Intersections between Social Protection, Inclusive Growth and Fiscal Space

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Presentation by the Director of the International Policy Centre for Inclusive Growth (IPC-IG) at Brazil's II National Development Conference on 24 November 2011. The presentation identifies the main subjects and policy issues that will be covered by IPC-IG's forthcoming Flagship Report on Social Protection and Employment for Inclusive Growth.

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Intersections between Social Protection, Inclusive Growth and Fiscal Space

  1. 1. Intersections between Social Protection, Inclusive Growth and Fiscal Space 2ª Conferência do Desenvolvimento - IPEA Rathin Roy Director, IPC-IG Raquel Ramos Macroeconomist Brasília, November 24th
  2. 2. Intersections between Social Protection, Inclusive Growth andFiscal Space1. Objectives of macroeconomic and social protection policies2. The interface between macroeconomic and social protection3. An analytical framework4. Design and objectives of existing social protection policies5. Implications: Fiscal space 2
  3. 3. Intersections between Social Protection, Inclusive Growth andFiscal Space1. Objectives of macroeconomic and social protection policies2. The interface between macroeconomic and social protection3. An analytical framework4. Design and objectives of existing social protection policies5. Implications: Fiscal space 3
  4. 4. Objectives of macroeconomic and social protection policiesMacroeconomic policies: • Stable Growth • Price Stability • External Sector EquilibriumSocial Protection policies: • Equity • Vulnerability 4
  5. 5. Goals of Macroeconomic Policy and Social Protection Macroeconomic Policy Social Protection Growth Price Stability External Sector - Equity - Vulnerability 5
  6. 6. Intersections between Social Protection, Inclusive Growth andFiscal Space1. Objectives of macroeconomic and social protection policies2. The interface between macroeconomic and social protection3. An analytical framework4. Design and objectives of existing social protection policies5. Implications: Fiscal space 6
  7. 7. The interface between macroeconomic and social protection1. Growth and Equity(Weeks, 2010; Roy and Weeks, 2004; Bacha and Taylor 1978; Roy 1994)1950s - 1970s: – trade‐offs between growth and income inequality1970s and 1980s: – redistributive mechanisms: poverty reduction not hampering growth – ‘trickle‐down’ mechanismsLate 1990s: – MDGs: a target requires policies + coherent strategy – Idea: maximise growth + income transfers + poverty reduction programmes – What about equity? Is growth enough? 7
  8. 8. The interface between macroeconomic and social protection2. Price stability, equity and vulnerabilityTraditional approach: – Monetary + Fiscal instruments  Focus on the overall price level – Subsidies + tax concessions  Control specific prices + ensure that poor and vulnerable access key basic goods and servicesWithin the Inclusive Growth approach: – Monetary  Focus on the overall price level – Conditional and Unconditional Cash Transfers  enhance the affordability of basic goods and services 8
  9. 9. The interface between macroeconomic and social protectionWell enhance the welfare of specific target groups by enabling them to better afford such goods andTargeted services;CashTransfers are more effective than subsidies; serve as countercyclical measures to enable vulnerable populations to better cope with the fallout of exogenous shocks that adversely impact their livelihoods address vulnerability of different target groups, when such vulnerability is impacted by rising or volatile price movements, as during the recent food crisis. 9
  10. 10. The interface between macroeconomic and social protectionConcluding…Emerging developing economies led an important change: there are key complementarities between the objectives of social protection policies and macroeconomic policies.Social policies can complement macroeconomic policies by: – enhancing the inclusivity of growth; – improving the sustainability of growth; – reducing countercyclical pressures ; – enabling growth to be inclusive through participation in its delivery, rather than just participation in the benefits of growth through compensating those left out of the growth process. 10
  11. 11. Intersections between Social Protection, Inclusive Growth andFiscal Space1. Objectives of macroeconomic and social protection policies2. The interface between macroeconomic and social protection3. An analytical framework4. Design and objectives of existing social protection policies5. Implications: Fiscal space 11
  12. 12. An analytical frameworkWe propose an analytical framework which make this interactions between social protection policies and macroeconomic policies explicit.• G = Growth• K = Capital• L = Labour• Pk = Price of Capital• Pl = Price of Labour• Th= Technology• K/Y = Capital productivity• L/Y = Labour productivity 12
  13. 13. An analytical framework– Growth thus occurs through a combination of increases in the: • application of resources (capital and labour), • improvements in the productivity of these resources, • improvements in innovation (whether technical, procedural or institutional)– Simplifying assumption: (following Kalecki, 1954; Rowthorn, 1977; and Kaldor, 1956): • L is exclusively supplied by those who are the targets of social protection policies; • K is supplied exclusively by those who are not such targets 13
  14. 14. An analytical framework– A process of inclusive growth would be one in which: G is secured by an increase in the intensity of use of the factor of production L– In this simplified version this can happen if: • The Price of L and/or the quantity of L used to produce G increases; • L/Y increases; • The greater the returns to L owners from the returns to g(th) increase relative to the state of affairs prior to the working out of the growth process. Social protection policies that secure any of the above will increase inclusion 14
  15. 15. An analytical framework– The model changes two assumptions made in most growth analyses(1) Most growth models assume that the policy objective is to maximize growth;(2) This maximization happens through the application of all the resources (K, L in this exposition) available in the economy and, then through increases in productivity.– These do not hold, especially in developing countries. Reasons: (1) Policy makers do not maximize growth; they choose a target rate of growth to be achieved; (2) Resources are not fully utilized; Most people are employed, but at very low levels of productivity Capital can be underutilized 15
  16. 16. Intersections between Social Protection, Inclusive Growth andFiscal Space1. Objectives of macroeconomic and social protection policies2. The interface between macroeconomic and social protection3. An analytical framework4. Design and objectives of existing social protection policies5. Implications: Fiscal space 16
  17. 17. Design and objectives of existing social protection policiesObjective of social protection programmes  increasing the investments in human capital through the support families give to their childrenBrazilian Bolsa Seeks to promote access to health, education and socialFamília assistance; to fight hunger and poverty; and to stimulate the sustained emancipation of families living in poverty and extreme povertyColombian Familias increase the investments by families in extremeen Acción poverty on their children’s human capital – resources conditional to attending schoolPhilippine 4P improving human development of extremely poor households - cash grants to households with pregnant women or childrenMexican enhance the opportunities of social and economicOportunidades development through the improvement of their education, health and nutrition options Children &Ethiopian PSNP fight food insecurity to reduce household s’ Pregnant women vulnerability 17
  18. 18. Design and objectives of existing social protection policiesEmployment and public works interventions attempt to induce structural change  increase the participation of a wider section of society in growth processIndia’s National Aims at enhancing livelihood security of households and creatingRural Employment durable assets in rural areasGuarantee Act This is done by providing employments on works that address problems such as drought, deforestation and soil erosionSouth African Promote economic growth and provide poverty and income reliefExpanded Public Reduce unemployment through the offer of temporary workWorks Programme related to public and community services for unemployed people 18
  19. 19. Design and objectives of existing social protection policiesFrom safety nets approach to one focused on inclusion it is not necessary for growth to be inclusive as long as those who Safety benefited from growth could be made to share some of their gains Nets with those who did not so that society as a while was better off Social with enhancing inclusion in the growth process as with the Protection equitable distribution of the benefits of growth as seen above 19
  20. 20. Intersections between Social Protection, Inclusive Growth andFiscal Space1. Objectives of macroeconomic and social protection policies2. The interface between macroeconomic and social protection3. An analytical framework4. Design and objectives of existing social protection policies5. Implications: Fiscal space 20
  21. 21. Implications: Fiscal space– Traditionally, Social Protection has been viewed as a “regrettable necessity” - as detracting from the pool of resources available for development– However, Social Protection can – improve quality and stability of Macroeconomic Policy – help secure the allocation and stabilization objectives of public finance– Social Protection is not just compatible with, but actively contributing to, fiscal and macroeconomic stability 21
  22. 22. Implications: Fiscal spaceWhat to consider in assessing fiscal space available for social protection?– The sustainability of policies to create fiscal space is a function of what the fiscal space is used for– Fiscal Policy’s Functions: stabilization, allocation, distribution and growth Should be balanced according to (Roy, Heuty and Letouze, 2009): – the timeframe of the analytical framework – political economy context– Finding sustainable fiscal space for social protection therefore involves asking – what is the purpose of social protection? – the timeframe for its implementation? – the political economy context within which it is implemented? 22
  23. 23. Implications: Fiscal spaceSocial protection policies and the stabilization function of fiscal policy– Developing countries are prone to be hit by exogenous shocks and less equipped to mitigate their consequences (Williamson, 2005)– The examples of India and Brazil during the recent economic crisis show that social protection programmes can have significant countercyclical value– Reason: social protection in these countries was not designed to act purely as safety nets or “floors”, but embedded in overall development policy 23
  24. 24. Implications: Fiscal space– The focus in low income countries: secure economic growth through investing in the social and human resources that enable such growth to be resilient– This is a sharp break from the growth mantras of the 1980s and 1990s - These focused on (a) an increase in exports based on static comparative advantage or (b) import substituting industrialization, But failed for lack of physical and social infrastructure and human capital– This important change in development strategy is characterized by the centrality of policy interventions to scale up those investments that secure the achievement of the MDGs 24
  25. 25. Implications: Fiscal space– What has to be taken into account in assessing the fiscal space for social protection?– To implement social protection systems in developing countries – Increase current expenditure in the short to medium term; – but social protection exp / total expenditure declines in the long term with increased incomes and improved employment performance– On the design of social protection programmes – It needs to embody highly specific objectives that deliver development results within the planning horizon; – the development impact of such expenditures should enhance the taxable capacity of the economy and allow for a broadening in ambition of the social protection programme in the medium term– If this is the case, current fiscal space utilized for social protection in most low income countries permit s an increase in the fiscal allocation for key social programmes 25
  26. 26. Thank you!Rathin.Roy@ipc-undp.org 26
  27. 27. 2ª Conferência do DesenvolvimentoInstituto de Pesquisa Econômica Aplicada Intersections between Social Protection, Inclusive Growth and Fiscal Space Rathin Roy Director, IPC-IG Raquel Ramos Macroeconomist Brasília, November 24th

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