To target or not to target? The costs, benefits, and impacts of indicator-based targeting

This paper assesses the cost-effectiveness of indicator-based targeting. Using household survey data from Malawi, we examine whether an indicator-based system is more target and cost-efficient in reaching the poor than universal systems and the currently used mechanisms for targeting agricultural subsidies in the country.Estimation results suggest that targeting Malawi's poor and smallholder farmers with indicator-based systems may be worth the extra effort and may improve program targeting and cost efficiency. Even though under the proposed system administrative costs increase, simulation results indicate that it does not make a targeted program cost-ineffective. More importantly, the proposed system appears to be more target and cost-efficient than the 2000/2001 Targeted Input Program (TIP) and the 2006/2007 Agricultural Input Support Program (AISP), both of which were administered through community-based targeting systems. While TIP and AISP transferred about 50% of total transfer, under the proposed system, about 73% of transfers are delivered to the poor and smallholder farmers. Additionally, the costs of leakage to the non-poor are cut by more than 50% under the proposed system.We conclude from the above findings that the newly proposed system can potentially improve the targeting and cost efficiency of Malawi's development programs. However, such improvements depend on actual implementation of targeted programs, a critical issue that should not be set aside.

► Indicator-based targeting of the poor may improve program efficiency. ► An indicator-based targeting system improves the transfers to the poor. ► Leakage rates can be substantially reduced under an indicator-based targeting system. ► Improvements to targeting are possible only if programs are fairly well implemented.