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The term ‘social protection’ covers a gamut of policies and mechanisms that seek to alleviate poverty, support vulnerable individuals, and provide safety nets in the face of social and economic shocks. Social protection can be financed from a number of sources, including public expenditure, international aid, contributions made from household-level savings, and private financing through business (e.g. pension/healthcare contributions by employers) or communities (informal networks, non-governmental organisations, or religious groups).

In this blog post, I discuss lessons from various countries’ efforts at expanding the fiscal space for social protection, and briefly touch upon some innovations in development finance, which can complement traditional public spending.

 

The need for expanding fiscal space for social protection

In most nations, the core social protection system is financed by public expenditure. In developed nations, this public expenditure is met through social contributions, earmarked revenue sources, or general (non-earmarked) tax revenues. This allows social spending to be high in the developed world – public social spending, on average, is about 21% of the GDP across OECD countries (OECD, 2017), and as high as 26.7% in Western Europe.

“...public social spending, on average, is about 21% of the GDP across OECD countries, and as high as 26.7% in Western Europe”

In contrast, developing nations often have a small tax-base and insufficient domestic revenues. This severely limits the fiscal space available for social spending, which constricts the coverage, targeting and adequacy of social protection programmes. This is reflected in the low levels of public spending in countries with some of the poorest, most vulnerable communities – social spending accounts for only 4.2% of GDP in Sub-Saharan Africa, and 5.3% of GDP in the Asia-Pacific region (ILO, 2014). According to the World Bank’s Social Protection Atlas, only 20% of Africans benefit from any kind of publicly provided social protection.

“...social spending accounts for only 4.2% of GDP in Sub-Saharan Africa, and 5.3% of GDP in the Asia-Pacific region”

While low-income nations predictably face difficulties in financing social protection, questions are being raised even in the developed world over the ‘affordability’ of public expenditure programmes, especially in light of public spending rising since the 2009 global recession.

It must be mentioned here that different schools of thought subscribe to different opinions on the desirable level of public social spending. However, few can deny the nation-state’s responsibility to ensure a minimum standard of dignified living – and a Social Protection Floor – to all its citizens. To this end, this blog post looks at how low- and lower-middle income countries can find ways to finance essential social protection.

 

Ways to ‘afford’ better social protection

Based on policy lessons from various countries, this section (briefly) discusses some options that can help governments generate additional resources for social protection.

 

1. Domestic resource mobilisation: This aims at generating additional resources through alternative modes of taxation, even in countries with a low tax-base for income taxation.

  • In Brazil, a Financial Transaction Tax (“CPMF”) was imposed from 1997 to 2007 in the form of deductions strictly from accounts held by financial institutions. Designed mainly to finance social protection, funds raised from CPMF were earmarked for specific social security measures. By 2007, revenue from CPMF totalled ~1.4% of the GDP, added 40 billion Brazilian Reais to the coffers, and was enough to cover the cost of several non-contributory social protection schemes, including Bolsa Familia. The innovative tax proved very successful administratively: Being digital in nature, it was evasion-proof, more efficient and less costly than orthodox tax models (Cintra, 2009).
  • Bolivia provides a tax-based revenue-sharing example relevant for many African countries that possess abundant natural resources. Privatisation of extraction from Bolivia’s natural gas reserves through the 1980s and 1990s led to much social conflict. These “Gas Wars” culminated in 2005 with steep increases in the royalties and taxes applicable on profits from extraction, which added to the country’s public resources. While there were other economic and political fallouts of the Hydrocarbon Law, it is estimated that were significant social gains from increased social spending in the following decade (from 2004 to 2014) – a 20% fall in the poverty rate along with a 0.13 point decrease in the Gini Coefficient, signifying reduction in inequalities (ILO, 2016).

 

2. External resource mobilisation: Targeted assistance from international donors remains important in the medium-term, especially for extremely low-income countries.

  • Rwanda has shown tremendous progress in healthcare with its community-based universal health insurance programme, ‘Mutuelle de Santé’, for which it utilised external aid in subsidising premiums as well as expanding the public health system. Initiated as a pilot in 1999, the programme now covers 96% of the population. Through improved access to healthcare, the proportion of households incurring ‘financial catastrophe’ (spending over 10% of household expenditure on health shocks) fell to 0.4% in 2013 from about 11% in 2000 (USAID, 2016).

 

3. Re-allocation of existing public resources: Re-prioritisation of public spending, although often contentious, can help increase public resources for crucial social protection goals.

  • Over time, Thailand has significantly reduced and reallocated its military expenditure from 31% of GDP in 1979 to below 8% in 2015 (World Bank Data, 2017). Among the gainers of this reallocation has been the public health system. Starting from 1975, when health services were made available free of charge to the poor, the country has consistently paid attention to healthcare. Between 1982-86, capital investments in urban hospitals were frozen to focus more on the inadequate rural health infrastructure. By 2001, Thailand’s Universal Coverage Scheme covered 98% of all citizens.
  • As far back as in 1948, Costa Rica abolished its military and announced that the nation’s military budget would be redirected towards healthcare, education and environmental protection. The country has been able to provide adequate (though not universal) welfare systems with social security benefits, free universal healthcare, and free and high-quality education (its education system is ranked 20th in the Global Competitiveness Report 2013-14).
  • Indonesia and Ghana have reduced fuel subsidies to reduce overall public spending, while redirecting some of the savings to social programmes. However, reduction in fuel subsidies can have spiralling effects on general prices affecting public sentiment, and hence must be implemented after a comprehensive impact assessment. When Ghana discontinued fuel subsidies in 2004, faced with severe fiscal constraints, it announced a slew of compensatory measures on the social front, such as elimination of school fees, and introduction of its now-flagship cash-transfer programme, ‘LEAP’ (Livelihoods Empowerment Against Poverty).

 

4. Planning for strategic assistance: Timely social assistance can go a long way in not only ensuring social wellbeing but also preventing higher/contingent expenses at a later date (the proverbial ‘a stitch in time saves nine’.)

  • At the time of scaling up its Productive Safety Net Program (PSNP), Ethiopia created a risk financing mechanism (RFM) to prepare for any transitory challenges. The RFM ensured that financial commitments from donors, such as the World Bank, were in place before any crisis could arise. Ethiopia used the RFM in 2008 and 2009 to provide additional cash transfers to PSNP beneficiaries in the face of drought and rising food prices. The RFM not only reduced the time taken in reaching beneficiaries, it also ensured that affected people were supported before specific problems led to even bigger crises.

 

Conclusion

This blog presents a few options available to governments for increasing the fiscal space for social protection. More alternatives are being discussed in the development arena, as wars, distress migration, economic recession, and the changing face of the labour market call upon governments to increase their social spending in the face of contrary political/populist pressures. These alternatives include eliminating illicit financial flows, managing/restructuring debt, and adopting a more accommodative macroeconomic framework (Ortiz et al., 2017).

One of the most reasonable and sustainable actions in the long-term is simply to study existing programmes comprehensively from an evidence-based perspective, and eliminate systemic/operational inefficiencies.

Policymakers should also consider a gradual shift in the pattern of government spending – essentially, reduce public expenditure in areas other than core social protection i.e. areas in which innovations in development finance can be more easily adopted (e.g. facilitating market-based solutions to specific challenges like crop insurance or service provision, or considering Social Impact Bonds, or encouraging Public Private Partnerships in infrastructure development), so that more public resources can be freed up for core social protection where there are fewer alternative financing mechanisms.

 

References

 

Barrientos, A. (2007). Financing Social Protection, Working Paper 5, Brooks World Poverty Institute, Manchester, UK.

Cintra, M. (2009). Bank Transactions: Pathway to the Single Tax Ideal, MPRA Paper, University Library of Munich, Germany.

International Labour Organisation (2008). Can Low-income Countries Afford Basic Social Security, Social Security Policy Briefings, Paper #3, International Labour Organization, Geneva.

International Labour Organisation (2016). Financing social protection through taxation of natural resources. Accessible: https://www.stratfor.com/analysis/bolivias-natural-gas-sector-under-threat [Accessed on 10 October 2017].

Ortiz, I. et al. (2017). Fiscal Space for Social Protection and the SDGs: Options to Expand Social Investments in 187 Countries, ESS Working Paper No. 48, International Labour Organization, Geneva.

The World Bank (2012). Affordability and Financing of Social Protection Systems, Africa Social Protection Policy Briefs, December 2012.

The United States Agency for International Development (2016). Health Insurance Profile: Rwanda, Accessible: http://www.africanstrategies4health.org/uploads/1/3/5/3/13538666/country... [Accessed on 10 October 2017].

 

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This blog post is published as part of the Ambassador Series, which presents insights into social protection around the world from the viewpoint of our Ambassadors, a group of international online United Nations Volunteers who support online knowledge sharing, networking and promotion of socialprotection.org.