**4. Effectiveness:  Is the reduction in poverty and inequality commensurate with the amount spent?** These favorable results for South Africa could simply reflect the fact that it may spend more than other countries. Therefore we ask: how effective are direct transfers in reducing poverty and inequality given the amount spent? We measure such “effectiveness” as the impact on poverty (or inequality) of the taxes or transfers being analyzed divided by their size relative to GDP (Lustig and Higgins, 2013). For example, for direct transfers, the effectiveness indicator (EI) for direct transfers is defined as:

where X(I<sup>j</sup> ) is the inequality or poverty measure of interest (e.g., the Gini coefficient or headcount index), which is defined at each income concept (market income, net market income, disposable income, post-fiscal income and final income). Let S<sup>D</sup> be total public spending on the direct transfer programs analyzed. This formulation allows us to compare across different programs within South Africa, as well as to compare South African programs to similar programs in other developing countries.

Looking just at direct cash transfers in South Africa, we find that they are highly effective at redistributing fiscal resources towards the poor and in reducing inequality. Figure 21A shows that the 3.8 percent of GDP spent on direct transfer programs (including FBS) reduced the headcount poverty rate for those living on less than US$2.50 day in South Africa by 12.8 percentage points in 2010/11 before the impact of indirect taxes (or 7.2 percentage points if the impact of indirect taxes are included).<sup>64</sup> This is a much larger reduction than in any other country for which similar analysis is available. The reduction in poverty for the amount spent (effectiveness) is the highest in the sample of middle-income countries of similar size, and reflects the combination of effective targeting and large size of the programs. Similarly, direct transfers reduce the inequality coefficient by 0.055 of a Gini coefficient (figure 21).

<!-- Start of picture text --> Figure 21. Poverty and inequality reducing effectiveness of direct transfers<br>A. Poverty-reduction effectiveness B. Inequality-reduction effectiveness<br>-13% 4.0<br>-0.06 1.6<br>3.5<br>-11% 1.4<br>-0.05<br>3.0<br>-9% 1.2<br>2.5 -0.04<br>1.0<br>-7%<br>2.0<br>-0.03 0.8<br>-5% 1.5<br>0.6<br>-0.02<br>-3% 1.0 0.4<br>0.5 -0.01<br>-1% 0.2<br>0.0<br>0.00 0.0<br>Change in Gini from Direct Transfers<br>Change in Poverty Rate Effectiveness Indicator<br>Effectiveness Indicator<br>Headcount<br>Change in Gini<br>Effectiveness Indicator<br>Effectiveness Indicator<br>Change in US$2.50-a-day Poverty<br><!-- End of picture text --> Source: Argentina (Lustig and Pessino, 2014); Brazil (Higgins and Pereira, 2014); Indonesia (Jellema et al, forthcoming), Mexico (Scott, 2014); Peru (Jaramillo, 2014), Uruguay <u>(Bucheli et al, 2014); and own estimates based on IES 2010/11..</u> Figure 22. Inequality Reducing Effectiveness of Direct and In-Kind Transfers

> 64 In line with standard practice in incidence studies, we do not include the impact of education and health spending on poverty because recipients may not be willing to pay in cash terms an amount equivalent to the outlays on these services in the budget.

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