This paper considers the evidence on the cost of social protection to reduce poverty, and its contribution to efficiency and growth. It finds that social protection is one mechanism for making growth pro-poor. It offers a direct and simple means of redistributing some of the gains from growth, and ways to ensure that shocks do not reverse gains. While it is not a driver of growth, it may contribute to growth when well designed. In particular, social protection could potentially provide high growth impacts when it is tailored and focuses on: 1) children, especially under-fives; 2) facilitating internal migration and inclusive city development, possibly via urban workfare schemes that emphasise urban community asset building; and 3) making adolescents and young adults more employable, including through transfers conditional on training relevant to urban labour market transitions.
The paper explores the evidence for the effectiveness of social protection in three distinct areas: reducing poverty directly, improving efficiency (correcting market failures) and stimulating growth. The focus is on the actual transfer of resources, and the economic justification for these transfers. The paper also considers alternatives, such as micro-credit and micro-insurance.
It finds that the costs of social protection to reduce poverty directly are rather substantial, but that successes can be claimed. In terms of improving efficiency, social protection is too blunt an instrument to generate overall efficiency gains. However, tailored social protection programmes could contribute to the processes of economic transformation that are required to make growth both sustainable and more inclusive. Further:
- The evidence on social transfers (in cash or in kind, conditional or not) suggests that while they have substantial poverty and equity impacts, their efficiency and growth impact is unlikely to be high – similar to the limited growth impact of micro-credit. Therefore, the main motivation for social transfers must lie in their equity or poverty impacts.
- The evidence on contingent transfers – made in response to shocks such as illness, drought or unemployment – such as social insurance, is that their contribution to resolving market failures may be higher: they might lead to more substantial gains, especially where children are targeted. Given the problems with developing market-based solutions via micro-insurance, there is a strong case for social protection initiatives in this area from an efficiency point of view, to complement contributions-based social insurance and micro-insurance initiatives.
- Conditions in cash transfers can also be used to enhance efficiency gains, such as if conditions target activities or investments with clear social externalities.
Social transfers and other social assistance can offer the productive assets the poor need to engage productively in the economy, and allow them to move out of dependence. Public works programmes can also build relevant public goods and infrastructure in local communities, contributing to growth. Well designed social insurance can plug gaps in private insurance markets and complement community-based systems. In particular, social protection can have strong effects in three areas:
- Both social insurance and social assistance can protect family investments in human capital, such as education and health, by ensuring that children stay in school or that nutrition does not suffer when a financial shock hits. (Losses in nutrition and education are often irreversible, especially in the case of very young children and serious crises, affecting the ability to contribute productively in adult life.)
- Social protection could be targeted to help the economic transformation become sufficiently labour intensive. Areas of importance would be support to migrants and migration, and inclusive growth in cities.
- Social protection could help make relatively poor adolescents more employable: economic transformation, and the inclusiveness of growth, depends on the extent to which labour markets can absorb these relatively low skilled workers. (Self-employment oriented micro business training with credit is likely to be beneficial to only a limited and well targeted group of potential entrepreneurs.)
In all these cases, standard cash transfers may be too blunt to have high impacts. More context-specific, ‘smarter’, social protection schemes may be needed, together with other policies related to health, education and employment skills formation.
