Aid’s impact on social protection in low- and middle-income countries

This study conducts an international comparative analysis of the recent evolution of social protection systems in sub-Saharan Africa (SSA), Latin America and the Caribbean (LAC), and Asia-Pacific (APAC) regions, paying particular attention to the role of foreign aid in these dynamics. It asks: Has foreign aid contributed to the development of social protection systems? If so, what actors have driven this process? What modalities and financial instruments have been used to support social protection systems? What other factors have contributed to the recent evolution of social protection systems? To address these questions, we implement Tobit models with endogenous regressors (IV-Tobit), and fractional response models with endogenous regressors (FRM). Overall, we find that aid has contributed to the expansion of social protection systems in the Global South: an increase in social protection aid by one percentage point is estimated to lead to an increase in the share of countries’ population covered by social protection by approximately 0.25 per cent, which is not negligible. The analysis also identifies key factors that have underpinned the recent expansion of social protection systems, including the economic dynamism of aid-recipient countries, their redistributive fiscal capacity, their insertion into the global economy, and their level of income inequality. Donors’ influence and policy diffusion seem to contribute to the expansion of social protection in some regions, particularly LAC and APAC, but not in SSA. The paper provides a discussion of plausible reasons underpinning these differences.