Financing of Social Assistance in Africa
The webinar "Financing Social Assistance in African Countries” was the 1st event of “The State of Social Assistance in Africa” webinar series and took place on May 7, 2020. The webinar was organized by UNDP’s Regional Service Centre for Africa and the International Policy Centre for Inclusive Growth (IPC-IG) and is based on our The State of Social Assistance in Africa report published in 2019. In light of the important role that social assistance plays in African countries to alleviate poverty and, as exposed by the COVID-19 crisis, to strengthen countries resilience to crisis, the webinar focused on:
- presenting the state of social assistance financing in African countries while tracing trends and identifying gaps, and
- highlighting potential pathways to improve social assistance financing in African countries.
The event was moderated by Renata Nowak-Garmer, Social Protection and Employment Specialist at UNDP. She was joined by two panellists Saurabh Sinha, Chief of Employment and Social Protection Section at UNECA and Gift Dafuleya, Lecturer at University of Venda and Research Associate at the Centre of Social Development in Africa at the University of Johannesburg
You can find the presentation here and the session's recording here.
Setting the scene: The State of Social Assistance Financing in African countries
The session started off with panellist Gift Dafuleya defining how social assistance is categorized in the State of Social Assistance in Africa report. Since the report is concerned with African governments’ commitment to social assistance, the report excludes emergency measures, who are often short-term and donor-run and defines social assistance as cash and in-kind transfers as well as public work programmes that operate long-term and are state-run.
In order to assess social assistance financing in African countries, Gift Dafuleya introduced the triple M paradigm. The triple M paradigm assesses social assistance financing on three levels—the Macro, Meso and Micro level. This paradigm illustrates how different approaches to financing lead to different financing outcomes. A positivist approach to financing would approach financing from top down, determining an appropriate level of social assistance expenditure as a percentage of GDP based on a number of different factors. For example, a country could look at levels of spending by other countries with well-performing social assistance systems to inform its own expenditure as a percentage of GDP. This percentage of the GDP is then the amount available to be allocated to different social assistance programmes, which, in turn, determines programmes’ transfer levels per beneficiary.
As the panellist presents, the State of Social Assistance in Africa report proposes approaching social assistance financing from a more normative angle. In line with the rights-based understanding of social protection in SDG 1.3, a normative approach to social assistance financing starts by assessing the need for social assistance in the population. One way of gauging social assistance demand in the population is by looking at the number of persons living below the extreme poverty line times the 1.90 USD per day that would be necessary to raise them above the poverty line. Through extrapolation from this number, the necessary programme financing (meso level) and total financing as a percentage of GDP (macro level) can be determined. This bottom-up approach can help to ensure that no one is left behind in the determination of social protection budgets.
Assessing social assistance spending in African countries
Using the normative approach, the necessary spending on social assistance financing in many African countries is likely to be a higher percentage of GDP due to the relatively high number of people living below the extreme poverty line. However, when we look at African countries’ actual expenditure, what we find is that most countries spend less than one percent of GDP on social assistance. A reason for this, in addition to political economy factors, is that most African countries carry budget deficits that make it difficult to create fiscal space for the financing of social assistance. Looking at where domestic financing for social assistance currently comes from further complicates the situation. For many African countries a majority of the budget is financed through income from indirect taxation (such as VAT taxes). Countries rely primarily on indirect taxation because the costs for collection of indirect taxes is relatively low. However, since poor people contribute a higher share of income to indirect taxes, it is important to note that the major source of domestic social assistance financing is one in which poor people over-contribute.
Looking at the micro-level, low-spending African countries spend up to 9 USD per person annually on social assistance transfers and intermediate spenders spend up to 150 USD per poor person annually. Although there is an outlier group of four high-spending countries (Mauritius, South Africa, Seychelles, and Tunisia) that spend up to 36,442 USD per poor person per year, African countries’ annual spending per poor person suggests low levels of transfer adequacy and programme coverage. Interestingly, social assistance transfers per person tend to be higher when social assistance programmes are financed domestically rather than through donor funding. This can be explained by the fact that domestically funded programmes tend to be more institutionalized and large-scale.
At the meso level, programme budgets show that poor people that face an additional vulnerability such as childhood, old age and disabilities tend to receive social assistance transfers. Poor unemployed youth and young or middle-aged workers tend not to be targeted with social transfers leaving a missing middle of uncovered and poor people who often work on the informal market and are exposed to a multitude of idiosyncratic and covariate shocks without access to social protection. For example, during the present pandemic, this means that many young and middle-aged workers do not have access to social assistance benefits to fend of the harsh socio-economic effects of the crisis.
Concludingly, the takeaways from the first presentations are firstly, whether we are approaching the micro-meso-macro-financing paradigm from the top down or the bottom up can make a big difference in terms of how much expenditure for social assistance financing we find appropriate. The normative approach suggested by Gift Dafuleya, in line with SDG 1, can help ensure that at a minimum social assistance financing suffices to reach all people living under the poverty line with adequate transfers. Secondly, a lot of people remain uncovered by social assistance systems or receive inadequate transfers that are below the poverty line; particularly young people and working age adults are typically left out of social assistance programme budgets. This leaves an uncovered missing middle of people that, as the current crisis exposes, remain devoid of protection in times of idiosyncratic or co-variate shocks. Thirdly, domestic financing of social assistance, on average, is higher than donor financing and tends to have higher reach and more adequate level of transfers due to higher levels of institutionalization. In sight of the current COVID-19 response, this has positioned countries with domestically financed and institutionalised systems of social assistance to be able to quickly institute and mobilize financing for emergency assistance programmes, whereas countries with donor-funded programmes may not have been able to respond with the same speed.
Six ways to mobilise domestic resources for social assistance financing
There is ample evidence that social protection spending has positive effects on poverty as well as inequality. It is, therefore, critical that countries expand financing for social protection to advance poverty and inequality reduction in African countries. Nevertheless, currently, only about 17.8% of Africans have access to at least one social protection cash benefit.
In African countries, social assistance spending makes up the majority of social protection expenditure. The question, then, is how African countries can manage to finance social assistance expansion without affecting macroeconomic stability. In a second presentation, our panellist Saurabh Sinha led us through six possible pathways to increase financing.
The average tax to GDP ratio in African countries is 19.3 percent which is low in the global comparison. Tax revenue in most African countries, which have large informal economies and many people with incomes below tax thresholds, primarily consists of revenue from indirect taxation which tends to be regressive. Due to the low tax to GDP ratio, increasing tax revenue, preferably from progressive taxation, is one of the pathways that African countries can explore to expand social assistance financing. For example, countries could raise so-called sin taxes. Sin taxes are additional taxes on consumer goods deemed unhealthy such as alcohol, cigarettes and sugary drinks. Whereas sin taxes can provide a double benefit by raising tax revenue while potentially also minimising health expenditure in the long run, they also tend to be unpopular and thus politically difficult to push through.
Currently, African countries carry an average debt burden of 57 percent of GDP combined with rather low debt servicing capacities in many African countries. Spending on debt servicing limits countries ability to commit financing for development programmes. Since a great amount of government revenue is spent on servicing debt payments, the fiscal space for social policy is minimised. Whereas the restructuring of debt payments is not in the hands of African governments themselves, accounting for debt servicing capacity and reducing debt burden when taking on new debt is key to expanding fiscal space for social policy.
Between 2002 and 2012 African countries have lost 300 to 600 billion USD due to illicit financial outflows. These outflows came primarily from resource rich countries and particularly effect lower middle-income countries. The amount of illicit outflows is so substantial that in many countries annual illicit outflows exceed the annual health financing gap. Consequentially reducing illicit financial outflows, especially for resource rich countries, could contribute substantially to expanding social assistance financing. Another option that particularly resource rich countries can pursue is the earmarking of revenues from natural resources for social assistance expenditure.
Furthermore, in awareness that increasing fiscal space is not always a feasible option, countries can instead consider the reallocation of budgets and the rationalisation of subsidies. However, when rationalising budgets, it is important to consider that trade-offs do not result in worse outcomes for those poor and left behind. Social protection must be embedded in a comprehensive and pro-poor overall social policy architecture, thus reallocations across the social policy sector, for example from health to social protection budgets, are likely to affect the poor negatively and must be assessed with care. Similarly, the rationalisation of subsidies, while possibly providing a more pro-poor trade off, may be challenging politically and thus not a popular option amongst decision-makers.
Lastly, countries can consider innovative financing mechanisms such as performance-based financing, social impact bonds and development impact bonds that are results-oriented financing mechanisms that albeit not yet having been tested in the public sector have been explored by the private sector and philanthropic organisations.
The webinar concluded with an interesting discussion and Q&A session, accessible here.
This blog post summarises the first webinar of the Webinar Series on The State of Social Assistance in Africa, organised by the UNDP.
