Economic growth

Social protection contributes to inclusive economic growth in direct and indirect ways, at different levels (see Table 4). Of particular importance and where the evidence is strongest are individual- and household-level growth impacts as this promotes inclusive growth (Mathers & Slater, 2014: 3). There is some evidence of local economic effects, and while macro growth impacts are also beneficial, Mathers and Slater (2014: 3) caution that ‘decisions about social protection spending should primarily be made by assessing its impacts on poverty and vulnerability’.

The following sections look at various micro-meso-macro effects, except for employment impacts, which are presented in the ‘Employment‘ section.

Table 4. Social protection and economic growth framework

Source: Mathers and Slater (2014: 8), Department of Foreign Affairs, CC BY 3.0 AU licence.

Microeconomic growth (individual or household level)

As shown in Table 4, social protection can have individual and household impacts in five main ways (direct and indirect): preventing the loss of productive capital; accumulating productive assets; increasing innovation and risk taking in the livelihoods of poor households; increasing investment in human capital; and influencing labour force participation (Mathers & Slater, 2014: 10). For impacts on the labour force see Employment.

There is evidence of the positive impact of cash transfers on strategic livelihood choices, including increasing savings and livestock accumulation (Bastagli et al., 2016; Daidone et al., 2017: iv), but some findings are mixed. Bastagli et al. (2016) found that of 10 studies that looked at the effect of cash transfers on household savings, half found statistically significant increases in the share of households reporting savings (ranging from seven to 24 percentage points) or the amount of savings accumulated. Of eight studies reporting on household accumulation of agricultural productive assets for crop production, three found ‘a positive and significant impact’ while five found no significant impact (ibid.). Explanations include ‘behaviour influenced by strong programme labelling (money was to be spent for children) and the low value or unpredictability of the transfer’ (ibid.). There was some evidence that ‘female-headed households make greater productive investments than male-headed households’ (Hagan-Zanker et al., 2017: 1).

Other reviews of cash transfers in Africa have highlighted ‘promising results’ on asset accumulation (particularly livestock ownership) (Ralston et al., 2017: 3; Daidone et al., 2017). Ralston et al. (2017: 3) also find an average increase in earnings of 50% and an average increase in business ownership of 70%, interpreting from this finding that beneficiaries may use accumulated assets to improve their labour productivity and earnings. Other qualitative research from six African countries finds that ‘a small but predictable flow of cash improves strategic livelihood choices and stimulates productive investments, including through positive effects on beneficiary entry into risk-sharing arrangements and networks for economic collaboration’ (Banks et al., 2017: 299).

OECD (2019: 56–57) finds that scholarships for poor students and social pension also have positive effects on household food consumption and investments.

Ralston et al. (2017: 3) call for stronger evidence on resilience mechanisms, finding weakly significant impacts on monetary saving and insignificant impacts on negative coping strategies (the use of child labour or temporary low wage work). (For more on findings on child labour, see Poverty, inequality and vulnerability). Explanations include insufficient transfer size to eliminate negative coping behaviours, challenges in identifying results on these outcomes, and implementation factors such as payment irregularity (ibid.). Irregular payments can have a profoundly negative impact on both welfare and livelihoods, with ample evidence that late payments can worsen household economic security and prompt recourse to negative risk-coping mechanisms (Banks et al., 2017: 316).

Social protection can also contribute to economic growth by helping to increase human capital – through improving access to health care and education, improving food security and dietary diversity, and increasing income, thereby potentially increasing livelihood opportunities in the short term, and enhancing households’ productivity in the long term (UNDP, 2016: 19; Slater et al., 2014). For further information, see Education; Health; Nutrition; and Empowerment.

Local (or meso) economic growth (community level)

The theory is that social protection can help stimulate local economies through multiplier effects from increased local consumption and production, creation of productive community assets (most commonly through public works programmes), and improvement of local labour markets, through effects on supply, demand and cost of labour (e.g. by public works programmes increasing the demand for labour) (Mathers & Slater, 2014; Slater et al., 2014; FAO, 2017).

There is some evidence of multiplier effects (Mathers & Slater, 2014: 3). Thome et al. (2016: 2) find evidence of ‘significant spillovers, resulting in [cash transfer] income multipliers’ from seven unconditional cash transfers in sub-Saharan Africa. Applying a local economy-wide impact evaluation model, analysis identified nominal income multipliers ranging from 2.52 in Ethiopia (‘for every Birr transferred by the programme… up to 2.52 Birr in income can be generated for the local economy’) to 1.34 in Kenya (summarised in FAO, 2017: 4). The extent of cash transfer multiplier effects depend on whether the transfers are cash or in-kind and can be limited by the often very small size of transfers in many low-income countries (and in particular typical for public works programmes ‘where wages are often deliberately set low to facilitate self-targeting of only the poorest and for fear of inflation effects on local wages’) (Mathers & Slaters, 2014: 14).

There appears to be little evidence of cash transfers leading to local price inflation (with FAO and UNICEF including this as one of their myth-busters), although the Bastagli et al. (2016: 29) review finds that it is a possible unintended effect, ‘likely to be stronger where there are market constraints to respond to increased local demand’.

The evidence ‘is less clear on the local economic impact of [community] assets’ created by public works programmes (Mathers & Slater, 2014: 3).

Macroeconomic growth (national level)

The primary aims of social protection are to reduce poverty and vulnerability rather than to promote macro-level growth. There is limited evidence of the effects of transfers both in creating overall economic growth and in addressing inequality through redistributing resources (Alderman & Yemtsov, 2014; OECD, 2019).

While there are some macroeconomic studies that ‘show positive impacts in certain circumstances and how active social spending (programs with a productivity enhancing objective) more likely leads to increases in aggregate growth’, Mathers and Slater (2014: 19, emphasis added) highlight that ‘these studies do not provide certainty about the channels through which growth impacts occur and caution should be exercised in extrapolating findings to other contexts’.

From a cross-country regression analysis comparing inequality before and after taxes and transfers, Ostry et al. (2014: 7) find that ‘the combined direct and indirect effects of redistribution – including the growth effects of the resulting lower inequality – are, on average, pro-growth’. However, ‘the impact of social protection on aggregate economic growth in low-income contexts is likely insignificant’, possibly due to the relatively low level of social protection spending as well as the marginal share of national income held by poor people (Mathers & Slater, 2014: 16); ‘the low levels of both taxes and social spending limit the redistributive impact of fiscal policy in developing economies’ (IMF, 2014: 18). Moreover, redistributive fiscal policies need to be carefully designed to minimise efficiency costs in terms of effects on incentives to work and save (e.g. gradually phasing out cash transfer benefits as incomes rise) (ibid.: 22). See Poverty, inequality and vulnerability for more on social protection’s impact on inequality.

However, the overall economic impact of social protection investments remains insufficiently documented (OECD, 2019: 3).

Key texts

OECD. (2019). Can social protection be an engine for inclusive growth? (Development Centre Studies). Paris: OECD Publishing.

Daidone, S., Davis, B., Handa, S., & Winters, P. (2017). The household and individual-level economic impacts of cash transfer programmes in sub-Saharan Africa. Rome: FAO.
Results from seven rigorous impact evaluations of government-run unconditional social cash transfer programmes in sub-Saharan Africa (Ethiopia, Ghana, Kenya, Lesotho, Malawi, Zambia and Zimbabwe) show significant positive impacts on the livelihoods of beneficiary households. Most countries saw ‘a reduction in household participation in casual agricultural wage labour… an increased use of agricultural inputs… increases or changes in agricultural production… increased livestock accumulation… [and avoidance of] negative risk coping strategies… [and strengthened] informal social protection systems’ (p. iv).

Bastagli, F., Hagen-Zanker, J., Harman, L., Barca, V., Sturge, G., & Schmidt, T. (2016). Cash transfers: What does the evidence say? A rigorous review of programme impact and of the role of design and implementation features. London: ODI.

See summary in Poverty, inequality and vulnerability – Key texts.

Alderman, H., & Yemtsov, R. (2014). How can safety nets contribute to economic growth? The World Bank Economic Review, 28(1), 1–20.
How do social safety nets contribute to growth? This article offers four pathways: (i) enabling households to make better investments in their future and changing incentives for investment in human capital; (ii) managing risk; (iii) creating assets and household-level investments; and (iv) relaxing political constraints on policy. Growth alone is not a justification for implementing safety nets; this argument is secondary to poverty reduction and equity.

Mathers, N., & Slater, R. (2014). Social protection and growth: Research synthesis. Canberra: Department of Foreign Affairs and Trade (Australia).
This review identifies the ways in which social protection impacts on growth and productivity, assessing available evidence against a framework for the links between social protection and economic growth at household, local and national levels. Looking mainly at social assistance, but also social insurance and active labour market policies, the report concludes that ‘social protection is an important tool for promoting inclusive growth’ with ‘potential to contribute, if only marginally, to aggregate growth’ (p. 25).

Other resources

Animation: Cash transfers: Myths versus reality. (2017). (2m:27)