latin American average, and is substantially higher than what countries like Mexico, Chile and Costa Rica spend on social assistance.

Why is social assistance so ineffective in reducing poverty in Panama?

Given the relatively large amounts spent on social assistance, it is remarkable that poverty, and especially extreme poverty remains high in Panama. This is a clear indication that social protection spending in Panama is ineffective. Either SA programs are not being well targeted to the neediest, or, when well targeted, they are not effective in reducing poverty. Emphasis should be given to looking for opportunities to better use existing resources in order to raise the efficiency and the impact of the SP system – for example, by reducing program overlap, improving program design and targeting – before additional resources are put into the social protection system.

For instance, the country has a large program of subsidies for electricity, water, cooking gas and gasoline, which accounts for almost two-thirds of spending in social assistance. These subsidies mostly benefit the non-poor, and spending is not focused on the most vulnerable groups, such as small children and pregnant or lactating mothers. Targeting these groups would more effectively contribute to breaking the intergenerational transmission of poverty.

Table 1: International Comparison of Social Spending as % of GDP

Source: World Bank reports, OECD, and staff estimates for Panama. a/ Education and health spending is adjusted to eliminate double counting with SA. b/ Five LA countries.

The social protection system in Panama therefore suffers from multiple programs with duplicating objectives and overlapping target populations, and weak to non-existent program monitoring and impact evaluation. Substantial gains in the fight against poverty in the country could be made by phasing out some of these programs and focusing on a new well-designed social assistance package for major at-risk groups, including the extreme poor and the indigenous. Preliminary simulations indicate that significant cost savings of at least B.\28 million per year could be generated by phasing out some of the untargeted subsidies and redundant programs with overlapping target population.

Conditional Cash Transfers: A new vision for Social Assistance in Panama

The proposed conditional cash transfer program being piloted by the Ministry of Social Development (MIDES) seems to be a step in the right direction for developing a clear social protection strategy in Panama. Robust international evidence has shown that CCT programs are considerably more effective than untargeted subsidies in fighting poverty, malnutrition and inequality.
The key to successful CCT programs is to ensure good targeting of the extreme poor. Our analysis indicates that combining Proxy Means Testing (PMT) and geographic targeting techniques would be the best approach to ensure that transfers reach the neediest. The targeting method selected by MIDES should ensure that at least 75 percent of the extreme poor would be reached if the CCT program currently being piloted were to be expanded to the country as a whole. More importantly, the simulation results show that 88 percent of the poorest 10 percent of the population, and 95 percent of the poorest 5 percent, can be included in a nation wide program using feasible and cost effective Proxy Means targeting mechanisms. While approximately 30 percent of the national program budget may not reach the extreme poor, 80 percent of such leakage would go to the moderate poor, and only 20 percent would go to the non poor. These targeting outcomes, are favorable compared to the international experience and could be further improved if measures are undertaken to increase self exclusion of the non-poor. For instance, imposing conditions on program usage for adults, such as demanding attendance to periodic health and nutrition classes, may increase the level of self exclusion of the non poor, as they tend to have a higher opportunity cost of personal time.
Simulations regarding the national CCT program that could follow the current pilot being implemented by MIDES show that the program is likely to reduce the headcount index of extreme poverty by approximately 10 percent in 6 years, and 13 percent in 12 years. However, as discussed above, because of the high depth and severity of poverty in Panama, the headcount index should not be the metric used to evaluate the success of the program. It is more important to measure its long run impact on the extreme poverty gap and the severity of poverty. As currently designed, our analysis suggests that a national CCT program would reduce the national extreme poverty gap by approximately 20 percent, from B.\104 to B.\83 million, and the severity of poverty index by 25 percent.
A slightly higher benefit amount per beneficiary family than is currently being piloted by MIDES would enhance the impact of the program without altering the overall budget if a narrower target of beneficiaries was specified. Nevertheless, given that it is always politically easier to increase rather than decrease benefit amounts, it would perhaps be prudent to start the program with the smaller transfer currently specified by MIDES, rather than a larger one. A more informed decision of whether or not to increase benefit amounts should await the results of the evaluation of the pilot.
A CCT program would also be an effective tool in fighting extreme poverty and malnutrition in indigenous areas since cash constraints represent a main barrier to access schools and health centers. The interrelated challenges of breaking the vicious circle of low nutrition, low health outcomes, low education and high poverty of the indigenous call for a combined policy intervention. For such an intervention to fully function in indigenous communities, complementary programs to raise the supply of adequate health and education services for indigenous people would also be required. More than a short-term decrease in poverty headcount numbers, such combination of interventions would tackle some of the roots of the inter-generational transmission of poverty. In the medium-term, it will not only lift households from their deep poverty, but will also yield significant welfare impacts.

Conditional cash transfer programs would also be relevant due to the demand-side issues faced both in education and health. To understand further the constraints facing indigenous people in accessing services and the relevance of a CCT program in these communities, eighteen focus groups with community leaders, community representatives and women took place in two communities of each of the three demarcated indigenous (comarcas). Communities were purposively selected with the support of traditional authorities and MIDES to include a community with some access to basic services and one without basic services in all three comarcas. All groups used a similar interview guide so as to identify differences of perception and representation between stakeholders.

The themes covered included:

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  Access to education and gender differences
  
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  Access to health services for illnesses and maternal and child health (pregnancy, birth, well-infant and baby services)
  
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  Community organization
  
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  Decision-making processes
  
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  Previous experience with direct transfer programs
  
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  Women as cash transfer recipients: rationale and potential conflicts
  

All focus groups provided clear examples of how cash constraints represent a main barrier to access schools and health centers because of transportation costs, uniform and school supplies costs, medicine and treatment costs. Providing cash, however, will only address some of the issues and the program will need to coordinate with sector ministries in health and education to ensure a greater access of quality services especially at the prenatal, infant and pre-school stages. This will require collaboration between traditional healers, birth attendants and doctors so as to accommodate some practices (e.g., presence of the birth attendant during institutional births, burial of the umbilical cord) and address child-feeding practices (delay in breast-feeding) and early child stimulation.
Local consultation and involvement of leadership are also likely to be key to program success. While communities consulted were open to the idea of a CCT, the local operation of the program and its success will crucially hinge on the support of local leaders, whom have been known to refuse access to programs and service providers. This stems both from a general suspicion towards the central government seen as encroaching on the indigenous communities (comarcas) autonomy and from a deep-seated reluctance of undermining some traditional power balances inside households but also at the community level. A transparent targeting mechanism will be a key element of the trust-building. Greater participation in the management of service provision would also help.
In sum, given current levels and patterns of public social sector spending in Panama, there is considerable scope for improving social protection outcomes for the poor, even within the current budget envelope. This could be achieved through strategic reallocations of resources to areas of high impact and the strengthened use of targeted approaches to ensure access to programs and services by the poorest and most vulnerable Panamanians. To this end, it is important to develop a clear social protection strategy with specific targets, consolidating redundant programs, and replacing ineffective and costly programs with well-designed ones focused on major at-risk groups, including the extreme poor and the indigenous. Decentralization of key components of some programs could also help enhance efficiency. For instance, the purchase of foodstuff in the SIF school lunch program could be decentralized to local communities to avoid costly logistical problems in delivering and storing food. Also, creating non-contributive systems to cover poor elderly citizens that do not have access to pensions or other source of income could generate savings from the current social protection budget envelope. Finally, concentrating the responsibility for the Social Cabinet agenda and results within one ministry to allow for better management and coordination of poverty reduction interventions could helps boost the effectiveness social spending.