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  • 1. Please do not cite or quote without written permission of the authors UNITED NATIONS DEVELOPMENT PROGRAMMESequencing, Cost-Efficiency and Fiscal-Sustainability of Social Protection—An Overview By Yanchun Zhang, Nina Thelen and Nergis Gulasan Preliminary Draft 25 October 2012 Bureau for Development Policy United Nations Development Programme, New YorkNote: The views expressed in this paper are those of the authors and do not necessarily reflectthose of UNDP. The authors thank Anne-Isabelle Degryse-Blateau and Selim Jahan for supportto this project. The authors are grateful for helpful comments received from Artemy Izmestievand Claudia Vinay. Please send comments and suggestions to the following e-mail, and 1
  • 2. Please do not cite or quote without written permission of the authors1. IntroductionSocial protection1 is gaining increasing support as an instrument to counter various types of riskand vulnerability in an ever globalizing world. The global economic and financial crisisreasserted the importance of protecting the livelihoods of all members of societies, especially themost vulnerable, through well-designed social protection systems.2 But while social protectionhas gained momentum in empowering people to weather an ever more insecure economicenvironment, social protection is more than just a buffer to the risks brought about by short termeconomic shocks like the recent financial crisis or fluctuations in the business cycle in general.More long term social pressures linked to population growth, demographic change andurbanization as well as environmental challenges through increasing droughts, storms and floodsaggravated by climate change have put government provision of social protection higher on thenational and global agendas. When well designed, social protection can contribute to economicgrowth.3 Social protection can also contribute to building more equal societies and reducing theeconomic costs and distorted opportunities (e.g. slower growth) brought about by large incomedifferences in societies. 4 Many social protection programmes in developing countriesincreasingly include transformative and productive elements which empower people to improvetheir lives and to graduate out of poverty. As a result social protection becomes an integrated partof development policy.Many questions, however, still remain to be answered on how to build a social protection systemthat protects the most vulnerable, contributes to sustainable growth and development andenhances resilience to shocks.Our paper focuses on three aspects of the social protection debate related to sequencing, cost-efficiency and fiscal-sustainability of building a well-functioning social protection system indeveloping countries. We aim to use some country experience to shed light on how developingcountries can proactively engage in an adaptable social protection agenda sequencing frominformal to more formal social protection arrangements, continually assess the evolution ofcountries‘ potential vulnerabilities and identify cost-efficient options to address thesevulnerabilities, and firmly embed fiscally sustainable social protection in national socio-economic development planning.The rest of the paper is structured as follows. Section 2 analyzes the sequencing of socialprotection to identify the limitations of informal and semi-formal social protection and pin downsome of the triggers for a switch to more formal social protection. Section 3 reviews cost-benefitanalysis to evaluate the economic affordability and cost efficiency of specific social protectionmeasures. Section 4 explores fiscal sustainability issues of a social protection system and1 The social protection term used in the proposed initiative is a broad concept which includes labour marketinterventions, social insurance programs and social assistance.2 G20 leaders and international agencies like the United Nations, the World Bank and the IMF are all supporting theimplementation of sound social protection systems and are calling on governments to step up measures to protecttheir peoples in order to restore growth, progress and confidence (see G20 2011).3 Dercon (2011); UNDP and ILO (2011).4 See, for instance, Stiglitz (2012). Soares et al. (2007) found that about one fifth of the 4.7 percentage point declinein the GINI coefficient during 1995-2004 could be attributed to Bolsa Famí lia. 2
  • 3. Please do not cite or quote without written permission of the authorsdeveloping countries‘ options to create fiscal space for social protection provision. Section 5concludes.2. The Sequencing of Social ProtectionOver the past decade, social protection has received increasing attention in development policyas an instrument to reduce poverty and to enhance opportunities and human capabilities. 5Particularly since the mid-1990s, many governments of developing countries have successfullyexperimented with social protection which demonstrates the potential.6 In the absence of publicsocial protection arrangements or inclusive and complete credit, savings and insurance markets,many people in developing countries have historically relied much on traditional and informalrisk mitigation arrangements.Social protection arrangements seek to reduce poverty and vulnerability and to improve humanwelfare. Hence, the main motivation for the existence of social protection in societies lies in corehuman values such as responsibility, reciprocity, social solidarity, civility and self-help. 7Precisely because social protection is built on ethical values and often also rooted in traditions,friends and family (i.e. households more broadly) serve as actors in informal social protectionarrangements. In addition, a large number of people in developing countries rely on so-calledsemi-formal social protection arrangements. Examples include savings clubs, food cooperativesand church groups. These ―mutual aid societies‖ or ―member-based organizations‖ provide socialprotection where family networks have been eroded, like for instance in urban settings, or wheremore formal arrangements fail to deliver.8The types of arrangements of social protection, as well as social protection initiatives andprogrammes vary strongly across developing countries (and regions). While differences betweenlow-income countries (LICs) and middle-income countries (MICs) exist, generally, manydeveloping countries are now considering revising their social protection programmes andmoving towards more integrated, inclusive, modern and established social protection systems.One option for governments to take into consideration is the implementation of a basic set ofsocial protection arrangements at the national level, a so called ―Social Protection Floor‖. TheSocial Protection Floor initiative is a UN system-wide effort to ensuring a basic cover of socialprotection for all over the life cycle.9 The reasoning of such a floor is that all in need should haveaccess to essential health care and to basic income security.10In this section, we first explain what social protection is and, for the purpose of this paper, settleon a definition of the term. We then provide an overview and elaborate on the types of5 Cook and Kabeer (2009).6 Cook and Kabeer (2009).7 Chen, Jhabvala and Lund (2002); UN (2000).8 Tshoose (2010).9 3
  • 4. Please do not cite or quote without written permission of the authorsarrangements in which social protection is provided (i.e. informal, semi-formal and formal).11Second, we discuss the limits of informal and semi-formal social protection arrangements.Third, we discuss evidence on triggers for a switch to more formal, modern, integrated andestablished social protection in different countries (world regions). The section concludes withfindings on enabling conditions that have helped developing countries to integrate socialprotection into their national development strategies and recommendations that developingcountries may with to consider when embedding existing non-formal social protectionarrangements in their national development strategies.2.1. Definition and Categorization of Social ProtectionThere is no unanimous definition of social protection 12 or clear categorization of socialprotection measures in the literature or in policy practice.13 For the purpose of this paper, wedefine social protection measures as interventions that are intended to reduce poverty andvulnerability (including transitory poverty and vulnerability owing to economic and othershocks) and to improve human welfare. Many social protection measures support poor andvulnerable groups of people, which includes groups like the (non-working) young, unemployed,elderly and special groups (children, sick, disabled and minorities) to cope with economichardships.14Social protection includes social insurance, social assistance and labour market interventions.15Contributory social insurance programmes under which people receive benefits or services basedon regular financial contributions to an insurance programme include publicly mandatedinsurance against ageing, disability, sickness, death or unemployment. Most social insuranceschemes are provided by the government and closely linked to the formal labour market whichoften limits their coverage to formal workers. However, we also count insurance schemes thatprotect against risks to livelihoods arranged by actors other than the government in ourdefinition.11 This paper is merely intended to provide an illustrative and informative overview of the topic. It is not intended toprovide a new analytical framework. For an alternative, deeper analysis of levels of social protection, formality andactors, please see Holzmann and Jø rgensen (2001).12 The term social protection is generally considered to encompass a broader array of arrangements and actors thansocial security. For instance, the former counts protection arranged through family members or members of a localcommunity (ILO 2010a). However, given the fact that the terms are often used interchangeably in the literature, weuse the terms social protection and social security interchangeably, unless noted otherwise.13 It should be noted that there is no generally recognized definition of social protection. In fact, variousinternational organization, scholars and even countries developed their own (Bonilla Garcí and Gruat 2003). For a acompilation of social protection definitions of selected international organizations, see Annex Box 1. Variousscholars have discussed social protection components and have developed typologies, see for instance Devereux andSabates-Wheeler (2004).14 We are aware that our definition may not be precise and can be broadly looked at as social policy measures, butdecided to use it for the purposes of this paper.15 Some narrower definitions of social protection used in other studies exclude interventions measures on publichealth, education, housing or labour market interventions (see Annex 1, Box 1). Our definition refers to the mostcommon areas of social protection as defined by the Governance and Social Development Resource Center (GSDRC2012). 4
  • 5. Please do not cite or quote without written permission of the authorsSocial assistance programmes are non-contributory transfer programmes targeted at the poor andthose vulnerable to poverty and shocks. There is no universal consensus on the types ofinterventions covered by the social assistance label. Common examples include cash transfers(conditional cash transfers (CCTs) which are transfers to poor households conditional on specificbehavior) and unconditional cash transfers (UCTs) like non-contributory pensions, etc.); in-kindtransfers (e.g. food transfers); fee waivers (health fees, school fees, scholarships); utilitysubsidies (e.g. electricity, housing and water) and so on.Labour market interventions are aimed at protecting people who are in the labour market or atpoor people who are able to work.16For the purpose of this paper, we differentiate between three types of social protectionarrangements17: (i) informal; (ii) semi-formal; and (iii) formal (public and private) arrangements.Informal arrangements are based on friends and family (―kinship‖).18 Semi-formal arrangementsare based on voluntary or membership associations, civil society organizations (CSOs) (e.g. non-governmental organizations (NGOs), trade unions). Formal arrangements are based on publicactors (i.e. the central or local government) and private actors (i.e. insurance companies (andbanks)).Social protection can be arranged informally, semi-formally or formally. Various actors areinvolved in these different types of arrangements. In the absence of formal social protectionmechanisms and—oftentimes—market mechanisms (for instance for credit and insuranceproducts), people in many developing countries have historically reverted to friends and familyfor help in the face of adverse conditions.19 This is what we define as traditional and informalsocial protection arrangements. The exact mechanisms of social protection provided in thisinformal way very much depend on the particular traditions of the society in question. Likewise,16 It should be noted that our definition of labour market interventions is broader than the definition by theGovernance and Social Development Resource Center that only counts ―[l]abour market interventions [that] provideprotection for poor people who are able to work‖ (GSDRC 2012). Labour market interventions include (vocational)training and skills development and changes to labour legislation. They also include labour market measures thatlikely fall under one of the other two areas of social protection (social insurance or social assistance) but are focusedon the labour market, like unemployment insurance, and part-time unemployment benefits. Public worksprogrammes (the poor working for food or cash), can be considered labour market interventions, but they are alsosometimes referred to as social assistance, since they basically function like conditional transfers (i.e. cash or food ishanded out in return for work on public infrastructure projects).17 It should be noted that this is the authors‘ own elaboration. We settled on this tentative typology to easeunderstanding of the landscape of possible arrangements of social protection. There is no generally accepteddefinition of ―formal‖ and ―informal‖ social protection arrangements in the literature. While Holzmann andJø rgensen (2001) identify three main arrangements of social protection (public, market based and informal) as doHoogeveen at al. (2004) (formal, market based and informal), Mohanty (2011) refers to CSOs as actors in semi-formal arrangements of social protection. Gentilini and Omamo (2009) consider both public and private actors to be―formal‖ actors in social protection arrangements. Our categorization includes three categories of social protectionarrangements: social protection through public and private actors (formal), social protection through community,groups, or member-based organizations (semi-formal) and social protection through households (informal).18 UN (2000).19 Mendola (2010). For a literature review on how people cope in the absence of publicly provided social protectionand often not accessible credit and insurance markets in low-income settings, please refer to Mendola (2010). For anoverview of how people cope with risk in an environment of non-inclusive markets, please refer to Mendoza andThelen (2008). 5
  • 6. Please do not cite or quote without written permission of the authorsthe nature and number of events that are covered by informal social protection also varydepending on the cultural and country context.Much for the same reason as informal social protection provision, semi-formal social protectionarrangements are found to have developed. Mutual aid arrangements at community level as wellas money transfer between people that belong to the same community or neighborhood or familyare examples of semi-formal social protection arrangements. Instead of merely relying on friendsand family, many people have joined forces in mutual aid schemes like burial societies or othercommunity-based arrangements. Supporting one another, mutual aid arrangements are organizedthrough groups, associations and social networks.20 Mutual aid schemes are found to partly havedeveloped in response to the process of industrialization and urbanization in developingcountries, supporting individuals where the original extended family system had been eroded.21Burial societies and stokvels 22 in Africa, for example, are found to be more present in urbanareas.23 Burial societies help meet (material and non-material) obligations to organize a dignifiedfuneral according to traditions for a deceased family member which otherwise might stretch afamily‘s budget. Civil Society Organizations (CSOs) are found to be involved in the provision ofchild protection services in the Pacific Island Countries (PICs) while church groups are found toplay an important role in caring for the aged and disabled in Africa. 24 Some of these groupsspecifically target those in need. For instance, social protection arrangements in church groups inZimbabwe only cater to members who are unable to help themselves.25In the category formal social protection arrangements, the public sector (local and federalgovernment) is an important actor. Another actor in formal, modern social protectionarrangements is the private sector. Private actors play a role in the areas of microinsurance aswell as general insurance afforded by insurance companies (and, in some cases, banks). 26Microinsurance27 provides an affordable alternative for low-income populations who are eitherexcluded from insurance markets or without access to appropriate public social protection, whereit exists. It can help people with limited financial means to hedge themselves against risks suchas old age, death or illness.28 Microinsurance can usefully be attached to or linked to existingformal social protection arrangements, so that public and private instruments together cancontribute to broadening coverage against those risks that pose the greatest challenge for thepoor. 29 Microinsurance is regarded as ―a social protection instrument that can complementexisting social protection systems in a meaningful way‖.30 Regulations for private actors as well20 Mendola (2010).21 Tshoose (2010).22 Stokvels are common in Africa, are invitation only clubs and usually comprised of 12 or more members whocontribute on a regular basis, based on their income. Each month, a different member receives the money. Regularmeetings assure that members pay their contributions, a constitution regulates the functioning of the stokvel. Formore information, see Tshoose (2010).24 Dhemba, Gumbo and Nvamusara (2002); Mohanty (2011).25 Dhemba, Gumbo and Nvamusara (2002).26 We do acknowledge that not all microinsurance providers are formal private actors (please see note in Table 1 formore information).27 Per definition, microinsurance is targeted at low-income populations (Churchill 2006).28 BMZ (2011).29 BMZ (2011).30 BMZ (2011, p.2). 6
  • 7. Please do not cite or quote without written permission of the authorsas close monitoring are needed to make sure that private actors can effectively complementgovernments in social protection.The private sector and the public sector can also usefully engage in partnerships in the areas ofpension. Many developing countries have started to develop ―hybrid pension systems‖, a mix ofpublic and private pensions. One example is Chile. Introduced in 1981, the private pension planhelped to accumulate a large pool of capital but had the downside of only benefiting those whopaid contributions (i.e. salaried workers in the formal sector).31 In 2008, the Chilean governmentexpanded public pensions to groups left out by the private pension system (i.e. the poor andinformal workers).32 About two-thirds of Chilean pension income will be paid from pre-fundedretirement accounts, one-third will be paid from tax-financed public benefits.33 A recent impactassessment of the 2008 reform‘s most important component, the new Basic Solidarity Pension(Pension Bá sica Solidaria) aimed at poor individuals aged 65 and older finds that targetedhouseholds (poor households with at least one person age 65 and older) received about 2.4percent more annual household income and were able to improve their welfare. 34 The studyfinds little evidence that the Basic Solidarity Pension led to a crowding-out of private transfers.35While the 2008 reforms have brought important improvements, a large share of the informalsector remains outside Chile‘s pension system.36Table 1 provides an illustrative overview of social protection arrangements (i.e. informal, semi-formal and formal), the actors involved in these arrangements, the three main areas of socialprotection interventions as well as examples of initiatives that fall under these main areas in therespective types of arrangement.37 For instance, utility subsidies are an example of a specificsocial protection initiative in the area of social assistance which is usually placed in the formal(public) arrangement category. A caveat regarding our overview that needs to be mentioned isthat borders between categories are often not clear cut. The line between informal and semi-formal social protection, for instance, is a fine one as is the line between semi-formal andformal.38 Thus, social protection initiatives can fall under more than one arrangement (sometimeseven with the involvement of external donors and other external actors).39While important, informal and semi-formal social protection arrangements face a number oflimitations which we will analyze in the next section.31 Gallardo (2008).32 Gallardo (2008).33 James, Cox Edwards and Iglesias (2010, p.25).34 Behrman et al. (2011, p.2) and Shelton (2012).35 Behrman et al. (2011).36 Shelton (2012).37 This compilation is merely meant to be illustrative and to provide an overview to the reader.38 There is no clear categorization of and/or distinction between semi-formal and informal arrangements of socialprotection (e.g. ADB (2010) even considers NGOs to be formal actors in social protection arrangements).39 The government can, in some cases, collaborate with the private sector and/or civil society actors in socialprotection arrangements. 7
  • 8. Please do not cite or quote without written permission of the authorsTable 1: Social Protection Arrangements, Actors and Examples of InitiativesType ofarrangement Actor Specific initiative under each area Social insurance Social assistance Labour market interventionsFormal public sector  health insurance  cash transfers  training programmes (government) (conditional cash transfers (CCTs) and unconditional cash transfers (UCTs))  disability and  in-kind transfers  skills development for invalidity workers insurance  life insurance  fee waivers  part-time unemployment benefit  public pension  utility subsidies  reintegration in the job market  employment counseling  changes to labour legislation  public works programmes  employment guarantee programmes private sector  microinsurance* (e.g. insurance (e.g. health, life, companies, accident insurance banks) targeted at low- income populations)  insurance policy or contract (e.g. private pension, health, life, accident)Semi-formal civil society  in-kind transfers to  skill training and organizations children education for poor, youth (CSOs)**  social welfare and unemployed (e.g. non- services for governmental women, the elderly organizations and the disabled (NGOs)***, church groups) mutual aid  burial insurance arrangements  savings and credit often at through community community groups level (e.g. 8
  • 9. Please do not cite or quote without written permission of the authors burial societies, Rotating Credit and Savings Associations (ROSCAs)) Informal**** family/kinship  remittances / (blood- direct money related), transfer friends  gift exchange / in- kind exchangeSources: Own elaboration based on Dekker (2008), Dhemba, Gumbo and Nvamusara (2002), GSDRC (2012),Holzmann and Jø rgensen (2001), Mohanty (2011).* Churchill and Matul (2012) differentiate between formal providers of microinsurance (e.g. insurance companies),and what we call ―semi-formal‖ providers (e.g. cooperatives, community-based organizations, mutuals, friendlysocieties).** Devereux (2010, p.13) broadly defines civil society to include ―[…] trade unions, rights-based NGOs,representatives of special interest groups (women, children, pensioners, people with disabilities, people affected byHIV and AIDS, homeless people, youth) community-based organisations (CBOs) and faith-based organisations(FBOs), as well as activist academics and the independent media.‖*** While we do recognize that NGO‘s can also be international actors (e.g. Save the Children), we mostlyconsidered nationally based NGOs.**** We consider informal social protection to be solely based on individuals and households. However, we dorecognize the argument that communities are sometimes extended families.2.2. Limitations of Informal and Semi-formal Social ProtectionA major part of the world‘s population still relies on informal arrangements as the main source ofsocial protection. 40 Informal and semi-formal social protection, however, is present in mostdeveloping countries: it has developed to fill gaps at the community and family/household levelthat government policies have not been able (or willing) to address 41 or that markets have notmanaged to (or have not been willing to) reach.4240 Holzmann and Jø rgensen (2001); Hoogeveen et al. (2004). Comprehensive social protection systems exist in onlyone-third of countries, where 28 percent of the global population lives; however, most of these systems cover onlyworkers in formal employment ILO (2010a, p.33). According to the ILO (2010a, p.33), only around 20 percent ofthe global working-age population and their families have access to comprehensive social protection. It is roughlyestimated that somewhere between 20 percent and 60 percent of the global population has access to basic socialprotection only ILO (2010a, p.33). According to the ILO, those enjoying only a basic level of income security(guaranteeing income at the level of the poverty line) at all stages of the life cycle as well as access to essentialhealth services are considered to benefit from basic social protection, or i.e., the social protection floor (ILO 2010a,p.22).41 Dercon (2002).42 For an analysis of how to make credit markets more inclusive for the poor, please refer to Mendoza and Thelen(2008). 9
  • 10. Please do not cite or quote without written permission of the authorsWhile being vital for a large share of the population, especially the most vulnerable, theseinformal and semi-formal arrangements can have two important downsides: first, they mayprovide inadequate protection since they might collapse or malfunction under certaincircumstances or since pay-outs might be too small. Factors that can contribute to themalfunctioning of informal and semi-formal arrangements include inherent characteristics ofthese types of arrangements themselves (like the mere size of the mutual assistance group/pool)and the complex nature of the risks they are not equipped to cover (diversification of the mutualassistance group/pool). Second, they may be exclusive of the poorest or discriminate certainsocial groups.First, in some cases, informal and semi-formal social protection arrangements provideinadequate protection. For instance, when exposed to a risk that affects everyone in the risk pool.Risks can affect whole communities/regions (covariate risks) or they can affect a particularindividual (idiosyncratic risks). 43 By definition, insurance does not work for covariate risks, order for an insurance scheme to work the risk pool needs to be sufficiently diversified so thata particular adverse event only affects a limited number of members of the risk pool. Thus, forexample in the case of community-based insurance schemes, if an adverse event affects thewhole community this social protection set up does not work. 44 Given the size of typicalcommunities, there are many risks that qualify as covariate risks. They include financial crises,other macro-economic shocks, or natural disasters. Likewise, many diseases that afflictdeveloping countries are also covariate risks. For instance, HIV/AIDS diminishes the earningpotential of entire communities and is found to have hindered capacity and operability ofinformal social protection mechanisms in Eastern and Southern Africa.45Naturally, the likelihood of a covariate risk increases the smaller the size of and the morehomogeneous the risk pool.46 Since some informal and semi-formal risk-coping arrangements aresmall in size, chances are high that a shock may hit the whole group. 47 Also, payouts might notbe particularly high if the insured group is small.48 An informal and semi-formal arrangement isalso found to be less effective in case it is a ―horizontal‖ (between two equally poor parties)arrangement as opposed to a ―vertical‖ (between a rich and a poor party) arrangement since thepoor parties both have less resources at their disposal.49 Hence, unless informal and semi-formalarrangements are able to transfer part of the risk to insurance markets outside the community,they are likely to collapse when experiencing a covariate risk. 50 Formal social protection43 The counterpart of covariate risks are idiosyncratic risks, e.g. risks that affect a particular individual in acommunity. Examples of idiosyncratic risks are illness, disability, theft, etc. Informal risk coping arrangements arefound to work better in the context of risks that only affect an individual in a community instead of affecting thewhole community (Dercon 2002).44 Dercon (2002).45 ILO (2001); UNICEF (2008).46 It should be noted that small informal groups with a high level of trust have also been found to achieve risksharing and punishment in case of non-compliance (Mendola 2010). One should assume that the insured risk was ofidiosyncratic nature.47 Bhattamishra and Barrett (2010).48 Bhattamishra and Barrett (2010).49 Devereux (1999).50 Dercon (2002) notes that communities or individuals can alternatively also revert to intertemporal transfers, likeusing individual or community-level savings. However, the poorest might not possess savings. 10
  • 11. Please do not cite or quote without written permission of the authorsarrangements can usefully complement or strengthen community-based arrangements to accesscommercial reinsurance markets.51On the other hand, some semi-formal social protection schemes have found to be overwhelmedby their membership size. While broad coverage means that there is strong demand for the semi-formal arrangement, it can also overburden its administrative and managerial capacity. Someburial societies in South Africa, for instance, have grown so big that they could possibly improvetheir service were they to be more regulated.52Second, informal and/or semi-formal social protection arrangements, in some cases, can beexclusive of the poorest or discriminative of certain social groups and minorities. For instance,they are exclusive of the very poor53 when they require contributions in cash or in kind which thepoorest are unable to pay. The poorest households in Fiji Islands and Vanuatu, themselves oftenpart of a family network of equally poor people, have been found to oftentimes be unable torevert to family support or to honor their contribution commitments to the community, church,etc. 54 Another barrier preventing people from accessing these arrangements can bediscrimination (for instance, based on ethnic background, migrant status, religion or gender).55More formal, more equitable social protection arrangements could help extend social protectionto the poorest and those excluded by discrimination.56While important, informal and semi-formal arrangements have many downsides as they canreinforce the poor‘s dependent status without making them resilient to (possible) frequentshocks.57 For instance, in the absence of formal insurance markets and social protection, farmersin Sub-Saharan Africa have been found to improvise measures like using mixed croppingsystems and planting multiple varieties to reduce the impact of shocks on their harvest. The pricethey pay is high: more work and lower yields.58 Governments may usefully strengthen informalarrangements in a given country context but may consider providing more formal solutions inothers.592.3. Potential Triggers for a Switch to More Formal Social ProtectionAs mentioned in the previous section, informal and semi-formal social protection arrangementsmay have a number of limitations that can lead to inadequate protection or non-inclusiveprovision. That may not in itself be a reason for a government to initiate a new formal socialprotection scheme or to broaden coverage of an existing social protection system. Our findingssuggest that a broad number of factors may potentially trigger a developing country to initiate amore formal social protection system by creating an enabling environment. These factors fall51 Bhattamishra and Barrett (2010).52 Bester et al. (2004); Olivier, Kaseke and Mpedi (2008).53 Bhattamishra and Barrett (2010); Dercon (2002).54 ADB (2010).55 Cook (2009).56 Bhattamishra and Barrett (2010).57 Cook and Kabeer (2009).58 UNDP (2012a).59 Cook and Kabeer (2009). 11
  • 12. Please do not cite or quote without written permission of the authorsinto two broad categories: internal triggers and external triggers. Internal triggers can be relatedto the limitations of existing informal and semi-formal social protection schemes andarrangements themselves or to a change in a country‘s political and economic context which inturn can influence the development path of a country (i.e. change in wealth level, populationrelated change), or boost public support and political will. External triggers include change inthe nature of shocks (i.e. from idiosyncratic to covariate), economic crises, natural disasters, etc.Many governments have moved in the direction of scaling up existing or implementing newformal social protection schemes when such a potential trigger is present. If not addressed in atimely fashion and with the right responses, vulnerabilities that are exposed in economic crisesand through other triggers may threaten growth prospects, hard-earned development gains andsocial stability. In this section we explore which factors appear to potentially trigger countries tomove towards a more modern, more efficient (and ultimately towards a more formalized) socialprotection system.2.3.1. Potential Internal Triggers for a Switch to More Formal Social ProtectionA change of a country‘s political or economic context may provide a trigger for broadeningformal social protection coverage. For instance, many formerly planned economies startedbroadening public social assistance coverage to previously excluded groups when switching tomarket economy systems. 60 Apart from the regime change itself, liberalization, increasedexternal competition and pressure on public accounts are factors that are found to have pushedtowards an extension of social protection.61 The Republic of Korea, for instance, experienced aperiod of extremely rapid growth brought about by industrialization. One of the least developedcountries in the 1960s, by 1995, the Republic of Korea was classified as an upper middle-incomecountry and today is classified as a high income country.62With increasing wealth, the Republic of Korea started to gradually implement social protectioninitially following the model of Western welfare states using the social insurance model coveringformal sector workers. The Republic of Korea‘s four main social insurance programmes havebeen progressively built up since the mid-1960s: Industrial Accident Compensation Insurance(1964), Medical Insurance (1977), National Pension Insurance (1988) and EmploymentInsurance (1995).63 Increasingly, the Republic of Korea‘s the development path on which theRepublic of Korea embarked, started to challenge the country‘s existing social protection system.As the Republic of Korea moved up the development ladder, it started facing different andevolving challenges like expanding and/or aging population, fast urban migration, and increasingdemand for more equal access to quality social services. The fast aging of the Republic ofKorea‘s population poses challenges to the country‘s pension system. By 2040, fewer than twopeople of working age in the Republic of Korea are expected to support every person age 65 andolder.64 One innovative approach the Republic of Korea has taken to address this problem is to60 Cook and Kabeer (2009).61 Cook and Kabeer (2009).62 Jung and Shin (2002, p.270); World Bank (2012).63 Jung and Shin (2002, p.270).64 The Economist (2012). 12
  • 13. Please do not cite or quote without written permission of the authorsprovide subsidies for the employment of the elderly so they continue working and providing forthemselves for longer. 65 As of 2008, elderly people in the Republic of Korea also have auniversal basic pension, earned-income tax credit and an insurance scheme providing long-termcare at their disposal, amongst others.66 Similar challenges are also faced in the developing Asiaregion more broadly where informal social protection mechanisms are eroding due to changes inworking habits, cultural values, family structures and urbanization.67In Latin America, the change in the political context was marked by the democratization in thelate 1980s, early 1990s of many countries in the region. Democratization is said to havecontributed to scaling up bottom up public support for social protection in Latin America.68 Astudy cites ―strong popular demand for social protection‖ 69 as an enabling environment for thebirth of a generation of ―highly innovative, domestically designed poverty and vulnerabilityreduction programmes‖ 70 in Latin America (e.g. Bolsa Escola/Famí lia (Brazil),Progresa/Oportunidades (Mexico), and Chile Solidario (Chile)). Brazil is an example of acountry where the government, in collaboration and pushed by civil society, has shown strongsupport for social programmes. The end of the military dictatorship in Brazil in 1985 wasaccompanied by an increasing occupation of the public arena by civil society and various grass-roots movements which brought the concerns of the people to the country‘s agenda. Thesemovements played a key role in the establishment of a new Constitution. With the approval ofthe Constitution in 1988 ―a new landmark point was established as a universalized social securitymodel came to life that was grounded in citizenship rights.‖71While bottom up support by the citizens was a key trigger for Brazil‘s move towards moreformal social protection, political will at the federal level was the key driver to broadencoverage, efficiency and areas of social protection interventions. The outspoken support of socialprogrammes by a new government put social protection high on the agenda of the federalgovernment in the early 2000s; the current government continued and deepened this course.Investing heavily in social as well as economic development, Brazil‘s approach to socialprotection demonstrates that the government is treating poverty as a multi-dimensional problemthat goes well beyond the lack of income.72 Since the early 2000s, the government has extended,designed and implemented a number of integrated programmes for social protection, extensionof basic services, and food security that have helped break vicious circles of social exclusion,lack of opportunity, low incomes, and poor health. 73Bottom up support through civil society, citizens and even the media are also said to have servedas a driving force in some successful African country cases. 74 In South Africa, civil society,through media campaigns, advocacy and street protests and even judicial proceedings, has65 The Economist (2012).66 The Economist (2012).67 AusAid (2012).68 Barrientos and Hulme (2008).69 Barrientos and Hulme (2008, p.9).70 Barrientos and Hulme (2008, p.9).71 UNDP and ILO (2011, p.66).72 UNDP (2012b).73 UNDP (2012b).74 Devereux (2010). 13
  • 14. Please do not cite or quote without written permission of the authorsdemanded changes towards more equal and inclusive social protection policies. 75 Part of thesuccess of civil society in South Africa was due to the fact that it used jurisdiction to claim theright to social assistance (i.e. this right is written in the South African Constitution). 76Whilesocial protection systems in LICs in Eastern and Southern Africa are still in the initial stages ofdevelopment, they are more advanced in MICs in the region.77 Successful upscaling of socialprotection in African countries is found to be linked to strong political will at the federal level (asopposed to an agenda of donors).78 South Africa is said to avail of the most comprehensive socialprotection system in Sub-Saharan Africa, also to a great extent thanks to political will.79Lastly, transition from conflict toward a more stable, accountable regime can be a potentialtrigger for a government to implement or broaden social protection schemes. For instance, someLICs, after exiting from conflict, broadened their social protection coverage. 80 In Liberia andSierra Leone the governments invested in labour market interventions aimed at the young. 81Social protection in post-conflict countries helped the government to build trust though theprovision of support and opportunities to its citizens. Social protection was also a key instrumentin building a more peaceful and equal nation after the end of the Apartheid regime in SouthAfrica.82 The South African government broadened its formal social protection system primarilyfocusing on child grants and non-contributory pensions and with the help of labour marketpolicies bringing more people into jobs.832.3.2. Potential External Triggers for a Switch to More Formal Social ProtectionAs discussed above, the change in the nature of shocks that households experience has an impacton the functioning of informal social protection arrangements. For example, while householdsand individuals in the South-East and East Asia region have historically experienced shocks thatare mostly of idiosyncratic nature, the increasing integration of the regional economy impliesthat economic shocks increasingly affect a broader range of people, challenging informalarrangements.84 This situation can trigger the need for more formal, more stable social protectionsystems.Economic crises have proved to be a testing moment for the adequacy of a country‘s socialprotection system as they tend to expose the system‘s flaws and weaknesses. In the case of LatinAmerica, the economic crisis in the early 1980s is often cited as a trigger to a switch to a moreformal and systematic approach to social protection.85 Prior to the crisis, like in many developingworld regions, social protection in Latin America was mostly limited to workers in the formal75 Devereux (2010).76 Devereux (2010).77 UNICEF (2008).78 Devereux (2010).79 Devereux (2010).80 Cook and Kabeer (2009).81 Alderman andYemtsov (2012).82 Alderman andYemtsov (2012).83 Du Toit and Neves (2009).84 Cook (2009); Sumarto and Bazzi (2011).85 Barrientos and Hulme (2008). 14
  • 15. Please do not cite or quote without written permission of the authorssector.86 The crisis brought about structural adjustment and economic liberalization which in turnwere followed by a rise in poverty and inequality. Initially, no broad social protection reformsfollowed (only social insurance institutions for the formally employed were reformed andfragmented social assistance programmes and social funds were mounted). The step for morecomprehensive and permanent public responses only started in the mid 1990s.87Another example is the Mexican economic crisis of 1994 (known as the ―Tequila Crisis‖) thatmotivated a change of the social protection system in Mexico. 88 The crisis exposed theinsufficiency of the existing mechanisms to protect the poor, so the new incoming administrationembarked on a two-pronged approach between (modestly) increasing support under existingmechanisms and slowly replacing the old system with new programmes. 89 Mexico‘s well-knownconditional cash-transfer programme Progresa-Oportunidades has its roots in the change createdby the Mexican economic crisis of 1994.90 And while the recent global economic and financialcrisis triggered the expansion of existing social protection arrangements (including of theOportunidades programme) it also led to the creation of a more comprehensive approach tosocial protection, the Vivir Mejor (Live Better) strategy, which is essentially a Social ProtectionFloor.91The Asian crisis of 1997-1998 is another example. Despite earlier reforms, the Asian crisis hitthe Republic of Korea hard; growth plummeted, unemployment rates soared and poverty levelsincreased. 92 Exposing the limitations of informal arrangements in those East Asian countrieswhose systems were based on ‗Confucian familism‘ (characterized by a ‗smaller government‘that provided less social protection for its citizens, relying on the family as a provider instead)the Asian crisis turned out to be strong trigger for more formal social protection systems.93 Priorto the Asian crisis, in the Republic of Korea, for instance, welfare services (e.g. health care andpensions) were delivered by state-owned corporations rather than the government. Furthermore,people between 18 and 65 years of age were not entitled to receive public assistance. 94 After theAsian crisis social assistance programmes like a cash transfer programme to the poor, even ifthey were able to work, were introduced.95 Initial evidence suggests that the social protectionreforms implemented after the Asian crisis have helped to shield the Korean people from thedetrimental impact of the recent global economic and financial crisis.96The global economic and financial crisis of 2008 may also have pushed many Latin Americancountries to start a second round of reforms of their pension systems. After the first round ofreforms in the 1980s, the second round of reforms is found to pay more attention to tackling86 Barrientos and Hulme (2008).87 Barrientos and Hulme (2008).88 Levy (2006).89 Levy (2006).90 Levy (2006).91 UNDP and ILO (2011).92 World Bank (2012) and Cook (2009).94 The Economist (2012).95 The Economist (2012).96 15
  • 16. Please do not cite or quote without written permission of the authorspoverty of the elderly, to expand coverage and equity to shield people from market risks. Hence,non-contributory schemes like social pension and more universal pensions have been placedhigher on the agenda.97The case of Indonesia serves as a striking example of a country whose steady path to economicgrowth and poverty reduction was interrupted by an external trigger, the Asian crisis of 1997-1998 (see Box 1).Box 1: Time to Act When a Trigger Exposes Vulnerabilities and Limitations: The Case ofIndonesiaThe Asian crisis of 1997-1998 hit Indonesia at a time when it had experiences around 30 years ofstrong economic growth and poverty reduction. When the crisis hit, GDP growth plummeted andpoverty rates increased, showing that the poor were hard hit by the crisis. The financial andeconomic crisis soon became a political crisis, forcing the head of government at the time to stepdown. By early 1998 the country was suffering from the combined effects of financial,economic, and political crises. Exposing the insufficient protection of a large share of thepopulation to such a shock, Indonesia‘s government had to react swiftly, implementing socialassistance programmes to shield the most vulnerable. What started as formally provided socialassistance has developed into the beginning of a social protection floor for all which in Indonesiaincludes components in the areas of health care (JAMKESMAS scheme targeted at the poor andnear-poor (76.4 million people), universal health insurance coverage is envisioned by 2014),food security (subsidized ―rice for the poor‖ programme), access to education (scholarships forstudents from poor families), UCTs, CCTs (Programme Keluarga Harapan or PKH) and aCommunity Empowerment Programme (PNPM).Sources: World Bank (2012) and social protection should usefully be in place once a country is hit by a shock (ex ante),governments have increasingly been encouraged by the international community and by exampleof their peers (e.g. Brazil, South Africa are role models in social protection for many otherdeveloping countries) to invest in social protection even in the absence of shocks and othertriggers.2.4. Embedding Social Protection in a National Development StrategyWe previously identified limitations of non-formal social protection. Vital for a large share of thepopulation in developing countries and a useful source of information on the local context, theseexisting arrangements might usefully be made part of a country‘s social protection strategy.98 Wealso identified a number of potential triggers that may contribute to creating an enablingenvironment for a country to implement a more formal system and a more broad-based coverageof social protection. Building on this information, we will present our findings on enablingconditions that have helped developing countries to integrate social protection into their nationaldevelopment strategies and on recommendations that developing countries may with to consider97 Calvo, Bertranou and Bertranou (2010).98 Hoogeveen et al. (2004); Olivier, Kaseke and Mpedi (2008). 16
  • 17. Please do not cite or quote without written permission of the authorswhen embedding existing non-formal social protection arrangements into their developmentstrategies.Public support has been found to be a strong driving force behind the successful social protectioncountry cases Brazil and South Africa.99 Both cases demonstrate that the formalization of socialprotection initiatives, through writing them into law, makes it more likely that they will be takento scale or institutionalized.100 According to Pero and Szerman (2005): ―The New [Brazilian] Constitution was ambitious: it settled social-democrat guidelines for social policy, stressing the universality of coverage and benefits, thus opposing the patterns prevailing until the 1970s. […] the use of selectivity criteria to distribute benefits to the most needy was also introduced. Furthermore, the Constitution deepened the ongoing decentralization process, strengthening the fiscal and administrative autonomy of sub-national governments.‖101One of the aspects pushed by Brazil‘s new Constitution was the decentralization of spending andbetter targeting of social expenditure for those who needed it most. 102 Despite high socialspending, social indicators in Brazil deteriorated further throughout the 1980s 103 and firstdetermined steps to breaking the inability of social spending to reduce poverty and inequality inBrazil and towards implementing a new social development strategy were only adopted by a newgovernment as of 1995. 104 Improvements in social protection spending, policy design andimplementation in Brazil owe much to partnerships between the federal government, sub-national governments, civil society and the private sector. An important building block ofBrazil‘s Bolsa Famí (the Bolsa Escola programme) was first developed and implemented at liathe municipal level before being scaled up to the national level.105 The partnership with civilsociety has helped the Brazilian government to improve the accuracy of Bolsa Famí lia’s 106beneficiary registry, and hence its targeting accuracy over time.Strong political will at the federal level is also a key prerequisite for the successful expansion ofsocial protection. A review 107 of social protection in Southern Africa concludes that socialprotection interventions have higher chances of succeeding if they are driven by political will,i.e. if they are government-led from the beginning than if they are donor-driven. For instance,successful social pension schemes for all older citizens were introduced in Lesotho (2004) andSwaziland (2005).108 These schemes were designed and implemented without donor support.109In general, in Southern Africa, government-led SP systems in South Africa, Botswana, Namibia,99 Devereux (2011); UNDP (2012a).100 Devereux (2010).101 Pero and Szerman (2005, p.5).102 Pero and Szerman (2005).103 Brazil‘s GINI index peaked in 1989 at 63, making Brazil one of the most unequal societies in the world (WorldBank 2012).104 World Bank (1988) as quoted in Pero and Szerman (2005). For detailed information on Brazil‘s socialdevelopment strategy under Cardoso, please refer to Faria (2002).105 De Janvry (2005); Pero and Szerman (2005).106 Lindert et al.(2007).107 Devereux (2010).108 Devereux (2010).109 Devereux (2010). 17
  • 18. Please do not cite or quote without written permission of the authorsand (until recently) Zimbabwe are found to be more successful than donor-led SP systems inLesotho, Malawi, Mozambique, Swaziland and Zambia.110In some cases, government-donor or public-private partnerships are usefully implemented tocomplement capacities. For instance, in Ethiopia and Malawi, index-based weather insurancescheme pilots have been set up for farmers. While donors pay the insurance premiums,transferring the cost of droughts to the international insurance markets, national governmentsprovide weather station infrastructure, foster an appropriate legal and regulatory environmentand educate farmers on insurance matters. 111 In Nepal, external actors like internationalorganizations and bilateral aid agencies are found to play a strong role in the country‘s socialprotection context. Over the past 20 years, these agents are found to have contributed withknowledge and expertise to promotion, design and implementation of social protection in Nepalwhile the government has been primarily responsible for financing and administering socialprotection initiatives.112The public sector might usefully engage existing schemes when considering scaling up formalsocial protection systems. This is also the approach that the Social Protection Floor promoted bythe UN-system is taking. According to UNDP and ILO (2011): ―A key strength of the social protection floor approach is that it does not start from scratch but with a careful analysis and stocktaking of existing structures and strengths and weaknesses of schemes and programmes in place. Building on the national social protection system by improving coordination of different activities, exploring synergies and increasing efficiency will free resources for extending social protection to those currently not covered.‖113Governments are well-advised to carefully analyze existing non-formal social protectionarrangements when considering to implement new or to scale up existing formal socialprotection schemes. 114 This is due to the fact that a randomly implemented formal socialprotection scheme might do more harm than good. For instance, the implementation of a formalfood for work programme may incentivize able bodied individuals to drop out of informalinsurance arrangements. This might leave the informal arrangement with a less diversified riskpool of less able bodied individuals (i.e. the elderly).115Integration should ultimately aim at serving the purpose of increasing the extension of coverageand/or providing a minimum level of protection.116 Prior to setting up a new formal system orextending an existing one, the reasons behind the existence of informal social securityarrangements as well as the nature of the relationship between current informal and formalarrangements need to be analyzed and understood. In order to be considered worthy candidates110 Devereux (2010).111 UNDP (2012a).112 Upreti et al. (2012, p.39).113 UNDP and ILO (2011, p.15).114 Hoogeveen et al. (2004); Olivier, Kaseke and Mpedi (2008).115 Hoogeveen et al. (2004).116 This paragraph is based on Olivier, Kaseke and Mpedi (2008). It should be noted that the original study talksabout ―social security‖, not social protection. 18
  • 19. Please do not cite or quote without written permission of the authorsfor integration, informal arrangement should be able to meet a number of criteria that includeprudent management, capacity financial viability and sustainability. Once an informalarrangement is found suitable to be scaled up and/ or integrated, governments can avail of anarray of government interventions to integrate them into, or link them to formal provision. Theseinterventions include training, subsidies, technical assistance, etc.For instance, an assessment in the Southern African Development Community (SADC) region117concludes that self-organized mutual support systems (at community level) in the SADC regionlend themselves better to being incorporated into social security systems than traditional supportsystems which are often rooted in African traditional values.118 Burial societies in Ethiopia andTanzania, may also be suitable candidates for linking them to additional types of insurance sincethey are often relatively formal in nature.119 However, evidence on how, why and when informaland semi-formal arrangements have been taken into account in the process of broadeningcoverage of social protection systems is scarce. More information could contribute to more andbetter informed decisions.Finally, social protection systems should be judged and measured against its efficiency ofcontributing to more equal societies, to more security for people (especially the poor and themost vulnerable), more stable and inclusive growth. The government is the actor that has theauthority to set the legislative and regulatory framework for other social protection providers tothrive and to assure that social protection is equitable and inclusive. Governments can andshould, usefully engage in close cooperation with actors that are well-informed about localconditions and public needs (like NGOs) and actors that might be able to improve efficiency(like the private sector). 120 Governments in many developing countries have partnered withprivate insurance companies to extend, assure (and provide) pension.1213. Cost Efficiency of Social ProtectionThe affordability of social protection schemes is a major concern for many developing countries,in particular the LICs. For a long time, the prevailing view was that social protection was notaffordable in developing countries. It was mostly believed that social expenditures wereunproductive measures that would crowd out private investment and create large fiscal deficitsthat would not be manageable.122In this section we will explore cost-efficiency of formal social protection programmes. In thiscontext, it is important to highlight differences between cost-efficiency and cost-effectiveness asthese two similar concepts can often lead to confusion and mistakenly can be used117 Current members of SADC are: Angola, Botswana, Democratic Republic of Congo (DRC), Lesotho,Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, United Republic ofTanzania, Zambia and Zimbabwe. For more information, see Olivier, Kaseke and Mpedi (2008).119 Dercon et al. (2004).120 For instance, building the link between the government and the people, NGOs in the Pacific Island Countries arefound to contribute to provide advocacy services, counseling, education and training (Mohanty 2011).121 Tapia (2008).122 Cook and Kabeer (2010, p. 7); Ortiz and Yablonski (2011, p. 51). 19
  • 20. Please do not cite or quote without written permission of the authorsinterchangeably. Whereas the main objective for cost-effectiveness is to achieve results at alower cost compared with alternatives, for cost-efficiency the main objective is ―to achieve themaximum possible outputs, outcomes, and impacts with the minimum possible inputs.‖123Therefore, cost-efficiency of a particular social protection programme will not depend solely onthe level of financial sources allocated to it but also, and most importantly, on achieving thedesired impact (e.g. improvements in human development outcomes, mitigation of risks andvulnerabilities) based on country-specific development priorities. The concept of cost-efficiencyplaces more emphasis on impacts than the concept of cost-effectiveness does and in turn takesinto account a broader set of costs and benefits.There are various costs associated with social protection that can be broadly grouped into directand indirect costs. Direct costs include those associated with setting up, implementing, andrevising (as appropriate) a social protection programme. Indirect costs include both opportunitycosts of not allocating resources to other programmes and negative externalities on non-beneficiaries and/or local economy.Besides the costs, affordability of a social protection scheme needs to be evaluated withconsideration of both the direct and indirect benefits 124 and impacts on people and on thesustainability of the economy as well as the contribution to building resilience to shocks of sucha scheme. Since it is not feasible to quantify all costs and benefits involved, qualitative analysesoffer an important complementary role to quantitative analyses.A careful needs assessment would enable a country to identify the most prevailing and urgentvulnerabilities that need to be addressed by a social protection programme.125 After determiningthe priority areas for action, the main challenges lie in ensuring that social protectionprogrammes are well designed, help achieve desired outcomes based on country priorities, areaffordable, and do not lead to costly entitlements that a country cannot sustain over time.Therefore, a comprehensive cost-benefit analysis for a social protection programme based oncountry priorities would be the one that would explore not only current affordability but alsofiscal sustainability.However, comprehensive cost-benefit analyses of social protection programmes are rare indeveloping countries mainly because of time and capacity constraints to assess social protectionprogrammes. Another reason why comprehensive cost-benefit analyses are not common indeveloping countries could be political if those in power aim at reaping political benefits ofsocial protection programmes within limited timeframes (e.g. before elections).It should be noted that with regard to certain social protection schemes, absence of cost-benefitanalyses (both ex-ante and ex-post) are not unusual even in advanced countries. For instance, a123 IEG (2007, p. 65). For more comprehensive definitions of and discussions on efficiency and cost-effectiveness,see Chapter 11 of IEG (2007).124 In this paper, the concept ―benefit‖ refers to all positive impacts of a social protection program and should not beconfused with the ―benefit amount‖ of a particular scheme.125 In this context, the ILO‘s Rapid Assessment Protocol (RAP) provides a useful tool for developing countries totake stock of and map existing social protection measures and identify priority areas for intervention (UNICEF andILO, 2011, p. 11). 20
  • 21. Please do not cite or quote without written permission of the authors2007 inventory of youth employment interventions in 84 countries from all regions in the worlddemonstrated that among the OECD countries, only Canada, the U.K. and the U.S conductedimpact evaluations and cost-benefit analyses of such interventions.126 Outside these countries andother than studies sponsored by international organizations, rigorous evaluations of youthemployment interventions were found to be very rare. 127 The ILO has recently adopted aresolution to call on governments, social partners and the multilateral system to take urgent andrenewed action to address the crisis of youth employment. 128 This resolution also stressed thatthe ILO‘s own activities promoting youth employment ―should be subject to rigorous monitoringand evaluation to ensure approaches are cost-effective and provide a positive impact.‖129One example of a developing country that has been undertaking social protection cost-benefitanalyses is Cambodia. The Government of Cambodia recently developed a social protectionstrategy based on a vulnerability and gap analysis; consultations with development partners andother stakeholders; as well as technical assistance from various International Organizationsincluding for costing exercises. Cambodia‘s strategy stresses that ―financing of the socialprotection programme must be seen as an investment rather than as an expenditure.‖130 Box 2summarizes how Cambodia‘s social protection strategy has been evolving in order to provide thereader an overview of possible issues that developing countries can encounter while expandingsocial protection and exploring affordability of priority programmes.Box 2: Cambodia’s National Social Protection Strategy for the Poor and VulnerableIn 2011, the Government of Cambodia adopted its National Social Protection Strategy for thePoor and Vulnerable (NSPS). Before developing this Strategy, the Government first identifiedgaps and constraints with regard to the effective and efficient provision of social protection suchas lack of longer-term vision for social assistance development; low local capacity; limitedcoordination among social protection interventions; problems with collecting and monitoringdata and assessing existing interventions; and inadequate budget for implementation.The Government of Cambodia stresses that ―limited fiscal space and implementation capacitiescall for prioritisation of options for social protection development in the short term.‖ The NSPSgives priority to addressing major sources of vulnerability (such as chronic and transient poverty,hunger, shocks, and social exclusion) by taking short- and medium-term measures including cashand in-kind transfers and fee exemptions; public works programmes; and social welfare services.The Strategy also sets the long-term framework for sustainable and comprehensive socialprotection for all in accordance with the Social Protection Floor Initiative. The aim is toestablish both contributory social security mechanisms for the formal sector and improved socialassistance for the informal sector.While preparing the NSPS, the Government held technical consultations with developmentpartners and national stakeholders, such as civil society organizations. Several International126 Betcherman, et al. (2007, p. 31).127 Betcherman, et al. (2007, p. ii).128 ILO (2012a).129 ILO (2012a, p. 14).130 UNDP and ILO (2011, p. 156). 21
  • 22. Please do not cite or quote without written permission of the authorsOrganizations including the World Food Programme (WFP) and the World Bank assisted theGovernment in undertaking a scoping and mapping exercise on existing safety-net programmes.The ILO also applied a diagnostic tool called Social Protection Expenditure and PerformanceReview (SPER) in order to assess system financing, to identify coverage gaps, and to discusspolicy issues for consideration by national policy makers. The ILO estimated that the totalexisting social expenditure for the year 2010, including ODA-funded programmes and subsidiesfor the health sector was at about 5.5 percent of GDP. The majority of social spending wasallocated for health, corresponding to about 60 percent of total social expenditure.As part of the technical consultations the World Bank conducted a study that estimated that aconditional cash transfer programme for poor families with pregnant mothers or children underfive would cost 0.21 percent of GDP (excluding certain administrative costs and supply-side costof providing nutrition services). Moreover, the NSPS provides preliminary cost estimates foreach short-term (up to 2013) priority programmes and actions but exact resource requirementswill be determined through further analyses and assessments. The Strategy states that ―a costingexercise for the medium- and long-term implementation of the NSPS will be developed as apriority activity during the first year of implementation (including a detailed costing of existingand planned interventions and a fiscal space analysis). Financing arrangements, including jointpool arrangements for certain tasks, will be discussed with development partners to embark on aprogramme-based approach for social protection in Cambodia and to align and harmonise donorsupport for the NSPS.‖ It is also stressed that during this process financing of the socialprotection programme must be seen as an investment rather than as an expenditure.Sources: ILO (2012b), Kingdom of Cambodia (2010), Royal Government of Cambodia (2011), UNDP and ILO(2011).In the following sub-sections, we will discuss cost-efficiency of social protection by taking stockof several costing exercises and analyzing potential short- and long-term benefits of socialprotection.3.1. Cost-Benefit AnalysesInstitutions such as HelpAge, International Labour Organization (ILO), Overseas DevelopmentInstitute (ODI), UNICEF, and World Health Organization (WHO) developed social protectioncosting models and/or undertook costing exercises. Some of these models have been applied byindividual countries in order to examine the feasibility of certain social protection programmes.At the same time, a number of institutions conducted broader studies looking into various sets ofcountries in order to contribute to the affordability debate.One widely cited example is the costing studies that the ILO undertook in seven sub-SaharanAfrican131 and five Asian countries132 estimating the annual costs of a basic social protection131 Burkina Faso, Cameroon, Ethiopia, Guinea, Kenya, Senegal, and the United Republic of Tanzania132 Bangladesh, India, Nepal, Pakistan, and Viet Nam 22
  • 23. Please do not cite or quote without written permission of the authorspackage that includes universal basic old-age and disability pensions, 133 basic universal childbenefits, 134 universal access to essential health care, 135 and a 100 day employment guaranteescheme.136 For the countries considered, the annual cost of a basic social protection package isestimated to be in the range of 3.7 to 10.6 percent of GDP in 2010.137 The estimated annual costsof each element are as follows:138 Universal basic old-age and disability pensions: between 0.6 and 1.5 percent of GDP Basic universal child benefits: between 1.2 and 3.6 percent of GDP Universal access to essential health care: between 1.5 and 5.5 percent of GDP 100 day employment guarantee scheme: between 0.3 and 0.8 percent of GDPThe cost of providing universal health care is noticeably higher than the cost of the remainingelements of the package. The results of this ILO study have been cited in the literature139 with thepurpose of demonstrating that a basic social protection package excluding universal health careprovision would be affordable even in low-income countries (the selected group includes bothlow-income and lower middle-income countries).Nevertheless, affordability is not evident merely from these numbers. According to this ILOstudy, even when governments increase the share of public spending attributed to socialprotection to 20 percent of their total budget, seven out of twelve countries analyzed will still notbe able to fill the financing gap from domestic resources by 2030. 140 Moreover, these costs werecalculated before the global financial and economic crisis hit, therefore the crisis impact on fiscalspace available to developing countries was not taken into account.141Other costing exercises have focused on specific elements of a basic social protection packagelooking at different or a greater number of countries. Some of these exercises estimate only133 ―It was assumed that the simulated universal old-age and disability pension would be set at 30 percent of GDPper capita, with a maximum of one US dollar (PPP) per day (increased in line with inflation) and would be paid toall men and women aged 65 and older; and to persons with serious disabilities in working age (the eligibility ratiowas assumed to be 1 percent of the working-age population, which reflects a very conservative estimate of the rateof disability).‖ ILO (2008, p. 6).134 The level of the child benefit is assumed to be ―15 percent of GDP per capita with a maximum of half of one USdollar (PPP) per day (increased in line with inflation) and paid for up to two children under the age of 14 per womanwho has given birth. The rationale behind this assumption is to tackle claims that universal child benefits wouldprovide an incentive to increase fertility.‖ ILO (2008, p. 7).135 It was assumed that basic health care costs would be based on a ratio of 300 medical staff to 100,000 population,with medical staff wages indexed in line with GDP per capital growth (health staff wages were assumed at aminimum of three times GDP per capita) and overhead costs of 67 percent of staff costs. ILO (2008, p. 21).136 The assumed beneficiary group of the employment guarantee scheme constitutes 10 percent of the working-agepopulation in each country. ―The benefit is only available to households not benefiting from any other form of cashtransfer. It was assumed that the simulated employment scheme would provide a benefit set at 30 percent of GDPper capita, with a maximum of one US dollar (PPP) per day (increased in line with inflation). The benefit would bepaid for a total of 100 days in the year.‖ ILO (2008, p. 9).137 ILO (2008, p. 10).138 ILO (2008, pp. 6-9).139 ILO (2011); Ortiz and Yablonski (2011).140 ILO (2008, pp. 13-14). These seven countries are Burkina Faso, Cameroon, Ethiopia, Kenya, United Republic ofTanzania, Bangladesh, and Nepal.141 UN NGLS (2010, p. 18). 23
  • 24. Please do not cite or quote without written permission of the authorscurrent costs, while others also provide estimates of future costs to discuss sustainability. Thefollowing sub-sections give an overview of these studies. It is worth highlighting that the aim isnot necessarily to provide comparisons (as methodologies, assumptions, and countries analyzeddiffer from one study to another) but instead to offer the reader a wide range of existing analyses.3.1.1. Universal Old-Age PensionsA HelpAge International study built on previous costing exercises by organizations such as theILO and estimated the cost of a universal old-age pension in 50 low- and middle-incomecountries.142 The study argues that universal old-age pensions in the countries analyzed would becurrently affordable (in 2010). It is estimated that a universal pension for everyone over 65143would cost less than 1.8 percent of GDP in all 50 countries (exceeding 1.5 percent of GDP onlyin China, Jamaica, Sri Lanka, and Thailand).144 Such scheme would cost around 1 percent ofGDP or less in most sub-Saharan African countries.145 Moreover, these costs would not surpass 8percent of current government expenditure in any of the 50 countries. 146 In 15 countries, thesecosts correspond to around or less than 2 percent of government expenditure (e.g. Burkina Faso,Malawi, Senegal, Mongolia, Ghana).147Moreover, in order to assess sustainability, this study projected the future costs of a universalold-age pension for everyone over 60 in Rwanda, Paraguay, and Thailand under differentscenarios. For example, when the pension is indexed to average income, the costs would riseover time in all three countries as populations age. As a percent of GDP, the costs wouldcorrespond to 1.4 in Rwanda, 3 in Paraguay, and 5.2 in Thailand by 2040.148 The reason behindthe higher cost for Thailand is that by 2040 a quarter of its population is projected to be over60.149 The study argues that governments can contain these costs by indexing the value of thetransfers to inflation and/or by increasing eligibility age as populations age and healthy lifeexpectancy increases.1503.1.2. Universal Health CareA WHO study estimated that providing key health services in 49 low-income countries wouldcost around USD 44 per capita on average in 2009, increasing to around USD 60 per capita by2015.151 This estimate includes the cost of interventions to achieve the health-related MDGs as142 Knox-Vydmanov (2011). HelpAge International calculations assume a transfer level of 20 percent of GDP percapita and set administrative costs as 5 percent of the total cost of transfers. (pp. 2-3).143 The study also provided separate cost estimates of pensions covering everyone over 60 and 70.144 Knox-Vydmanov (2011, Figure 1, p. 3).145 Knox-Vydmanov (2011, Figure 1, p. 3).146 Knox-Vydmanov (2011, Figure 2, p. 4).147 Knox-Vydmanov (2011, Figure 2, p. 4).148 Knox-Vydmanov (2011, p. 7).149 Knox-Vydmanov (2011, p. 7).150 Knox-Vydmanov (2011, p. 8).151 WHO (2010, p. 22). 24
  • 25. Please do not cite or quote without written permission of the authorswell as those targeting noncommunicable diseases. 152 Cost estimates were made for eachcountry, and then aggregated; hence they are ―simply an (unweighted) average across the 49countries at the two points in time.‖153 Obviously, cost estimates vary by country. For instance,while five of the countries analyzed would need to spend more than USD 80 per capita in 2015,six countries would need to spend less than USD 40.154Current health spending varies substantially from one country to another. For instance, annualhealth spending in the US and Norway surpasses USD 7,000 per capita and OECD members as agroup spend on average around USD 3,600 per capita. 155 On the other hand, among WHO‘sMember States, 31 countries spend less than USD 35 per capita annually and four countriesspend less than USD 10, even when external aid is taken into account. 156 The WHO stresses thatthe poorest countries would need assistance from the international community to expand accessto health services since the Organization argues that ―even with relatively high levels of domesticgrowth, and national budgets that prioritize health, only eight of the 49 countries have anychance of financing the required level of services from domestic resources in 2015.‖1573.1.3. Child BenefitsA Save the Children UK study estimated the likely current costs of providing different types ofunconditional child benefits for a large sample that includes 57 developing countries. 158 Theaverage cost159 of providing universal child benefits for children under 5 is estimated to be 2.08percent of GDP. 160 When children under 5 who are below the poverty line are targeted, theaverage cost decreases to 1.28 percent of GDP.161While the average costs look relatively modest, the results of this study exhibit significantvariations across countries and regions. On a positive note, in many poor and middle-incomecountries in Asia the cost of a universal cash transfer for children under 5 would be less than 1.5percent of GDP.162 However, one exception is Nepal, where this cost is estimated to exceed 2.5152 More specifically, the study ―included interventions proven to reduce mortality among mothers, newborns andchildren under five; childbirth care; reproductive health services; prevention and treatment of the main infectiousdiseases; diagnosis, information, referral, and palliative care for any presenting conditions; and health promotion.‖WHO (2010, p. 38).153 WHO (2010, p. 23).154 WHO (2010, p. 23).155 WHO (2010, p. 21).156 WHO (2010, p. 21).157 WHO (2010, p. 23).158 Yablonski and O‘Donnell note that this is a static analysis of the likely current cost of child benefits andestimates will change over time according to the particular combination of changes in each country arising from:population growth, changes in poverty headcount, changes in average poverty gap, economic growth, potentialchanges in administrative costs over time (p. 44).159 The average cost has been calculated for 54 countries as Burundi, Liberia, and Democratic Republic of Congo aretreated as outliers.160 Yablonski and O‘Donnell (2009, Table 2, p. 26).161 Yablonski and O‘Donnell (2009, Table 2, p. 26).162 Yablonski and O‘Donnell (2009, Figure 6, p. 27). These countries include Bangladesh, China, Cambodia, India,Indonesia, Laos, and Pakistan. 25
  • 26. Please do not cite or quote without written permission of the authorspercent of GDP. 163 Moreover, for LICs in Africa, a universal cash transfer for children under 5is found to be unaffordable in most cases. It is argued that some of these countries would needconsiderable external assistance to fill the gap. For instance, Liberia and Tanzania would needdonor funding equal to approximately 90–95 percent and 70-85 percent of costs, respectively.164Countries such as Sierra Leone, Niger and Mozambique currently are not able to afford even themore narrowly targeted options at national scale out of domestic resources.1653.1.4. Social Pensions and Child BenefitsA joint UNICEF and ODI study estimated the possible costs of social pensions and child benefits(universal and/or selective) in five West African countries. These simulations as a percentage ofboth GDP and recurrent expenditure are presented in Table 2 and vary significantly across thesefive countries. For instance, while the cost of a universal child benefit and social pensionprovision is estimated at 1.1 percent of GDP in Equatorial Guinea, the same provision for Ghanais estimated to cost 11.3 percent of GDP (which is considerably higher than the upper range ofrelated ILO estimates) corresponding to more than 60 percent of recurrent expenditure. Theestimated costs for Equatorial Guinea are substantially lower than the ones for Ghana becausethe former‘s per capita GDP is much higher due to its oil exports.166However, the study highlights that affordability in simple aggregate terms does not necessarilyimply feasibility of a programme. For instance, whereas the oil-rich Equatorial Guinea seems tohave necessary fiscal space to finance additional social protection expenditures, it may facepolitical and institutional challenges. In Section 4, we will discuss in more detail a range ofchallenges that countries may encounter in addition to financial constraints.163 Yablonski and O‘Donnell (2009, Figure 6, p. 27).164 Yablonski and O‘Donnell (2009, p. 27).165 Yablonski and O‘Donnell (2009, pp. 26-28). In such cases, the authors recommend rolling out a universalprogramme geographically in areas with the highest poverty rates and argue that ―gradual expansion by age orgeography will help to keep costs manageable, and allow time for building the systems and capacity necessary todeliver programmes at scale.‖ (p. 28).166 UNICEF and ODI (2009, p. 25). 26
  • 27. Please do not cite or quote without written permission of the authorsTable 2: Annual Programme Expenditure Cost Estimates of Child Benefit and SocialPension Options: Simulations for Congo, Mali, Senegal, Equatorial Guinea and Ghana Congo, EquatorialCosts Republic Mali Senegal Guinea Ghana Pension Pension Pension Social Social Social UCB UCB UCB UCB UCB SCB SCB SCB% of GDP 2.0 1.2 1.0 5.9 3.2 6.4 3.7 0.9 0.2 8.7 2.6% of 16.7 9.9 8.3 42.8 23.5 30.0 17.6 20.8 5.0 46.3 13.9recurrentexpenditureNote: UCB: Universal Child Benefit, SCB: Selective Child Benefit.Source: UNICEF and ODI (2009, Table 2, p. 26).3.1.5. The Social Protection Floor Costing ToolIn addition to undertaking costing exercises that covered a selected group of countries, someinternational organizations have built costing tools that can be applied by individual countries.For example, following the adoption of the Social Protection Floor (SPF) Initiative, UNICEF andILO jointly developed the SPF Costing Tool in 2010. The objective of the tool is to help supportpolicy decisions regarding selection, revision and investment in social protection programmes byproviding an initial basic assessment of the potential costs of both new schemes andmodifications to existing ones.167 It should be noted that the tool is only adapted to estimating thecost and impact of cash transfers.168Whereas the SPF Costing Tool was developed in order to support the Social Protection FloorInitiative, the tool can be applied to other social protection contexts. The cost of a specific socialprotection scheme would of course vary across countries depending on demographic, labour, andmacroeconomic conditions. While the SPF tool allows users to enter these relevant data points,the tool has certain built-in assumptions about how these different parameters interact. Countriescan choose to conduct a simple application of the tool by using its built-in assumptions only (e.g.Senegal), or can carry out more elaborated costing exercises by modifying these assumptionsbased on their national context (e.g. Argentina and Egypt—See Box 3). 169 Some countries167 UNICEF and ILO (2011).168 The SPF Costing Tool can provide cost estimates for old-age pensions, child benefits, disability benefits, orphanbenefits, education stipends, birth lump-sum benefits, youth labour market programmes, and unemploymentprogrammes (UNICEF and ILO (2011, p. 5)). For a discussion of the SPF Costing Tool‘s limitations, see UNICEFand ILO (2011, pp. 9-10).169 UNICEF and ILO (2011, pp. 3-4). The countries that have conducted social protection costing exercises using theSPF Costing Tool include Argentina, Egypt, Madagascar, Mozambique, and Senegal. 27
  • 28. Please do not cite or quote without written permission of the authorschoose to utilize multiple tools. For instance, Senegal‘s simple application of the SPF CostingTool was complemented by the World Bank‘s ADePT tool for estimating poverty impacts.170Box 3: Application of the SPF Costing Tool in EgyptA recent study applied the SPF Costing Tool for a proposed system of child cash transfers inEgypt, in order to estimate not only its costs but also poverty impacts. The study simulationsshow that with an overall cost of 0.88 percent of GDP, the proposed scheme can lift 19.3 percentof poor people in Egypt out of poverty according to the national poverty line. The potentialimpact on children is expected to be greater with an estimated poverty reduction of 28.2 percentamong poor children up to 14 years of age.While examining the sustainability of such a scheme, the study took population dynamics intoaccount. Egypt‘s demographic profile appears to be favourable because of the growing ratio ofworking age population in the overall population. Hence, over the period 2012-2020 the cost ofthe scheme is projected to fall as a percentage of GDP benefiting from the declining dependencyratio—regardless of whether the scheme‘s benefit amount is held constant in real terms or as apercentage of GDP per capita.Source: Rabi (2012).3.1.6. Rapid Assessment Protocol (RAP)On the basis of the SPF Costing Tool, the ILO (in close collaboration with UNICEF) hasrecently developed a new costing tool called the Rapid Assessment Protocol (RAP), whichprovides a useful method for developing countries to take stock of and map existing socialprotection measures and identify priority areas for intervention.171 The tool also provides ―a basisto discuss and simulate alternative financing options and fiscal space.‖172The first step in this exercise is to construct an SPF Rapid Assessment Matrix (see Figure 1) inorder to analyze the present and planned future social protection provisions according to thebenchmarks set by the four guarantees of the SPF and to identify gaps in policy design andimplementation.173170 UNICEF and ILO (2011).171 UNICEF and ILO (2011, p. 11).172 ILO and IMF (2012, p. 3).173 Bonnet et al. (2012, p. 7). 28
  • 29. Please do not cite or quote without written permission of the authorsFigure 1: Structure of the Social Protection Floor Rapid Assessment MatrixSource: Bonnet et al. (2012, p. 8).After constructing an SPF Rapid Assessment Matrix, the RAP identifies and defines the policyoptions that would complete the SPF and provides cost estimates for different measures andrelates them to projections of the government budget. 174 This tool ―builds on single agepopulation projections; single age estimates of labour force participation rates; a relatively crudeeconomic scenario as determined by assumptions of the overall GDP growth rates, productivityrates, inflation and base real wage rates and increases over the projection period, and interestrates, as well as initial poverty rates‖ 175 and uses these variables as drivers of expenditures andrevenues. Since the RAP conducts a more detailed analysis than the SPF Costing Tool, it offersmore robust results; however, the RAP is also more time demanding. Box 4 provides keycomparisons between the SPF Costing Tool and the RAP and Section 4 will give examples of itsapplication.174 Bonnet et al. (2012, p. 17).175 Bonnet et al. (2012, p. 17). 29
  • 30. Please do not cite or quote without written permission of the authorsBox 4: Key Comparisons between the SPF Costing Tool and the Rapid AssessmentProtocol COSTING TOOL RAPID ASSESSMENT PROTOCOL 1. Fixed and pre-defined format 1. Flexible format 2. Not time demanding 2. Time demanding 3. Features: pre-defined scenarios, 3. The construction of the model goes types of benefits; pre-defined hand in hand with a dialogue process poverty impact module involving national authorities and 4. No previous knowledge on Excel other actors dealing with social modelling, demographics, protection macroeconomics, government 4. Previous knowledge on Excel finances, benefit design or poverty modelling, demographics, impact is necessary. macroeconomics, government finances, benefit design or poverty impact is required.Source: Behrendt (2011, slides 4 and 5).3.1.7. Importance of PrioritizationAnother study took a different approach for exploring affordability of social protection andcompared five African countries‘ 176 actual expenditure levels in social protection and otherdevelopment sectors to the spending targets they committed to in international agreements.177176 Ethiopia, Kenya, Malawi, Mozambique, and Uganda.177 Hagen-Zanker and McCord (2011) identified six key development sectors as social protection, health, education,water and sanitation, agriculture, and infrastructure. In order to calculate ―actual‖ expenditure levels, they used themost recent data available, which was for 2006-2007. 30
  • 31. Please do not cite or quote without written permission of the authorsThe results show that most targets are not met (see Table 3) and even though individual sectoraltargets may be affordable, the targets are not jointly affordable, pointing to the need for sectoraltrade-offs.Table 3: Sector Expenditure as a Share of Total Government Expenditure/GDP in SelectedAfrican Countries in 2006-07Note: Shading indicates that target has been met.Source: Hagen-Zanker and McCord (2011, p. 13).Therefore, assessing whether a social protection measure is affordable requires much more thanundertaking a costing exercise and exploring availability of fiscal space. While setting budgetpriorities, there will naturally be competing policy options for allocation of public resources. Forthis reason, it is critical to analyze not only the associated costs, but also potential and relativebenefits of a social protection scheme.3.2. BenefitsSocial protection can promote economic growth and sustainable development by augmentinglabour productivity, enhancing human development outcomes, reducing poverty and inequality,and facilitating social cohesion (e.g. through improving food security, empowering women).Also as demonstrated by various impact analyses, some social protection schemes have positiveexternalities on local economy and/or non-beneficiaries. For instance, old age pensions can havepositive impact on children living in households that receive the pension.178Social protection measures can help countries build resilience against economic crises andexternal shocks by acting as automatic stabilizers.179 Social protection is increasingly seen as ―a‗win-win‘ investment that pays off both in the short term, given its effects as macroeconomicstabilizer, and in the long term, due to the impact on human development and productivity.‖180178 ILO and UNDP (2011, p. 24).179 ILO (2011, p. 2 and p. 52).180 ILO (2011, p. xxii). 31
  • 32. Please do not cite or quote without written permission of the authorsSome argue that the fiscal costs of investing in social protection ―are normally offset by positiveeconomic returns and the enhanced productivity of a well-educated, healthy, and well-nourishedworkforce.‖181Effective social protection measures contributing to economic growth can also support their ownsustainability and future financing by extending the resource base. 182 An analysis of cashtransfers stresses that ―the greater the growth impact, the more affordable and politicallydesirable is the social cash transfer programme—and this has a positive effect onsustainability.‖183Moreover, for countries that already have well-functioning social protection programmes inplace, it is relatively easier to take discretionary measures to protect the vulnerable populationsduring times of crisis by extending or revising existing schemes. For instance, during the latestglobal economic and financial crisis, government responses to increasing unemployment levelshave varied among different country groups. A survey of policy responses to the crisis in 77countries shows that high-income countries mostly modified existing unemployment benefitsystems, while middle-income countries extended cash transfer or public work schemes. 184 Forexample, the United States provided federal funding for social assistance payments to theunemployed who had exhausted their unemployment benefits. 185 The Republic of Koreaintroduced early reemployment allowances, vocational skills development allowances as well asjobseeking and moving allowances. 186 Among the MICs group, Colombia‘s conditional cashtransfer programme Familias en Accion was expanded to an additional 1.5 million families.187On the other hand, low-income countries, most of which were already facing underemploymentbefore the crisis, had limited options available, such as food subsidies and public works.188A range of successful national programmes have demonstrated the role of social protection inreducing poverty and inequality. For instance, Brazil‘s conditional cash transfer programmeBolsa Famí is estimated to be responsible for one sixth of the reduction in poverty and liainequality (as measured by changes in the Gini co-efficient) during 2003-2009.189 Bolsa Famí liais the largest conditional cash transfer programme in the world, reaching to a quarter of Brazil‘spopulation.190 It is also notable for its relatively low overall cost (0.4 percent of the GDP in2010) as well as low operational costs that correspond to 5 percent of the programme budget.191Furthermore, it is estimated that the combined effect of grants in South Africa (including the old-age pension, disability grant and child support grant) may decrease the number of people in181 Ortiz and Yablonski (2011, p. 51).182 Samson (2009, p. 47).183 Samson (2009, p. 48).184 ILO and World Bank (2012, p. 27).185 ILO and World Bank (2012, p. 27).186 ILO (2011, pp. 51-52).187 ILO and World Bank (2012, p. 29).188 ILO and World Bank (2012, p. 27, p.29).189 UNDP (2012b).190 ILO (2010a, p. 76).191 UNDP and ILO (2011, p. 72). 32
  • 33. Please do not cite or quote without written permission of the authorspoverty by 16 percentage points and reduce the Gini coefficient by 3 percent.192 South Africa‘sChild Support Grant covers approximately 90 percent of eligible poor families with children (7.5million children) and costs about 1 percent of GDP. 193 The Old Persons Grant covers almost 2.6million people and costs about 1.4 percent of GDP.194There are also various studies showing positive impacts of India‘s Mahatma Gandhi NationalRural Employment Guarantee Act (MGNREGA) including rise in agricultural productivity,women‘s empowerment through an emphasis on equal wages, as well as positive impact on thegeographical-ecological environment by creating productive green jobs. 195 The scheme provides―at least one hundred days of guaranteed wage employment in a financial year to everyhousehold whose adult members volunteer to do unskilled manual work.‖196 It reaches around52.5 million households197 and it is one of the largest rights-based social protection initiatives inthe world.198 The MGNREGA contributed to increasing income levels and employment in therural areas199; and thus, it is regarded as an important factor behind the recent boost in ruralconsumption which grew faster than consumption in cities during the last two years (March2010-March 2012).200 Through creating economic opportunities in rural areas, the programmealso decreased out-migration from villages. 201 It is also considered as the largest financialinclusion scheme of the rural poor as ninety million accounts were opened in banks and postoffices for wage disbursement. 202 The cost of the MGNREGA was around 0.5 percent of GDPin 2010-2011.203 Despite the modest cost, there is some criticism and debate over the specificsand future costs of the scheme especially in the context of India‘s rising fiscal deficit.On the other hand, not every affordable social protection scheme can lead to significantreductions in poverty and inequality levels in the short-run. For example, after conducting cost-benefit analyses for various design options, a recent study proposed a cash transfer programmetargeting all households that have a child under five in the 15 poorest districts in Senegal, whichwould cost 0.55 percent of GDP corresponding to 2.17 percent of government expenditure.204The cost is modest compared to the UNICEF/ODI estimates presented above; however, theestimated poverty and inequality impacts are not large. The simulations suggest that thereduction in poverty among children under five would be 2.32 percent and the Gini coefficientwould decrease by 1.2 percent.205 This result was attributed to the big size of targeted householdsand their distance from the poverty line. Accordingly, the study recommends implementing smallscale pilot programmes first in order to test their effectiveness at reaching the poor and achieving192 ILO (2011, p. 39).193 ILO (2011, p. 14).194 ILO (2011, p. 14).195 Government of India (2012a). ILO (2011, p. 60), UNDP and ILO (2011, p.16).196 Government of India (2012b, p. 312).197 ILO (2011, p. 15).198 ILO (2010a, p. 77).199 CRISIL (2012).200 UNDP and ILO (2011, p. 16).202 UNDP and ILO (2011, p. 279).203 Schnitzer (2011, p. 54).205 Schnitzer (2011, p. 52). 33
  • 34. Please do not cite or quote without written permission of the authorsdesired impacts. 206 In general, many international organizations also recommend piloting andgradual expansion of new social protection programmes.3.2.1. Costs of InactionA report by the United Nations Secretary-General (UN 2000) stressed that: ―Any trade-off between public spending items and between various economic needs and the need for social protection must incorporate recognition of the long–term negative impact of social pathologies. Finance ministries need to be as rigorous in estimating the economic and social benefits of social programmes as they are about calculating their costs.‖ 207Some authors argue that policy makers need to take proper account of the costs associated withnot providing effective social protection. The absence of effective social protection can lead toan increase in poverty and vulnerability, increasing inequality, social disintegration, malnutrition,stunting, low educational achievement, and loss of assets. 208 For example, in the event of aneconomic crisis or natural shock, ―the coping strategies the poor utilize, such as sellingproductive assets or sending children to work, have high opportunity costs.‖209 The losses inhuman capital and productive capacities can become a constraint on growth and development. 210Because of these significant costs associated with the absence of effective social protection, notproviding social protection in developing countries is not regarded as a viable option. Someexperts also argue that for developing countries ―affordability is less of an issue when the costsof not having social protection are factored in‖ and the major concern is about long-termsustainability rather than affordability.211 However, as demonstrated by various costing exercisesearlier, affordability remains a serious concern in many developing countries.Evaluating affordability of a certain social protection programme also requires taking properaccount of existing and potential financing options. We will discuss fiscal sustainability aspectsand financing options and strategies in the next section.4. Fiscal Sustainability of Social ProtectionAs discussed in previous sections, when a country decides to build or extend a formal socialprotection system as part of its national development strategy, the country needs to decidespecifics on what to build and where to start. Even though nearly all countries in the world availof some form of social protection provision, these interventions are often not comprehensive or206 Schnitzer (2011, p. 57).207 UN (2000, p. 7).208 ILO (2011); Ortiz and Yablonski (2011); Barrientos (2010); Barrientos and Hulme (2008).209 ILO (2010b, p. 6).210 Barrientos and Hulme (2008, p.16). Also see Ortiz and Yablonski (2011, pp. 46-47) for an overview of ―long-term human costs of malnutrition and losses in education and health‖.211 Barrientos (2010, p. 16). 34
  • 35. Please do not cite or quote without written permission of the authorsuniversal, covering only a few contingencies and accessible for only parts of the vulnerablepopulation. There is a strong argument for extending and strengthening social protectionprogrammes in developing countries, and a high demand to generate concrete processes to bringgood theories to practice.It is argued that some basic country-specific social protection programmes, when designed welland implemented gradually, are not only affordable but can even pay for themselves in the longrun by enhancing labour productivity, the resilience and the stability of society.212 On the otherhand, an overly ambitious or generous social protection system could trigger fiscal difficulties oreven a sovereign debt crisis down the road.In this section, we focus on reviewing fiscal sustainability issues of a social protection systemand different options for creating fiscal space to finance social protection programmes. Taking adynamic and comprehensive approach, we argue that a prudent medium- and long-term (evenintergenerational) fiscal framework is needed to help policymakers evaluate the long-livedimplications and crowding-out effects of actions taken today on governments‘ current and futurefiscal positions, underlying growth trends and welfare of future generations.In theory, it is well recognized that a social protection programme has to be evaluated based onboth the direct and indirect costs and benefits of such a programme on people and on theeconomy, not only now but also over time. In practice the costs, benefits and medium- and long-term fiscal sustainability have largely been examined in a simplified fashion and deserve muchmore attention from researchers and policymakers. In this section, we will review some lateststudies that start to examine these issues in a dynamic and comprehensive framework.4.1. Fiscal Space and Fiscal Sustainability4.1.1. DefinitionsWe define a fiscally sustainable social protection system as one that does not undermine agovernment‘s overall fiscal position and underlying trends in the medium- and long-term. 213Fiscal space is broadly defined as the available budgetary room that a government can use tospend on a desired purpose.214 Fiscal space and fiscal sustainability are two related concepts.When fiscal space is exhausted, a government‘s fiscal position may be threatened and becomeunsustainable.212 ILO (2011).213 Our definition is similar to the one used in Roy, Heuty and Letouzé (2009). Often used indicators of fiscalsustainability include a targeted debt level, overall deficit, or primary deficit (i.e. the fiscal deficit excluding interestpayments) as a share of Gross Domestic Product. Factors determining fiscal sustainability include the projectedeconomic growth rate, fiscal revenue growth, expenditure growth, and the interest rate at which the Government canborrow to finance its fiscal deficit.214 This broad definition is taken from Heller (2005, p. 3) which defines fiscal space as ―the availability of budgetaryroom that allows a government to provide resources for a desired purpose without any prejudice to the sustainabilityof a government‘s financial position‖. There are other definitions of fiscal space. For example, DevelopmentCommittee (2006) defines fiscal space as the gap between the current level of expenditure and the maximum level ofexpenditures that a government can undertake without impairing its solvency. 35
  • 36. Please do not cite or quote without written permission of the authorsIn principle, there are a variety of ways to create fiscal space and improve fiscal sustainability.Additional fiscal space can be created by raising government revenues, cutting lower prioritygovernment spending, or both. Additional revenues can be generated internally or externally.Ceteris paribus, faster economic growth will contribute to higher tax revenues, so will raisingtaxes and improving tax collection; and more grants from external sources will also help createfiscal space. 215 A tax-based financing has the advantage of linking budgetary processes to socialprotection policy and therefore ensuring the sustainability and legitimacy of social protectionfunding. On the spending side, less desirable expenditures can be cut or postponed to make roomfor higher priority expenditures such as social protection. In addition, fiscal space can also becreated through borrowing, either from domestic or external sources.4.1. 2. Fiscal Space and Fiscal Sustainability: a Dynamic and Comprehensive ApproachFiscal space and fiscal sustainability need to be assessed within the context of a dynamic(forward-looking and intergenerational) and comprehensive (cross-sector) fiscal and budgetaryframework.A dynamic approach is needed because many types of social protection expenditures— buildingsocial housing, supporting pensions and health insurance, providing unemployment benefits,offering vocational training — will require not only some budgetary room today but also theavailability of future budgetary resources as these social protection programmes have clearimplications for subsequent spending on operations and maintenance.216Therefore exploitation of fiscal space for social protection requires a careful assessment whethersocial protection expenditures incurred today and over time can be sufficiently financed fromcurrent and future revenues. Some additional fiscal space or leeway is probably also needed toensure that a government can meet unanticipated fiscal challenges in the future. 217 For LICsreceiving significant flows of external resources dedicated to social protection purposes,domestic financing will be essential in the medium and longer run.A comprehensive approach is needed because fiscal space created for social protection mayimmediately or ultimately crowd out spending on other programmes. A government facingbudget constraints has to weigh the relative merits of spending across different sectors and set itsexpenditure priorities. It also should be noted that even if fiscal space exists today for additionalsocial protection programmes without any cut on other expenditures, if such a fiscal space maynot be available in the future the fiscal sustainability concern will emerge and may force agovernment to cut spending on other expenditure areas in the future.A dynamic and comprehensive approach to fiscal space and fiscal sustainability of socialprotection implies that a government‘s revenue and expenditure policies must be assessed in thecontext of the governments broad strategic priorities and stated fiscal objectives over the short215 Another way of creating fiscal space is through seigniorage.216 Heller (2005).217 Heller (2005). 36
  • 37. Please do not cite or quote without written permission of the authorsand longer term. A dynamic and comprehensive approach also implies that we need a betterunderstanding of the long-term effects of social protection spending on economic growth andhuman development.218 If social protection programmes are debt financed, then the impacts ofdebt on the underlying economic growth rate, inflation and welfare are also need to be assessed.4.2. Practice of Social Protection Fiscal Sustainability AnalysisIn our view, analyzing fiscal sustainability of social protection programmes in developingcountries is about connecting the dots between costs, fiscal space and the potential benefits thatsuch social protection programmes are associated with.With countries increasingly recognizing the importance of social protection, efforts have beenmade to yield better understanding of fiscal sustainability of specific social protection measuresor full-fledged social protection systems. The recent collaborative work among variousinternational organizations (ILO, IMF, UNDP, UNICEF, World Bank, and others) in assessingthe fiscal cost and fiscal space available for the implementation of social protection floor policiesover the medium term has helped ―provide the factual bases for national dialogues on alternativepolicy options, implementation priorities and the phasing-in of SPF policies‖.219 Despite being aquite simplified model, the RAP has emerged as a useful analytical tool to tackle the technicalquestions associated with social protection that developing countries face in their policy makingprocess.In the following sub-section, we will review several country studies (Viet Nam, El Salvador,Mozambique, and Thailand) applying the RAP to assess fiscal space, budget allocations andfiscal sustainability of social protection programmes over the short and medium term. TheseRAP studies are supported by a national consultation process through which the range, level andpriorities of social protection measures, financing options and fiscal space have beendiscussed.220A dynamic approach to fiscal sustainability of social protection requires a costing exercise thatnot only estimates the start-up costs of social protection measures but also projects themaintaining and operating costs over the medium and long term. The data constraints limit the218 Roy, Heuty and Letouzé(2009). Besides long-term fiduciary sustainability, Roy, Heuty and Letouzé(2009) pointout that for developing countries which fiscal space relying on volatile and exogenous sources of external financesuch as bilateral aid, concessional and non-concessional foreign borrowing, long-term fiscal sustainability alsorequires minimizing the reliance on external finance over longer term.219 ILO and IMF (2012, p. 7). ―In what appears to be emerging as a standard procedure, the UN is leading thecosting exercise and developed the various benefit scenarios according to the national priorities and the recentlyapproved NBSS strategy, helped by macroeconomic and general government operations data provided by the IMFfor the model. The IMF led the analysis on the creation of fiscal space for government priorities in a medium-termfiscal framework […]‖.220 ILO and IMF (2012); IMF (2012a). 37
  • 38. Please do not cite or quote without written permission of the authorsevaluation of long term costs (10 years or longer),221 and most studies on developing countriesfocus on estimating the costs over the medium-term (5 - 10 years)222.The cases of Viet Nam (Box 5), Mozambique, El Salvador and Thailand all show that theidentified programmes to close the social protection coverage gaps in each of these countries areaffordable both for now and consistent with a sustainable medium-term fiscal framework andmacroeconomic stability.223After a costing exercise is carried out over the medium term, fiscal space has to be identified tofinance the proposed social protection measures that help close the SPF gap. Examining thecurrent revenue and expenditure and the underlying trend is a necessary step to identify thecurrent and future fiscal space. The RAP estimates that Viet Nam (Box 5) will need an extrafiscal space (net of additional interest payments) of about 2.2 percent of GDP by 2015 and amaximum of 2.3 percent in 2016 to 2020. 224As discussed earlier, fiscal space can be created by an increases of government revenues, a cut inother government spending, or both. In practice, it is not easy to cut government spendinganywhere and it is in particular difficult in developing countries as first the room for cut is rathersmall because of limited fiscal space, and second many spending items are regarded crucial forsupporting and accelerating economic growth. Therefore the focus of creating fiscal space forproposed social protection measures has been on increasing government revenues.In Viet Nam‘s case, the RAP proposes that a combination of an increase in personal income tax,which is currently very low, by 1.3 percent of GDP (which will move the income tax revenue inViet Nam towards the average level of income tax revenues in upper-middle income countries),and a 1 percent increase of the value-added tax rate could already generate the 2.3 percent ofGDP that close the SPF financing gap while keeping the overall government deficit at aprojected level of 3 percent of GDP.225 Alternatively, and administratively easier, that additionalfinancing requirement could be generated by raising the general VAT rate by about 2.5percentage points, or 25 percent in relative terms. 226221 An exception is the HelpAge International study to estimate the cost of a universal old-age pension in 50 low-and middle-income countries. The study find that the costs of old-age pension would rise over time and reach 1.4percent of GDP in Rwanda, 3 percent of GDP in Paraguay, and 5.2 percent of GDP in Thailand by 2040.222 The Egypt study on child cash transfers discussed in the last section finds the proposed cash transfer program hasa modest overall cost of 0.88 percent of GDP but a big poverty reduction impact of lifting 19.3 percent of poorpeople in Egypt out of poverty. While examining the sustainability of such a programme, the study took Egypt‘sfavourable population dynamics into account and projected the cost of the programme will fall as a percentage ofGDP over the period 2012-2020.223 Successful capacity building and improvement in revenue collection will be required as well.224 ILO and IMF (2012, p. 32).225 ILO and IMF (2012, p. 33). However, further investments in tax collection would probably be needed.226 ILO and IMF (2012, p. 33). 38
  • 39. Please do not cite or quote without written permission of the authorsBox 5: Application of RAP in Viet Nam over 2010-2020A joint study on Viet Nam conducted by the ILO and the IMF applies the RAP to estimate thecosts of closing the SPF gaps in the country. Social protection measures focusing on increasingpension for the elderly, a package of benefits including both cash and educational services for theyoung, and employment guarantees for the working age are proposed, and the associated costshave been evaluated based on a set of assumptions (for example, assumption on populationgrowth are taken from the UN population projections, and assumption on labour force growth aretaken from the ILO generic labour force participation projections).For the elderly, an enhanced social pension was suggested, by increasing the benefit level andlowering the age threshold. Gradual implementation and two different scenarios were assumed:the first scenario providing the social pension to people not covered by the formal pension, witha maximum cost of 0.6 percent of GDP; and the second providing 50 percent of the benefit tothose receiving the formal pension as a step to building a universal non-contributory programme;the latter would cost up to 0.8 percent of GDP.For child benefit, a package for children under 16 years old, composed of an allowance,additional education services and one meal per day, was suggested for gradual implementationover five years. The ILO designed two scenarios for poor children: one benefit capped to twochildren per household, which would cost 0.47 percent of GDP; and another without any ceiling,with a maximum cost close to 0.87 percent of GDP by 2016.For the working-age population, the ILO proposed the gradual implementation over four years ofan employment guarantee of 100 days, similar to the Mahatma Gandhi National RuralEmployment Guarantee Act of India, combined with social assistance for the disabled andtraining services to facilitate return to employment and the creation of micro-enterprises. Thisbenefit is estimated to have a maximum cost of 1.14 percent of GDP.Different combinations of elderly pension, child benefit and labour market support measures areexamined and the associated costs are calculated. The RAP finds that with gradualimplementation, the cost of a moderate combination of proposed social protection measureswould peak around 2016, once fully implemented for the working-age benefit and child benefitand with the retirement age reduced for the uncovered to 72 years old. The total cost of the entirepackage declines from a peak of around 2.33 in 2016 to 2.3 percent of GDP in 2020 (Box 5Figure 1).The RAP projects overall public revenue and expenditure in Viet Nam from 2010 to 2020 basedon a number of economic assumptions and the public revenue and expenditure projections fromthe IMF. General government revenue starts out at a level of 28.2 percent of GDP in 2010 and isassumed to be about 27.9 percent of GDP in 2020. During the same period general governmentexpenditure is projected to decrease from 34.6 to 30.8 percent of GDP. The projected income andexpenditure developments result in a crisis-triggered high deficit equal to 6.4 percent of GDP in2010 which slowly decreases to 3.0 percent of GDP in 2020 (Box 5 Figure 2). 39
  • 40. Please do not cite or quote without written permission of the authorsBox 5 Figure 1. Total Additional Costs of Combined SP ComponentsBox 5 Figure 2. Projected Fiscal Space Needed for Combined SP ComponentsThe estimated costs for the proposed additional social protection measures are then added to thestatus quo budget projection, and different combinations of financing options could be designedto close the budget gap. In a modest variant of measures to close the SPF gap (benefits for allpoor children, pensions for all pensioners not covered elsewhere and limited social assistance forunemployed in active age), the country would face additional benefit expenditure (net ofadditional interest payments) of about 2.2 percent of GDP by 2015 and a maximum of 2.3percent in 2016 to 2020.Source: ILO and IMF (2012). 40
  • 41. Please do not cite or quote without written permission of the authorsIn another study on Mozambique, several international organizations collaborated and helped toidentify the priorities and available fiscal space of a set of revised social protection programmesin the country over the medium term. A revamped and streamlined social protection systemrolled out by the Mozambican government in the fall of 2011 comprises cash transfers, theprovision of social services, and new programmes for labour-intensive public works, and thegovernment pledged to allocate adequate budget resources for social protection and embed it inthe national economic programme.The Mozambique study suggests that the government‘s current target of reaching 815,000 poorhouseholds would require an annual resource allocation of 0.4 to 0.8 percent of GDP over thenext 10 years (Figure 2), which is affordable and consistent with a sustainable medium-termfiscal framework and macroeconomic stability. 227 The study also finds that gains from fiscalreforms, in particular from phasing out the fuel subsidy would more than offset the trend declinein foreign aid and would create additional fiscal space of 2.5 percent of GDP cumulativelyduring 2012-22 (medium-term). 228 Such a projected fiscal space could be even larger if morefiscal revenues become available from the country‘s to-be-developed natural resource sector andfurther donor support. Therefore the government could consider using the identified fiscal spacefor social protection and other government priorities, such as infrastructure investment.229Figure 2. Identifying Fiscal Space for Social Protection in MozambiqueSource: IMF (2012a, Box 2, p. 20).The RAP is also applied to El Salvador to evaluate the fiscal feasibility and sustainability ofexpanding basic cash transfers to children, women, and the unemployed, a social pension to theelderly and the disabled, and basic health care protection programmes in the country. The studycompares the possible costs of three RAP-Scenarios,230 which are designed based on the gaps227 IMF (2012a, p. 20).228 IMF (2012a, p. 20).229 The possibility of obtaining further donor resources for extending social protection programs, possibly throughthe creation of a common fund, is currently being discussed (IMF 2012a).230 The three RAP-Scenarios studied are Extreme Poverty Focus scenario, Poverty Focus scenario, and Universalismscenario. The three RAP scenarios are composed of same benefits and only differ in terms of target population. The 41
  • 42. Please do not cite or quote without written permission of the authorsindentified in the current social protection system in El Salvador, and of the current governmentsocial protection strategy Plan Quinquenal, which is based on a 5-year Development Plan (2009-2014) established by the current government foreseeing the implementation of a universal socialprotection system.The costs of several scenarios were estimated and two scenarios, the Plan Quinquenal and theExtreme Poverty scenario targeting the poorest population came out as the most financiallyviable scenarios (Figure 3). The identified funding options include collecting general taxes moreefficiently, reducing subsidies, raising income and value-added taxes, exercising new taxes andlowering minimum pension costs.231Figure 3. Cost estimates (Percent of GDP) and projected revenues (millions of USD) in ElSalvador, 2011-2020.first scenario targets the extremely poor population, the second the poor population and the third scenario wouldensure universal coverage of unemployment benefits, pensions and health care by covering those not covered bysocial insurance (ILO and IMF 2012, p. 13).231 ILO and IMF (2012). The study also finds out that the high costs of the minimum pension guarantees in ElSalvador is mainly due to the high transition cost triggered by pension privatization and therefore recommends,amongst others, the re-introduction of a public pillar that is actuarially balanced and well managed, which couldreduce the transition cost. 42
  • 43. Please do not cite or quote without written permission of the authorsSource: ILO and IMF (2012, Figure 5 and Figure 7, pp. 14-15).In an ongoing study on Thailand, the RAP is applied to estimate the cost of the proposed socialprotection programmes over the 2012-2020 period.232 Two scenarios combing different benefitsfor children, working age populations and the elderly are examined. The RAP estimated that thetwo scenarios will cost up to 0.9 percent of GDP for the low-level benefit combination and 1.6percent of GDP for the high-level benefit combination (Figure 4).Figure 4. Projection of Costs for Low and High Benefit Combinations in Thailand(percentage of GDP)Source: ILO (2012c, p.14).To connect the dots between costs, fiscal space and the potential benefits that social protectionprogrammes are associated with, an assessment of benefits is needed and will provide sometechnical facts for the government to set priorities when planning its social protection strategy.232 ILO (2012c). 43
  • 44. Please do not cite or quote without written permission of the authorsA well designed social protection system can yield many benefits. One of the most importantgoals that a government aims to achieve through social protection programmes is povertyreduction. The poverty impact of social protection is often examined based on a simple staticmicro-simulation exercise of the (direct) impact of social protection measures onindividual/household expenditure and poverty status. 233 Despite its limitations, this simpleassessment provides some technical facts for the government to set priorities when planning itssocial protection strategy within the context of sustaining and promoting economic growth andhuman development.For example, in the Viet Nam study, 234 a micro-simulation based on data from the latestavailable Viet Nam Household Living Standards Survey 2008 is conducted. The poverty impactis shown by comparing the poverty rates before and after the implementation of the proposedsocial protection programmes.235The study finds that for the three social protection programmes studied in the RAP, the elderlypension would reduce poverty among the elderly population from its current level of 14.5 to 12.2percent in 2020. 236 The less expensive child benefit package capping the benefits to maximum oftwo children per household would reduce child poverty from 20.8 to 12.2 percent, while themore expensive package without any ceiling would cut child poverty drastically to 2.2 percent.237Guarantee work and other working-age benefit would reduce the working-age populationpoverty rate from 12.1 to 5.3 percent and the disabled poverty rate from 25.8 to 9.4 percent. 238The simulation results therefore imply that the child benefit targeting all poor children wouldyield the highest impact on poverty reduction, followed by the working-age benefit.4.3. Financing Social ProtectionIt could be challenging for low income countries (LICs) to create fiscal space for socialprotection expansion. In those countries where less than 20 percent of GDP is mobilized forpublic spending (Annex Table 1), even if social expenditures are kept below 5 percent of GDP,they still constitute a big portion of government budget and a big burden on the nationaleconomy.There are studies that demonstrate potential (not necessarily existing) affordability of certainsocial protection schemes conditional upon effective domestic resource mobilization. Forexample, the cost of introducing a social protection package239 in Zambia was estimated between233 A full dynamic assessment of the impact is very difficult as such an assessment will need to take behaviouralchanges into account.234 ILO and IMF (2012).235 Three major assumptions are made to conduct a poverty impact analysis: the individuals/households consume thebenefit in full; an equal sharing of individual benefits among all household members; a perfect targeting of benefits.These assumptions may overestimate (or underestimate) the impact for this type of benefit.236 ILO and IMF (2012, p. 10).237 ILO and IMF (2012, p. 10).238 ILO and IMF (2012, p. 10).239 The proposed package includes a universal old-age pension, a cash transfer targeting the most vulnerablehouseholds, and a child benefit. 44
  • 45. Please do not cite or quote without written permission of the authors2.8 and 3.7 percent of GDP during the first year, which is projected to decrease to 1–1.5 percentof GDP by 2025.240 The introduction of such a package is regarded as potentially affordable forZambia provided that the government commits itself to a clear resource mobilization strategy. 241So, how can countries mobilize additional financial resources for social protection? It is arguedthat finding or creating fiscal space is feasible even in the poorest countries depending on policyactions and reforms that governments would pursue for resource mobilization.242 Over the lastdecade, domestic revenue to GDP ratios have increased in all country groupings but the progresswas more notable in resource-rich countries and middle-income countries. The percentage ofsub-Saharan African countries that raised less than 15 percent of GDP as public revenuedecreased from 30 percent in 2002 to 17 percent (corresponding to eight countries) in 2011.243Despite this improvement, it is estimated that half of sub-Saharan African countries can furtherincrease the equivalent of 2 percent to 4 percent of GDP in domestic revenue.244Fiscal space can be created through many different sources; however not all of them would beapplicable in all settings. Options to create fiscal space should be carefully assessed taking intoaccount political and socio-economic contexts and future growth perspectives.245 There may betrade-offs and potential risks (e.g. volatility) associated with various financing options dependingon the country context.246Whereas the simplest way of creating fiscal space is through economic growth, in the absence ofhigh growth, fiscal space can be created by ―improving revenue collection, reallocatingexpenditure and increasing spending efficiency‖ provided there is political will.247 There are alsoa range of innovative financing mechanisms that countries can use to raise additional funds forsocial spending. Other options include lobbying for increased aid and transfers and borrowingand restructuring existing debt248; however these are only viewed as short-term solutions. Nextsubsections discuss these financing options in more detail.4.3.1. Increasing Tax RevenuesTax-based financing is regarded as the most effective way in ensuring the sustainability andlegitimacy of social protection schemes as it links budgetary processes to societal policypriorities. 249 Expanding coverage over time and scaling up programmes gradually based onrevenue growth is also recommended.250240 Aguzzoni (2011, p. 1).241 Aguzzoni (2011, p. xiv).242 Ortiz, Chai, and Cummins (2011, p. 1).243 OECD (2012, p. 24). In comparison, the average (unweighted) tax revenue in OECD countries was 33.8 percentof GDP in 2009 (OECD (2011, Table A)).244 OECD (2012, p. 24).245 Aguzzoni (2011, p. 8).246 Ortiz, Chai, and Cummins (2011, p. vi).247 ILO (2011, p. 67).248 Ortiz, Chai, and Cummins (2011).249 ILO (2011, p. 68).250 Ortiz and Yablonski (2011, pp. 51-52). 45
  • 46. Please do not cite or quote without written permission of the authorsGeneral and broad-based taxation is advocated for financing social protection in order to ensureits sustainability.251 Some middle-income countries such as Brazil, China, India and South Africahave extended social assistance programmes mainly through general taxation. 252 Domesticrevenue generation was facilitated by rapid economic growth particularly in China and India. 253South Africa and Brazil have recently managed to increase their tax revenues as percent of GDP.In addition, Lesotho and Swaziland are examples for countries that finance their universal socialpension schemes through general tax revenues.254It is also important to finance social protection through progressive taxes, which would ―ensurethat the poor do not pay disproportionably more tax as a proportion of their income than therich.‖ 255 There are studies that show that greater progressivity in taxation and higher socialspending reduce inequality.256A rough measure for the progressivity of taxation is the ratio of direct to indirect taxes. A higherratio indicates a potentially more progressive tax system. 257As Figure 5 shows, the progressivityof tax systems has been declining in LICs despite the increase in social benefits and subsidies (aspercent of potential GDP) since the 1990s.Figure 5: Ratio of Direct to Indirect Taxes and Social Benefits and Subsidies in DifferentIncome Groups, 1980-2009Source: IMF (2012b, p. 52).251 Newson and Walker Bourne (2011, p. 5).252 ILO (2011, p. 68).253 ILO (2011, p. 68).254 Newson and Walker Bourne (2011, p. 2).255 Newson and Walker Bourne (2011, p. 9).256 IMF (2012b, p. 54)257 IMF (2012b, p. 54). 46
  • 47. Please do not cite or quote without written permission of the authorsFor the LICs, the IMF advises that ―efforts are needed to increase fiscal revenues over themedium term, for example, by establishing effective customs and tax administrations,eliminating exemptions, implementing a broad-based VAT with a fairly high threshold, andestablishing a broad-based corporate income tax at internationally competitive rates.‖258Developed countries mostly finance their social protection programmes with payroll taxes;however, this option is not available to many MICs let alone to LICs because of the high degreeof informality in employment. 259 One major challenge for developing countries is finding theway to broaden the tax base by also including the people in the informal sector.260While raising tax revenue is especially challenging in countries with large informal sectors,Indonesia is seen as a notable example where there have been improvements in tax collectiondespite the large informal sector.261 Indonesia achieved this through simplifying its tax systemand making its administration more transparent; encouraging voluntary compliance; andadopting a policy of zero-tolerance towards corruption.262 Accordingly, non-oil tax collectionincreased from 9.9 percent to 11 percent of GDP within first four years of implementation andmost of the additional resources were allocated to health spending.263Indonesia showcases the importance of strengthening tax administrations and mitigating taxevasion and fraud, which in turn can create additional revenue for social spending. Tax evasionis a major concern for developing countries as it has been estimated to result in total revenuelosses of USD 285 billion annually.264 While undertaking tax reforms, developing countries canalso benefit from best practices in other countries as well as technical assistance fromdevelopment partners.265In some countries, it may be easier to receive political support for higher taxes on the conditionthat the revenue would be spent on social sectors. One such example is Ghana, which increasedconsumption taxes by 2.5 percent and earmarked the tax revenue for health spending in 2003.Currently the revenue for this earmarked tax provides 61 percent of its National Health InsuranceScheme‘s budget.266 Moreover, there is evidence that Ghana‘s consumption tax is progressivedespite earlier concerns.267In certain contexts, modest tax increases may create sufficient resources for a given socialprotection scheme. For example, it is estimated that a 0.5 percentage point increase in valueadded tax in Sri Lanka would raise adequate resources to pay for a universal pension that would258 IMF (2012b, p. 23).259 Barrientos (2007, p. 5); Newson and Walker Bourne (2011, p. 7).260 OECD (2012, p. 26) notes that ―this may require reviewing the taxation of land and buildings; exploring newways to tax households; re-examining the tax treatment of small and medium-sized enterprises; working to minimisethe wasteful impact of tax incentives for investment; or introducing simple environmental taxes. It may also requiremoving towards a heavier reliance on fees and charges.‖261 WHO (2010, p. 26).262 WHO (2010, p. 26).263 WHO (2010, p. 26).264 Ortiz, Cummins, and Chai (2011, p. 8).265 Newson and Walker Bourne (2011, p. 5).266 Lagomarsino et al. (2012, p. 936).267 Lagomarsino et al. (2012, p. 936). 47
  • 48. Please do not cite or quote without written permission of the authorscover everyone over 70 and over. 268 On the other hand, it is recommended to have tax revenuesas diverse as possible, which would decrease ―the over-reliance on any one tax source.‖269 Forexample, in 2000 Costa Rica financed its pension through a combination of sales tax (48.3percent), payroll taxes (46.2 percent), alcohol and cigarette taxes (5.4 percent) and accruedinterest on judicial deposits and bank accounts (1.7 percent). 2704.3.2. Reprioritization and Increasing Efficiency of Public ExpendituresSome countries also might have the option of shifting budgetary allocations by reducingexpenditure in low-priority areas, despite possible political obstacles. One potential and perhapspolitically less challenging option is shifting resources from military budget. For instance, CostaRica and Thailand decreased or eliminated, respectively, military expenditure and shiftedresources to social protection.271 South Africa also decreased defense spending by almost half inorder to finance social protection programmes fully from domestic revenue. 272Various countries have raised additional resources for social protection by eliminating inefficientand regressive subsidies. For instance, El Salvador removed untargeted energy subsidies andused the resulting savings to increase social spending to safeguard the poor against the impact ofhigher fuel and food prices. 273 In Indonesia savings from a reduction in petroleum subsidiescontributed to financing a cash transfer programme in 2005.274 Currently, India is recommendedto reform its subsidy system to make it more sustainable especially in the context of high fiscaldeficit (projected to be nearly 9 percent of GDP in 2012), underperforming tax revenues, andincreased demands for social spending due to the weakest monsoon since 2009.275Furthermore, eliminating inefficiencies in public expenditure and fighting with corruption wouldalso be critical. In addition to assessing the overall cost-effectiveness of a specific programme,there is need to strengthen supervision and inspection and reduce corruption.276 For example, inZambia and the United Republic of Tanzania there have been leakages of about 60 percent of thebudget allocated to education spending.277 It is estimated that total losses due to corruption insub-Saharan Africa were USD 148 billion in 2002, corresponding to nearly half of total taxrevenues. 278 Similarly, it would be vital to fight against illicit financial flows in developingcountries.4.3.3. International Assistance268 Newson and Walker Bourne (2011, p. 6).269 Newson and Walker Bourne (2011, p. 9).270 Newson and Walker Bourne (2011, p. 2).271 ILO (2011, p. 70).272 ILO (2011, p. 69).273 ILO (2011, p. 46).274 ILO and UNDP (2011b, p. 27).275 IMF (2012b, p. 5).276 Ortiz, Cummins, and Chai (2011, pp. 6-7).277 Aguzzoni (2011, p. 16).278 ILO (2011, p. 70). 48
  • 49. Please do not cite or quote without written permission of the authorsOfficial Development Assistance (ODA) and technical support from donors would be importantin particular at the initial phases of designing and piloting a social protection intervention andfinancing one-off expenses. Earlier in the paper, we have presented examples of countries, whichare not in a position to feasibly finance certain social protection programmes out of domesticresources in the short run; and hence need complementary international aid.On the other hand, since sustainable and predictable funding is important for social protection,domestic financing is critical especially in the medium and long term. For instance, with regardto building social protection floors, the ILO stresses that ―international solidarity in the form ofaid can help to kick-start and consolidate the process in low-income countries, but over the longrun implementation has to be financially sustainable at the national level.‖279 Moreover, buildingsufficient government capacity and ownership is also important for the sustainability of socialprotection programmes. 280At the same time, it is recognized that some successful programmes such as Progresa (Mexico)and Bolsa Famí (Brazil) CCTs were designed domestically. After these programmes rendered liapositive results, donors showed interest in promoting CCTs as ‗best practices‘ and providedfunding to other developing countries to implement similar programmes. 281 In this context, it isnoteworthy to emphasize the complementary role of emerging donors in knowledge sharing andcapacity building. In addition to highlighting the need for predictable multi-year aid to LICs, theSocial Protection Floor Advisory Group (ILO 2011) made the following recommendation: ―We suggest that traditional donors, such as the OECD member countries, and emerging donors, such as the BRICs (Brazil, Russian Federation, India and China), agree on triangular cooperation mechanisms to enable the building of social protection systems in partner low-income countries. These mechanisms could create a division of labour in which traditional donors could provide predictable multi-year funding through direct budgetary support to expand affordability of social programmes, while emerging donors could continue focusing on knowledge sharing and capacity building based on their own development experiences. International forums on development cooperation, such as the high-level forums on aid effectiveness could serve as a platform for the agreement of such mechanisms.‖282It would be important for traditional donors to honor their ODA commitments despite recentbudgetary constraints that led to a decrease in ODA levels by around 3 percent in 2011 (inconstant prices and exchange rates).283Many countries have also benefited from debt relief through the Heavily Indebted PoorCountries (HIPC) Initiative and have directed resources to social protection. For instance,279 ILO (2011, p. 67).280 Newson and Walker Bourne (2011, p. 9).281 Britto (2006, p. 17).282 ILO (2011, p. 97).283 UN (2012, p. 8). 49
  • 50. Please do not cite or quote without written permission of the authorsNigeria uses ―general revenues freed through debt relief to fund pilot coverage programmes forpregnant women and children.‖ 2844.3.4. Innovative Sources of FinancingInnovative financing mechanisms for creating additional funds for social protection couldinclude a financial transaction tax, currency transaction tax, carbon taxes, debt swapmechanisms, solidarity levies on airline tickets, and measures to facilitate remittances, amongothers.285 Some of these options are currently being explored such as global currency transactiontax (see Box 6).It is stressed that not all innovative financing options will be applicable in all country settingsand potential revenues that can be raised will also differ among countries. For instance, thecurrency transactions tax may not apply to most LICs and MICs as 10 high-income countriesaccount for 85 percent of the traditional foreign exchange trade.286 On the other hand, India is anotable exception with a significant foreign exchange market. It is estimated that India can raiseabout USD 370 million annually if it implements a currency transaction levy of 0.005 percent onits foreign exchange trade.287In addition, increasing excise taxes is regarded as an innovative way to raise domestic resources.Excise taxes are collected through goods that create negative externalities such as beer, cigarettesand petroleum.288 Increases in these taxes may be politically more acceptable if the revenue isearmarked for social spending. 289 Some excise taxes have the potential to raise significantamount of resources. For example, it is estimated that a 50 percent increase 290 in taxes ontobacco in 22 of the 49 LICs (where data is available) would generate USD 1.42 billionadditional revenues.291Since 2009, 10 out of 15 emerging market economies studied by the IMF, have increased excisetaxes and seven of these countries have also improved tax compliance, 292 which ―typicallyimproves the degree of progressivity in taxation‖. 293 Moreover, Costa Rica‘s social pensionscheme received 5.4 percent of revenue from taxes on tobacco and alcohol in 2000. 294 Anotherexample is the Thai Health Promotion Fund, which was established in 2001 and financed with a2 percent additional surcharge on tobacco and alcohol.295284 Lagomarsino et al. (2012, p. 936).285 ILO (2011, p. xxxii).286 WHO (2010, p, 28).287 WHO (2010, p, 28).288 Newson and Walker Bourne (2011, p. 7).289 Newson and Walker Bourne (2011, p. 7).290 Currently excise taxes in these countries range from 11 percent to 52 percent of the retail price of the mostpopular brand of cigarettes. (WHO 2010, p. 30).291 WHO (2010, p. 30).292 IMF (2012b, Table 4, p. 18).293 IMF (2012b, p. 21).294 Newson and Walker Bourne (2011, p. 7).295 WHO (2010, p. 30). 50
  • 51. Please do not cite or quote without written permission of the authorsResource-rich countries can also raise revenue by introducing taxes from (non-renewable)natural resources.296 For example, Peru has expanded taxes levied on the mining sector in orderto further invest in health and education programmes. 297 Due to commodity price volatility,many countries, including Chile, Iran, Papua New Guinea, and Russia, created stabilizationfunds and some of these countries accessed these funds to increase social protection during thelatest global economic crisis.298Another innovative financing method has been used in Gabon, which has introduced a levy onmobile phone use to raise resources for health spending. 299 Similarly, in Nigeria an earmarkednational tax on mobile phone bills has been proposed to raise funds for the National HealthInsurance Scheme. 300Box 6: Innovative Sources of Financing Applied to Social ProtectionFinancial transaction tax: Many countries – including Brazil, the Republic of Korea, India andthe United Kingdom – have implemented some sort of financial transaction tax, most commonlyan ad valorem tax on share trades of 10–50 basis points. On average, these taxes raise less than0.5 percent of GDP. In Brazil, the provisional contribution on financial transactions helped toconsolidate the universalization of the health system. The Bill Gates report to the G20 CannesSummit estimates that a small tax of 10 basis points on equities and 2 basis points on bondswould yield about USD 48 billion a year in the G20. If introduced, part of these resources couldbe allocated towards the development of social protection in low-income countries.Global currency transaction tax: The Leading Group on Innovative Financing forDevelopment estimated that a tax of 0.005 percent on foreign exchange transactions in all majorcurrency markets at the point of settlement would raise about USD 25 billion to USD 36 billionfor the four major currencies (dollar, euro, yen and sterling). The group suggests the resources beused to set up a Global Solidarity Fund, which could be dedicated to international developmentcooperation, including the implementation of social floors.Solidarity levy on airline tickets: In 2006, Brazil, Chile, France, Norway and the UnitedKingdom, in collaboration with the UN, agreed to tax airline tickets and invest the funds raisedin basic health protection, in particular by facilitating the purchase of drugs and medicines tofight AIDS, tuberculosis and malaria in low-income countries. Benin, Burkina Faso, Cameroon,Republic of the Congo, Côte d‘Ivoire, Guinea, Republic of Korea, Madagascar, Mali, Mauritiusand Niger later joined the scheme. The cost to passengers ranges from USD 1 (economy classtickets) to USD 40 (business class). Since its creation, the airline levy has helped UNITAID tocollect about USD 2 billion to fund programmes benefiting people in 94 countries.Remittances: Decisive action to reduce transaction costs, which are estimated to average 9percent, can increase the net income transferred. A recent study in rural areas of Mozambique296 Ortiz, Cummins, and Chai (2011, p. 14).297 Ortiz, Cummins, and Chai (2011, p. 14).298 Ortiz, Cummins, and Chai (2011, pp. 14-15).299 WHO (2010, p. xi).300 Lagomarsino et al. (2012, p. 936). 51
  • 52. Please do not cite or quote without written permission of the authorsshows that migration associated with remittances is positively related to stimulating solidarity incommunities. Risk pooling and financial inclusion mechanisms among remittance recipientscould also be stimulated to enhance the impact of remittance flows on community well-being andconvert informal arrangements into formal social floor schemes.Debt-base instruments: Since 2007, under the Debt2health swap scheme, Australia andGermany have converted about USD 160 million in bilateral debt owed by Côte d‘Ivoire, Egypt,Ethiopia, Indonesia and Pakistan into investments in basic health in these countries. Under thisscheme, the creditor cancels bilateral debt and the debtor commits to invest in basic health. Debtswap and debt cancelation facilities could be enhanced to increase investment in socialprotection.Source: Excerpted from ILO (2011, p. 74) and partly shortened.4.3.5. BottlenecksIn certain cases a specific social protection measure may seem affordable on financial groundsbut there may be other bottlenecks or limitations in a given country. These may include deliverycapacity limitations as well as lack of political will, good governance and accountabilitymechanisms.301Evidence shows that social spending levels differ considerably even among countries with thesame size government budgets.302 Therefore resources allocated to social protection cannot beexplained solely on financial grounds. Besides fiscal space, new social protection programmesrequire ―political space‖ as well.303Delivery capacity limitations pose a significant challenge in many developing countries,particularly in LICs. These limitations can be observed with regard to ―the capacity to study,measure, and analyze poverty and vulnerability, the capacity to design and implementappropriate policies, and the capacity to deliver and evaluate social protection programmes.‖ 304In order to address capacity issues, developing countries can seek technical assistance fromdonors and international organizations in designing pilot programmes and later scaling upsuccessful ones. The role of North-South, South-South, and triangular knowledge sharing is alsocritical in building these capacities.For instance, Timor-Leste has a Sovereign Wealth Fund which provides a viable option tofinance social protection; however for a long time it could not channel these resources toeffective poverty reduction and social protection programmes due to delivery capacitylimitations.305 In 2007, Timor-Leste designed a conditional cash transfer programme, Bolsa daMae, with the aim of improving health and education outcomes.306 Due to several challenges301 Cook and Kabeer (2010, p. 24).302 Ortiz and Yablonski (2011, pp. 51-52).303 UNICEF and ODI (2009, p. 9).304 Barrientos and Hulme (2008, p. 17).305 Ortiz, Chai and Cummins (2011, p. 27).306 ILO and UNDP (2011a, p. 35). 52
  • 53. Please do not cite or quote without written permission of the authorsrelated to capacity and design issues, the programme has been modified benefiting from thelessons learned from the South, in particular from Brazil.307 UNDP is also currently providingtechnical assistance to the government on monitoring and evaluation, identification ofbeneficiaries, and the development of e-tools.308 The Bolsa da Mae programme is seen as anexample of how technical assistance and South-South knowledge transfers can improve cost-efficiency of social protection programmes by reducing costly trial and error processes whilebuilding national capacity.309Developing countries can also receive support from international NGOs or consultancycompanies in order to tackle capacity limitations particularly in service delivery; however, thiscan only constitute a short-term solution.310In order to achieve desired impacts of social protection programmes, there may be need tocomplement these programmes with other government policies and actions. For instance, CCTscannot generate desired impacts if relevant services are difficult to reach by the targetedpopulation, or have poor quality, or simply do not exist. Hence, complementary governmentactions are critical in order to ensure availability and quality of essential services. 311 Moreover,effectiveness of social protection programmes particularly in reducing poverty and inequalityalso depends on synergies with economic policies, such as employment and entrepreneurshipsupport policies.5. ConclusionThe cases of developing countries reviewed in this paper provide evidence that well-designed,prudent social protection systems can help strengthen countries‘ resilience to shocks; safeguardeconomic, political and social stability; achieve sustainable growth and human development; andfacilitate countries‘ transition from one economic development stage to another. The recentglobal economic and financial crisis confirmed the importance of social protection in cushioningeconomies against shocks and in achieving more sustainable, balanced and inclusive growth.Many questions remain to be answered on how to build a social protection system that protectsthe most vulnerable, contributes to sustainable growth and development and enhances resilienceto shocks. In this overview paper, we have focused on sequencing, cost efficiency and fiscalsustainability of social protection.The types of social protection arrangements evolve over time and differ across countries andregions. Informal and semi-formal social protection is present and even dominant in somedeveloping countries. In the paper, we scan literature and case studies for evidence on howcountries switch to more formal social protection systems. We find that while informal and semi-formal arrangements are vital for a large share of the population, especially the most vulnerable,307 ILO and UNDP (2011a, p. 35).308 UNDP (2012c, p. 62).309 ILO and UNDP (2011a, pp. 34-35); UNDP (2012c).310 Barrientos and Hulme (2008, p. 17).311 ILO and UNDP (2011a, p. 18). 53
  • 54. Please do not cite or quote without written permission of the authorsthey can be limited in providing adequate protection for all. Changes in their political andeconomic contexts have been pushing many developing countries towards more integrated,inclusive, modern and established social protection systems.The affordability of social protection schemes is a major concern for many developing countries,in particular the LICs. Contrary to the previous view that social protection was not affordable indeveloping countries, social protection has been increasingly recognized as an investment thatboosts economic growth by augmenting human capital and labor productivity. It also has acritical developmental role as it contributes to reduction of poverty, inequality, and future socialcosts and counters various types of risk and vulnerability.In the paper we have explored cost-efficiency of formal social protection programmes byconsidering various direct and indirect costs associated with social protection and both the directand indirect benefits and impacts on people and on the economy. In practice, a vulnerabilityassessment is often conducted as a first step to determine the priority areas for action.Subsequently a quantitative cost-benefit analysis for a social protection programme,complemented by qualitative evaluations, would be conducted to examine not only short-termaffordability but also medium- and long-term fiscal sustainability.The cases of Viet Nam, Mozambique, El Salvador and Thailand reviewed in this paper show thatthe identified social protection programmes to close the social protection coverage gaps areaffordable. These country cases also demonstrate that well-designed and gradually-implementedprogrammes would be consistent with a sustainable medium-term fiscal framework andmacroeconomic stability.Creating fiscal space for social protection is feasible in developing countries as domesticrevenues have recently increased, in particular for resource-rich countries and middle-incomecountries. Domestic resource mobilization is crucial for creating fiscal space for a sustainablesocial protection system. Tax-based financing is probably the most effective way in ensuring thesustainability and legitimacy of social protection schemes as it links budgetary processes tosocietal policy priorities. Fiscal space can be also created by reducing expenditure in low-priorityareas. International aid can play an important role especially in the LICs during the initial stagesof introducing and scaling up social protection programmes. On the other hand, aid flows areoften volatile and currently face increasing uncertainty because of downward pressure on donorcountry aid budgets after the latest global economic crisis; hence, they should be considered onlyas a short-term financing option. Looking forward, innovative financing mechanisms deservemore attention. 54
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  • 65. Please do not cite or quote without written permission of the authorsAnnexAnnex Box 1: Definitions of Social ProtectionADB (ADB 2009): ‗[…] policies and programs designed to reduce poverty and vulnerability bypromoting efficient labor markets, diminishing people‘s exposure to risks, enhancing theircapacity to protect themselves against hazards and interruption/loss of income.‘ ADB names fivemain areas in social protection: labour markets, social insurance, social assistance, micro- andarea-based schemes and child protection.DFID (DFID 2005): ‗[…] a sub-set of public actions—carried out by the state or privately—thataddress risk, vulnerability and chronic poverty.‘ For operational reasons, DFID (2005) sub-divides social protection into three key components: social insurance, social assistance andsetting and enforcing minimum standards.ILO (García and Gruat 2003): ‗[…] the set of public measures that a society provides for itsmembers to protect them against economic and social distress that would be caused by theabsence or a substantial reduction of income from work as a result of various contingencies(sickness, maternity, employment injury, unemployment, invalidity, old age, and death of thebreadwinner); the provision of health care; and, the provision of benefits for families withchildren. This concept of social protection is also reflected in the various ILO standards.‘IMF (IMF 2001): ‗[…] government outlays on social protection include expenditures on servicesand transfers provided to individual person and households and expenditures on servicesprovided on a collective basis. […] Collective social protection services are concerned withmatters such as formulation and administration of government policy; formulation andenforcement of legislation and standards for providing social protection; and applied researchand experimental development into social protection affairs and services.‘ Health care is notincluded in the IMF definition of social protection expenses as it is classified as a separateexpense.OECD (OECD 2009): ‗[…] social protection and empowerment provide security and unlockhuman potential and thereby encourage poor people to take advantage of opportunities, which inturn promotes more sustainable pro-poor growth strategies. Social protection cuts across allsectors, and is considered important for breaking the intergenerational cycle of poverty, and forachieving a social contract on nation-building and accelerating progress towards the MDGs.‘OECD also states that social protection measures are ‗[…] investments in people of all ages[that] […] have a clear gender dimension.‘UN (2000): ‗[…] a set of public and private policies and programmes undertaken by societies inresponse to various contingencies to offset the absence or substantial reduction of income fromwork; to provide assistance for families with children as well as provide people with health careand housing. This definition is not exhaustive; it basically serves as a starting point of theanalysis […] as well as a means to facilitate this analysis.‘Source: Zhang, Thelen and Rao (2012, p.). 65
  • 66. Please do not cite or quote without written permission of the authorsAnnex Table 1:Total Public and State Social Expenditure in an International Context, 2009 (with updatedGDP data for 2011)Country GDP per GDP per General Total Social Public capita, PPP capita, government public expenditure social current current expenditure, social excluding security international US$, 2011 percent of security health care, benefit UDS, 2011 GDP (latest expenditure percent of expenditure available including GDP excluding year) health, health care, percent of percent of government total expenditure government expenditureZimbabwe n.a. 776 49.64 7.9 0.3 0.6Liberia 577 281 21.82 65.2 9.9 45.2Burundi 608 271 32.09 5.7 1.1 2.8Niger 732 374 19.89 12.2 0.5 1.5Sierra Leone 877 374 21.99 12.3 1.0 4.5Madagascar 972 467 21.84 10.4 0.3 7.1Mozambique 982 535 38.00 10.4 0.7 n.a.Togo 1042 584 22.16 10.6 1.3 5.9Ethiopia 1116 374 27.92 34.3 6.5 4.8Guinea 1128 502 14.92 5.1 0.1 1.3Rwanda 1251 583 24.27 20.2 0.8 2.1Nepal 1256 619 18.90 15.5 1.3 4.2Burkina Faso 1310 600 23.05 21.3 1.6 6.9Uganda 1354 487 19.37 12.1 0.4 2.1Tanzania 1521 529 24.48 18.2 1.2 4.9Zambia 1623 1425 22.53 17.9 1.6 7.1Benin 1628 802 21.56 18.6 1.0 2.3Bangladesh 1788 735 15.42 13.0 1.1 2.9Côte d‘Ivoire 1803 1195 21.32 8.3 0.9 4.2Ghana 1884 1570 33.28 12.7 1.9 5.7Senegal 1981 1119 25.39 14.2 1.9 7.5Gambia 2135 625 28.81 14.4 1.2 4.2Yemen 2349 1361 38.11 17.4 4.7 12.3Cameroon 2383 1271 16.99 11.5 0.5 2.9Kyrgyzstan 2424 1075 31.85 26.6 6.1 19.2Mauritania 2571 1151 28.48 8.2 0.8 1.8Papua NewGuinea 2695 1845 36.25 10.5 0.2 0.6Pakistan 2763 1194 25.23 7.6 1.5 5.5 66
  • 67. Please do not cite or quote without written permission of the authorsLaos PDR 2809 1320 18.26 7.3 0.6 3.3Solomon Islands 2943 1517 34.69 13.4 0.7 2.0Uzbekistan 3310 1546 29.49 36.2 8.3 28.1Moldova, Rep. of 3392 1967 37.28 46.9 12.6 31.2Viet Nam 3435 1411 34.60 10.2 2.2 8.5India 3652 1489 28.25 14.3 3.1 13.8Philippines 4140 2370 20.42 15.7 1.9 9.3Congo 4429 3563 21.42 8.4 0.9 2.8Indonesia 4668 3495 20.92 11.1 1.4 5.3Fiji 4787 4391 31.16 16.7 2.3 9.3Bolivia 5130 2421 35.73 21.3 4.4 13.9Georgia 5503 3203 32.25 19.8 4.9 16.8Sri Lanka 5620 2835 24.90 24.5 4.2 16.9Bhutan 5810 2288 18.00 16.9 0.2 n.a.Armenia 5829 3305 19.96 29.6 4.2 12.5Jordan 6007 4666 43.77 28.7 8.4 19.0Belize 6722 4133 28.93 13.0 1.0 3.8El Salvador 6877 3702 26.34 24.9 3.9 8.8Ukraine 7251 3615 43.75 51.9 18.8 37.9China 8466 5445 19.09 31.3 4.1 22.3Thailand 8703 4972 19.95 23.8 2.6 8.1Saint Lucia 9385 7001 32.62 15.9 1.9 5.8Tunisia 9415 4297 35.63 27.6 7.5 20.9Azerbaijan 10136 6916 29.18 29.0 7.6 26.0St Vincent &Grenadines 10812 6291 40.52 16.8 3.4 8.4South Africa 11035 8070 36.40 33.9 8.4 13.6Brazil 11719 12594 49.90 25.4 9.6 19.2Costa Rica 12236 8676 24.78 38.4 4.2 16.9Dominica 12678 7126 47.12 18.2 4.1 6.5Venezuela 12836 10810 27.15 14.7 2.1 7.6Kazakhstan 13189 11245 22.98 27.2 3.9 19.8Mauritius 14523 8797 23.56 33.9 5.9 22.6Bulgaria 14603 7158 34.67 48.6 12.0 32.0Belarus 15040 5820 47.00 38.4 13.5 29.2St Kitts & Nevis 15154 13364 37.55 16.2 2.6 6.9Romania 15163 8405 32.64 45.5 11.0 27.3Mexico 15270 10064 24.41 30.3 4.5 16.8Malaysia 15589 9656 27.77 23.2 4.2 15.1Panama 15695 8590 43.67 23.6 5.1 11.7Chile 17311 14394 19.81 42.2 5.4 30.9Turkey 17499 10498 24.27 56.4 8.3 34.2 67
  • 68. Please do not cite or quote without written permission of the authors Argentina 17674 10941 32.36 39.7 8.5 26.2 Latvia 17692 12726 37.18 33.3 8.6 24.2 Croatia 20031 14488 43.22 50.3 15.7 37.8 Lithuania 20374 13339 32.63 50.9 11.1 28.2 Russian Federation 21248 13089 31.01 39.6 8.3 28.2 Poland 21310 13463 43.78 48.0 16.7 40.7 Hungary 21610 14044 51.74 43.5 16.5 31.1 Estonia 21942 16556 32.83 37.2 9.0 27.4 Slovakia 24022 17646 37.49 44.3 11.3 29.1 Portugal 25385 22330 46.32 49.9 15.9 37.3 Trinidad & Tobago 25951 16699 32.93 16.2 3.1 11.4 Czech Republic 26046 20407 43.95 44.4 13.2 29.4 Seychelles 26420 11711 57.34 29.1 12.6 14.2 Greece 26948 26427 36.59 56.0 14.9 47.6 Slovenia 27412 24142 45.42 50.1 16.6 35.4 Korea, Rep 30254 22424 30.10 22.9 3.7 12.3 Spain 32424 32244 38.38 55.2 15.4 39.3 Italy 32928 36116 48.87 51.2 18.2 39.5 Japan 34294 45903 36.69 50.7 12.3 33.5 France 34993 42377 52.97 55.1 21.4 40.0 United Kingdom 35494 38818 44.49 47.9 14.3 40.9 Iceland 36085 44072 42.70 39.6 10.6 35.4 Finland 38083 49391 49.31 52.9 19.9 40.4 Belgium 38605 46469 48.59 54.3 19.1 44.0 Germany 39211 43689 45.26 59.0 19.0 46.0 Canada 40440 50345 39.33 42.0 9.7 30.8 Denmark 40983 59684 51.15 53.0 21.2 45.4 Sweden 41300 56927 53.93 54.5 22.6 44.3 Ireland 41543 48423 33.95 49.2 10.2 31.5 Austria 42225 49707 49.18 55.3 20.4 43.7 Netherlands 42834 50087 46.39 45.1 14.9 44.2 United States 48442 48442 36.69 43.3 8.9 24.3 Switzerland 49151 80391 34.76 58.4 14.2 58.4 Singapore 61103 46241 21.16 7.3 0.6 2.6 Norway 61882 98102 40.63 53.2 15.8 42.3 Luxembourg 89992 115038 38.83 59.7 16.2 40.4Source: Bonnet et al. (2012, Annex 3, pp.50-51), World Bank (2012). 68