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.

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. Intersections between Social Protection, Inclusive Growth and
Fiscal Space
1. Objectives of macroeconomic and social protection policies
2. The interface between macroeconomic and social protection
3. An analytical framework
4. Design and objectives of existing social protection policies
5. Implications: Fiscal space
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3. Intersections between Social Protection, Inclusive Growth and
Fiscal Space
1. Objectives of macroeconomic and social protection policies
2. The interface between macroeconomic and social protection
3. An analytical framework
4. Design and objectives of existing social protection policies
5. Implications: Fiscal space
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4. Objectives of macroeconomic and social protection policies
Macroeconomic policies:
• Stable Growth
• Price Stability
• External Sector Equilibrium
Social Protection policies:
• Equity
• Vulnerability
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5. Goals of Macroeconomic Policy and Social Protection
Macroeconomic Policy Social Protection
Growth Price Stability External Sector
- Equity
- Vulnerability
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6. Intersections between Social Protection, Inclusive Growth and
Fiscal Space
1. Objectives of macroeconomic and social protection policies
2. The interface between macroeconomic and social protection
3. An analytical framework
4. Design and objectives of existing social protection policies
5. Implications: Fiscal space
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7. The interface between macroeconomic and social protection
1. Growth and Equity
(Weeks, 2010; Roy and Weeks, 2004; Bacha and Taylor 1978; Roy 1994)
1950s - 1970s:
– trade‐offs between growth and income inequality
1970s and 1980s:
– redistributive mechanisms: poverty reduction not hampering growth
– ‘trickle‐down’ mechanisms
Late 1990s:
– MDGs: a target requires policies + coherent strategy
– Idea: maximise growth + income transfers + poverty reduction programmes
– What about equity? Is growth enough?
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8. The interface between macroeconomic and social protection
2. Price stability, equity and vulnerability
Traditional 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 services
Within the Inclusive Growth approach:
– Monetary  Focus on the overall price level
– Conditional and Unconditional Cash Transfers  enhance the affordability of
basic goods and services
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9. The interface between macroeconomic and social protection
Well enhance the welfare of specific target groups by
enabling them to better afford such goods and
Targeted services;
Cash
Transfers 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.
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10. The interface between macroeconomic and social protection
Concluding…
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.
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11. Intersections between Social Protection, Inclusive Growth and
Fiscal Space
1. Objectives of macroeconomic and social protection policies
2. The interface between macroeconomic and social protection
3. An analytical framework
4. Design and objectives of existing social protection policies
5. Implications: Fiscal space
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12. An analytical framework
We 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
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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
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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
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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
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16. Intersections between Social Protection, Inclusive Growth and
Fiscal Space
1. Objectives of macroeconomic and social protection policies
2. The interface between macroeconomic and social protection
3. An analytical framework
4. Design and objectives of existing social protection policies
5. Implications: Fiscal space
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17. Design and objectives of existing social protection policies
Objective of social protection programmes  increasing the investments in
human capital through the support families give to their children
Brazilian Bolsa Seeks to promote access to health, education and social
Família assistance; to fight hunger and poverty; and to stimulate the
sustained emancipation of families living in poverty and extreme
poverty
Colombian Familias increase the investments by families in extreme
en Acción poverty on their children’s human capital – resources conditional
to attending school
Philippine 4P improving human development of extremely
poor households - cash grants to households with pregnant
women or children
Mexican enhance the opportunities of social and economic
Oportunidades 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. Design and objectives of existing social protection policies
Employment and public works interventions attempt to induce structural change
 increase the participation of a wider section of society in growth process
India’s National Aims at enhancing livelihood security of households and creating
Rural Employment durable assets in rural areas
Guarantee Act This is done by providing employments on works that
address problems such as drought, deforestation and soil erosion
South African Promote economic growth and provide poverty and income relief
Expanded Public Reduce unemployment through the offer of temporary work
Works Programme related to public and community services for unemployed people
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19. Design and objectives of existing social protection policies
From 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
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20. Intersections between Social Protection, Inclusive Growth and
Fiscal Space
1. Objectives of macroeconomic and social protection policies
2. The interface between macroeconomic and social protection
3. An analytical framework
4. Design and objectives of existing social protection policies
5. Implications: Fiscal space
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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
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22. Implications: Fiscal space
What 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?
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23. Implications: Fiscal space
Social 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
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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
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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
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26. Thank you!
Rathin.Roy@ipc-undp.org
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27. 2ª Conferência do Desenvolvimento
Instituto de Pesquisa Econômica Aplicada
Intersections between
Social Protection,
Inclusive Growth
and Fiscal Space
Rathin Roy
Director, IPC-IG
Raquel Ramos
Macroeconomist
Brasília, November 24th