Conditional Transfers, Labor Supply, and Poverty: Microsimulating Oportunidades

This article summarizes a microsimulation exercise for the Mexican human development program, Oportunidades, and presents a series of simulations of its actual and potential impact on poverty at the national, urban, and rural levels. The simulations were partly based on a program that we designed and developed under the sponsorship of the Mexican Secretary of Social Development (Secretaría de Desarrollo Social, or SEDESOL). Our goal is to provide ex ante estimates of the potential effects that changes in program design, in terms of the selection of beneficiaries or the amount of benefits, may have on poverty in Mexico.¹

Microsimulations differ from impact evaluations in that they allow analysts to assess different possible policy measures before the measures are implemented. Several ex post impact evaluations of Oportunidades highlight the success of this program in terms of beneficiaries' health and school enrollment. Oportunidades, which was initiated in late 1997 under the name Progresa, has become one of the most important and well-known programs in Latin America. By 2005, it covered five million recipient families with an annual budget of U.S.$2.1 billion.² The program served only rural families through 2002, when it began to incorporate the urban sector. Given the program's current size and reputation, administration officials cannot rely exclusively on ex post evaluations for judging the potential effects of changes in the program. A prospective instrument for steering the future development of Oportunidades is needed, and microsimulation techniques, such as those presented here, complement and expand what we have learned from the experimental and quasi-experimental program evaluations.

Microsimulation exercises are a common instrument of policy analysis. Several literature surveys review the evolution and extension of these techniques applied to different fields.³ Bourguignon and Pereira survey different techniques for evaluating the distributional impact of economic policies.⁴ They classify these different techniques according to several perspectives: ex ante or ex post, accounting or behavioral, and partial equilibrium or general equilibrium. Ex ante simulations are performed before the program is enacted to predict the likely impact on chosen variables, whereas ex post simulations show what a program's effect would have been had it been designed differently. The accounting simulation simply modifies the variable under study (for example, transfers or subsidized prices) for the selected sample observations that comply with certain eligibility requirements. Distribution indicators for the database with modifications are then compared with the corresponding measures for the original data. The comparison of the real and counterfactual distributions allows analysts to infer the distributional impact of the hypothesized change in policy. However, individuals affected by policy changes are generally likely to modify their behavior (for example, labor supply or consumer demand) in response to the policy. A behavioral simulation, therefore, is one that seeks to predict the changes in economic behavior by the individuals subject to changes in the policy under study. Finally, a general equilibrium simulation takes into account the effects of changes in beneficiaries' behavior on other variables, such as the price of related goods, as well as changes in the behavior of individuals who are not subject to the policy but are affected by changes in the market as a whole.

This paper presents results from both accounting and behavioral partial equilibrium microsimulation exercises that allow us to estimate the effects of Oportunidades on poverty. Oportunidades is a conditional cash and benefits program that promotes the accumulation of human capital in terms of education, health, and nutrition among Mexican families in extreme poverty. Selected families receive cash transfers of up to 1,540 Mexican pesos a month (around U.S.$150), on the condition that children attend school and family members go to health clinics provided by the program. The program does not explicitly aim to raise family income in the short term.⁵ The cash transfers do change households' disposable income, however, and they can raise the beneficiaries' families above the poverty line.

Given that most evaluations of Oportunidades address its impact on health and schooling, we instead gauge the program's impact on current poverty...