Hybrid Means Testing An Overview

One of the tasks of the Social Assistance Pilots Program was to carry out experiments on developing new means testing methods within the Ukrainian context, with a focus on the Hybrid Means Testing (HMT) methodology as pioneered by the World Bank.

In Ukraine the performance of current social assistance (SA) system is satisfactory in terms of targeting recipients of those SA benefits that are subjected to means testing. Verified means (income) testing is usually employed. Other methods, including proxy means testing, unverified means testing, randomized means testing, and self-selection, are also used but somewhat irregularly/haphazardly. This is often due to limited capacities of overburdened SA office staff. In terms of total SA transfers (all benefits and privileges combined, most of which are not means tested), however, targeting is inferior.

HMT is one of the instruments to target those who need SA the most (by reducing the errors of inclusion and exclusion), and is intended to support the efficient management of budget resources. HMT is considered a “hybrid” because it involves both: (i) direct methods, e.g., verified income testing (formal verification of incomes); and (ii) indirect methods, e.g., proxy means testing (incomes or needs assessment based on some observable/measurable indicators that are related to or correlated with the conditions they reflect, including place of residence and socio-economic characteristics.

HMT in the format developed by the World Bank is used to estimate total family income, which is broken down into two categories: (i) easy-to-verify incomes, such as official wages, pensions and allowances; and (ii) hard-to-verify incomes derived for instance from self-employment or land plot use. The latter may be imputed on the basis of proxy indicators, derived from an econometric model or by means of other methods.

Possible applications of HMT include its use as: (i) an additional information source; (ii) an instrument for “Client profiling”; and (iii) an extension of currently used methods (rather than their replacement). As a next step, HMT should be introduced in biding pilots (i.e., affecting grants of SA benefits), but only in selected regions, applied to certain categories of applicants, such as those who suffer from chronic (long-term) poverty or who generate most of their incomes from informal sources (e.g., from agriculture).
Ukraine can learn from the existing considerable international experience of HMT applications. This method is believed to be especially useful for countries, such as Ukraine, which remain at a middle level of development and in which a relatively high share of incomes is generated by the informal sector.

HMT’s main shortcoming is that it requires the availability of appropriate up-to-date data and strong analytic capacities of the entities working on SA. Also the proxies generated by HMT for the hard-to-verify incomes are just averages (mean expected values) which in some cases may significantly diverge from the actual values.

Should a comprehensive HMT be officially introduced in Ukraine, a lot of preparatory work and capacity building will be needed.