Poverty and Social Impact Analysis (PSIA) is the analysis of the distributional impact of policy reforms on the well-being or welfare of different stakeholder groups, with particular focus on the poor and vulnerable.
PSIA addresses seven key areas:
1. Impact of what: What is being analyzed?
Assessing distributional impact of policy reforms is a challenging task, as the final impact is determined by a complex combination of factors such as further changes in other policies. While it would be conceptually preferable to assess the combined effect of a series of policy changes in a single analytical framework, few tools can accomplish this—and those that can tend to be complex and data-intensive. Therefore, it is often more practical to disaggregate expected overall impacts to individual reforms, and consider sequencing on a reform-specific basis. Consideration of the impacts of a “package” of reforms is still pertinent, however.
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2. Impact on what: What is the welfare measure being assessed?
PSIA focuses on assessing distributional impacts on welfare, or well-being, including both its income and non-income dimensions, such as human development and social development indicators addressing risk, vulnerability, and social dimensions. In undertaking PSIA, the analyst will need to choose appropriate indicators of welfare and poverty based on the country and policy context.
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3. Impact on whom: Whose welfare is being analyzed?
PSIA is concerned with the distributional impacts of policy change on various groups, with a particular focus on the welfare of the poor and those vulnerable to impoverishment. Depending on country circumstance, groups may be defined in terms of income class, gender, ethnicity, age, geographic location, livelihood, or other such criteria. In practice, however, household members do not always pool resources or allocate benefits equally. When the impacts on different members within a household are likely to differ, it is important to also analyze intra-household effects (e.g. gender). The ability to conduct intra-household analysis may however be constrained by data availability, particularly in the case of household survey data. Further, the distributional impacts of a policy, even among non-disadvantaged groups, can be important for the effectiveness of that policy and its ultimate sustainability as potential losers might block reform efforts due to social or political economy reasons.
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4. Impact how: How are impacts channeled?
Policy reforms can be expected to have an impact on various stakeholders through five main transmission channels: (i) employment; (ii) prices (production, consumption, and wages); (iii) access to goods and services; (iv) assets; and (v) transfers and taxes. Each policy reform is likely to have impacts through more than one channel.
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5. Impact how: How do institutions affect outcomes?
The implementation of many reforms depends on institutional change. This may involve creating new organizations or changing rules to achieve new objectives through existing organizations (for example, improved cooperation among government agencies). Changes in formal rules of the game often must be accompanied by changes in incentives in order to alter the behavior of agents. Moreover, institutions (including markets) often do not function smoothly and according to formal rules. High transaction costs, ineffective enforcement, or lack of competition or accountability can lead to suboptimal performance of government, market, or civil institutions.
Understanding the impact of a policy reform requires an appreciation of the country’s organizational structures and the institutional rules governing them. PSIA therefore may require careful organizational and institutional analysis of the formal and informal rules, and the behaviors of and dynamics among key stakeholders who can affect reform outcomes. Such analysis help understand how the existing rules and informal practices are likely to influence the impact of a specific policy change on the poor and other stakeholder groups.
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6. Impact when: When do impacts materialize?
A major challenge for PSIA is to take into account the fact that policies can affect different groups in very different ways, in large part because some of the economic and behavioral responses to a policy change can take time. Understanding and explaining how short-run losses may result in long-run gains for given groups, or how immediate gains may lead to eventual losses, is one of the challenges inherent to PSIA. Eventually it will be necessary to consider both a) the net effects across groups for a given time horizon and b) the net effects over time for a given group.
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7. Impact if: What are the risks of an unexpected outcome?
The design of reforms is based on underlying assumptions about the context and the behavioral response of key institutional and human actors. If these assumptions are not realized, reform outcomes are at risk. A crucial element of PSIA, therefore, is understanding and articulating ex-ante the key assumptions for the success of the policy reform. Assumptions must be made explicit as to how economic agents and institutions are expected to act (for example, the sign and magnitude of an elasticity), how policy impacts would be transmitted to households (for example, transmission channels) and how conditions exogenous to the policy, such risks from underlying country conditions (for example, ethnic tensions), are factored into the risk assessment.
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