Abstract: This essay examines the role of targeted transfers in poor countries in the light of the new theories on the social costs of unmitigated inequalities and uninsured risks. Recognizing that the policy implications depend crucially on whether there is good empirical evidence to support the theoretical arguments, the bulk of the first half of the essay discusses the evidence. The essay then takes up a key question for policy: Can the potential for efficient redistribution be realized in practice using targeted transfers, given the constraints faced in poor countries? It is argued that there can be too much uninsured risk and inequality, when judged solely from the viewpoint of aggregate output. For example, credit market failures can mean that it is the poor who are unable to exploit new economic opportunities; the more poor people, the fewer the opportunities that get exploited, and thus the lower the rate of growth. Persistent concentrations of poverty in poor environments can also arise from market failures, given geographic externalities whereby living in a poor area is a cause of poverty. This body of theory and evidence offers a new perspective on social protection policies in poor countries, suggesting that there is scope for using these policies to compensate for the market failures that help perpetuate poverty, particularly in high-inequality settings.

Keywords: equity-efficiency, targeted transfers, inequality, insurance-efficiency, redistribution, poverty reduction,