Safety nets pay

The recommendations made in this week's European Report on Development, drafted by the Florence-based European University Institute in Florence and funded by the European Commission and some European Union member states, will surprise few experts.

What is remarkable about this latest report is how clearly its authors, most of whom are economists, advocate stronger government engagement in social policies - even in the low-income countries of sub-Saharan Africa. Basic social protection schemes, the authors suggest, could contribute to growth and poverty reduction, and assist developing countries in reaching the Millennium Development Goals.

The report draws on recent research that highlights the importance of social protection to the economic and political development of countries. People without access to a social safety net risk falling (even deeper) into poverty when faced with a shock like illness or a bad harvest. They may then have to turn to savings, sell livestock or other assets or send their children to work rather than school in order to finance their daily needs. In this way, they lose means of livelihoods that might otherwise help them to establish at least a modest existence on their own.

More seriously, households without social protection tend to shy away from investing savings at the outset, instead hoarding income to stay liquid and to prepare for a possible loss of future income or unexpected expenditures. Empirical studies suggest that families, and especially those who work in the informal sector, are more likely to invest when they have access to basic social protection schemes. Such investment promotes economic growth precisely where it is most likely to help reduce poverty.

Finally, social protection schemes contribute to political stability. By reducing poverty and economic insecurity, they lower the chances that a people will resort to violence to achieve political aims.

Above all, though, such schemes show citizens that the state feels responsible and cares for them. Many studies point out that, where public social protection schemes exist, citizens identify more closely with the state and show a willingness to fulfill their obligations to the community.

So basic social protection helps not only to reduce poverty but also acts as insurance for business activities and the material basis of a social contract accepted by every citizen.

Many will ask how low-income countries can be expected to finance social protection schemes - and rightly so. It is rarely the case that the majority of a population is covered by social protection systems that the members themselves finance through contributions - social and private insurance schemes and community-based mutual insurance associations, for instance. This is because, in low-income countries especially, contributions to such schemes are too high for many people. At the same time, the idea of social transfer schemes financed by the state from tax revenues is often rejected on the grounds that governments in low-income countries do not enjoy wide enough budget margins to be able to fund such schemes.

Yet this year's European Report on Development (ERD) reflects a turning point in the academic debate. Even low-income countries that cannot afford comprehensive social protection for all their citizens can find satisfactory solutions for particularly vulnerable groups. For example Lesotho, among other African countries, has created a tax-financed system that grants a modest flat pension to everybody over a certain age. Although Lesotho is a poor country, the program costs less than two percent of gross national income, and in many households it benefits not only the elderly but also their student grandchildren who want to lay better foundations for their later working lives.

Similarly, Ethiopia has developed a program that provides poor families jobs in rural infrastructure construction. The International Labor Organization estimates that the total cost of establishing both of these programs as well as an unconditional cash transfer program for orphans would not exceed six percent of national income in any sub-Saharan African country.

Unfortunately, the 2010 ERD does not explain how and by whom social protection is to be organized where the state is unwilling or unable to do so. In such cases, social protection can be provided only by non-governmental actors through, for example, micro-insurance schemes. The ERD restricts the definition of social protection to action conducted by the state, and so does not consider this course of action. Where efficient government does not exist, self-help in the shape of, say, mutual insurance continues to be the only way out. This is now true of a quarter to a half of all countries in sub-Saharan Africa, as noted in last year's ERD.

This column reflects the opinions of the author.

Dr Markus Loewe is an economist at the Competitiveness and Social Development Department of the Bonn-based think tank Deutsches Institut fuer Entwicklungspolitik, the German Development Institute.

The German Development Institute is one of the leading think tanks for development policy worldwide. The Institute draws together the knowledge of development research available worldwide, dedicating its work to key issues facing the future of development policy. The unique research profile of the Institute is the result of the cooperation between research, consulting and professional training. The Institute is building bridges between theory and practice and works within international research networks.

Author: Markus Loewe
Editor: Sophie Tarr