Clientelistic Politics and Pro-Poor Targeting: Rules versus Discrtionary Budgets

Past research has shown evidence of clientelistic politics in delivery of benefits and manipulation of local government program budgets by upper level officials in the context of West Bengal, India. We examine the implications of moving to a system of formula based program budgets on pro-poor targeting. Using a household panel data for 20042008, we show that targeting of anti-poverty programs within local governments (GPs) was progressive. We estimate the effect of replacing observed GP program budgets by those implied by a rule-based formula recommended by the 3rd State Finance Commission (SFC) based on GP demographic characteristics. We find that the SFC formula would have reduced pro-poor targeting of anti-poverty programs. Moreover, alternative formulae obtained by varying weights on GP characteristics used in the SFC formula improve targeting only marginally. Hence clientelism has been successful in targeting benefits to the poor, and there is little additional scope for improvements from transitioning to formula-based budgeting. JEL Classification: H40, H75, H76, O10, P48. ∗Prepared for a WIDER conference on Clientelistic Politics and Development. For financial support, we thank the EDI network, IGC and WIDER. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. †Boston University. email: dilipm@bu.edu ‡Federal Reserve Bank of Minneapolis. email: Anusha.Nath@mpls.frb.org