Household Vulnerability and Conditional Cash Transfers

Mexico is a leading economy among the countries of Latin America and the Caribbean (LAC). It has made the most of globalization in its economic development process, for instance, through the North American Free Trade Agreement (NAFTA), which came into force in 1994. Mexico has implemented various poverty-reduction policies that have now converged into what is reputedly the first conditional cash transfer (CCT) program in the world. In spite of all these efforts, Mexico continues to suffer from high incidence of poverty and inequality, and has experienced an unexpected upsurge in poverty since 2006 amid the international food price crisis and the global economic crisis in 2008. This chapter summarizes the concepts of poverty and vulnerability. Additionally, it presents a macroeconomic and poverty outlook for Mexico, contrasting it with the LAC average. Moreover, the chapter briefly explains the Mexican CCT program, PROGRESA-Oportunidades, thereby providing an introduction for the discussion in subsequent chapters.

This chapter focuses on the poverty increase in Mexico that is clearly observed from 2006 to date after the country achieved a sustainable poverty decline during the 2000s for the first time since the lost decades of the 1980s and 1990s. In particular, it examines the impoverishment of the most marginalized rural localities, and conducts empirical analyses from the perspective of household vulnerability using household survey panel data for 2003 and 2007. In addition, this study applies a probit model to identify the characteristics and determinants of poverty, and the vulnerability of rural households in terms of both the impoverishment of non-poor households and emergence from poverty of poor households. The regression results indicate that the households susceptible to falling into poverty and vulnerability were those who were indigenous, with a migrant member, engaged in agriculture, without self-consumption for 2007, or access to credit. Meanwhile, households with highly educated household heads, and those with access to non-agricultural or wage income (especially in 2007) are likely to have resiliency to impoverishment. In addition, the study focuses on the relationship between household vulnerability (impoverishment) and the marked de-agriculturalization observed over the same period. The regression results imply that vulnerability may be mitigated in cases where wage income is secured after household members quit agricultural activities. However, the mitigating effects are not observed in cases where households relied on migration, remittances, or self-employment.

The global food price crisis commenced in 2006 and has coincided with the poverty upsurge in Mexico, as discussed in the previous chapters. This chapter analyzes the vulnerability of rural households, emphasizing causality between increased poverty and rising food prices caused by the international commodity boom in the 2000s. It also examines the degree to which the mitigating effects of the conditional cash transfer (CCT) program could be effective in helping rural poor households smooth their consumption when facing shocks. Empirical results from the fixed effect model show that poverty, measured by food consumption, worsened significantly. In addition, the fact that households with self-consumption were able to cancel out the consumption decrease almost completely by their food production supports causality between poverty increase and rising food prices, as the theory predicts. Moreover, cash transfers under the CCT program served as a partial buffer, but could not completely protect the poor from price shocks.

This chapter focuses on the empirical analyses of risk-sharing and household vulnerability to idiosyncratic shocks in rural Mexico. It aims to test the full risk-sharing hypothesis proposed by Townsend (1994), and to examine whether the conditional cash transfer (CCT) program reduces vulnerability within the risk-sharing framework using the same ENCEL rural household panel dataset for 2003 and 2007 applied in the previous chapters. Despite the rich information, the data have not been fully utilized given the lack of pure control groups. Drawing on Townsend’s (1994) risk-sharing model, the empirical results reject the hypothesis of full risk sharing at village level but confirm that risk-sharing functions serve better in securing basic needs such as food. Additionally, in this chapter, I define vulnerability as the lack of ability to smooth consumption because of liquidity constraints caused by restricted access to insurance and/or credit markets. The regression results of risk-sharing models considering the phase-in effects of the three treatment and control groups show that the risk-sharing function, reinforced by longer exposures to the CCT program, serves to mitigate vulnerability of poor households.

Thus far, this book has discussed the effect of the PROGRESA-Oportunidades cash transfer on reducing household vulnerability from different perspectives. All three empirical analyses from Chaps. 2 to 4 confirmed that the conditional cash transfer (CCT) program played a certain role in mitigating vulnerability; however, the effect was rather partial and could not fully achieve poverty reduction during the surveyed period 2003–2007. Although the transfer amount of PROGRESA-Oportunidades has increased since 2007 owing to the introduction of additional transfers to compensate for the price rise in food and energy, as discussed in Chap. 1 these measures turned out to be insufficient. Nevertheless, it is implausible to increase the amount of cash transfer for fear of moral hazard that could undermine self-efforts through an excessive reduction in household labor market participation, although Levy (2006) confirms that PROGRESA-Oportunidades did not negatively influence the work incentives. I will discuss alternative measures later in this chapter to conclude that the program has focused excessively on the labor supply side. Thus complementary policies must enhance the demand side, especially in creating decent employment opportunities for youth.