Social Protection in PERs

1. Social Protection in PERs PEAM course May 2006, Washington DC Margaret Grosh

2. What is Social Protection? • Definition in Bank’s SP strategy paper “SP as public interventions (i) to assist individuals, households, and communities better manage risk, and (ii) to provide support to the critically vulnerable” • Contrasts with traditional definition, as a group of public programs: pensions, labor market interventions, safety nets, and social care • New definition conceptual useful and clarifies trade-offs but causes some boundary issues in PERs

3. Conceptual definition leads to issues with respect to boundaries in treatment of SP in PERs • Traditional SP vs other sectors: SP chapters usually stick to traditional boundaries, social risk management framework can be used throughout report and other sectoral analysis viewed through that lens. • Public/private. A great deal of SRM is delivered through private mechanism. A PER cannot cover all private spending in detail, but must have a notion of it to draw appropriate conclusions about the public part. • What programs specifically? Fuzzy conceptual boundaries, fragmentation in institutional responsibility and budgets • PER vs fuller sector work:PER is selective and summary; fiscal issues predominate, institutional and service delivery systems usually the least treated

4. Summary of SP in PER Guidance Note: • Sector wide view • Very brief synopsis of poverty, risk and vulnerability • Overview of budget allocation, trends, processes* • Individual program analysis • Adequacy • Equity* • Efficiency* • Contribution to risk management* • Delivery mechanisms • Sustainability • Impact * Denotes issues selected for discussion in rest of presentation

5. Selected key issues:Budget Allocations Is spending on SP productive?significant ideological controversy • Traditional view: • redistribution justified by moral philosophy; • social protection as a cost, a luxury • Both taxes and transfers discourage work effort • New view: • SP as an investment • Disincentives in fact not so large as usually thought PERs often don’t touch this issue frontally

6. SP/SRM is worth financing because: Redistribution is valued • by moral code, • for immediate impact on poverty reduction and inequality. Half or more of poverty is transient, SP can help reduce that substantially. SP allows governments to make choices that support efficiency and growth • Safety nets can facilitate macroeconomic and structural changes in the economy, thereby allowing faster growth to occur, i.e. through more efficient policy choices for trade, industry, labor, etc. • Societies can use good social assistance programs to replace inefficient redistributive elements in other programs. • Safety nets can help temper inequality and reduce its costs. SP allows households to make choices that support independent earnings • Families that can't afford a bad year can't use the most effective earnings strategies. • SP helps people avoid coping strategies that perpetuate poverty. • Safety nets can act as springboards to greater self-sufficiency.

7. Social Assistance and Social Insurance as percent of GDP Source: Blank, Grosh, Hakim and Weigand 2006, OECD SOCX

8. What is right assignment of resources within sector? • No single right answer • Look at diagnostics on risk and vulnerability • Look at overall balance among programs (including outside SP sector) • Review individual programs’ performance

9. diagnostic process Some very summary information from poverty and risk and vulnerability assessments Then a look at what groups are protected from which risks by which programs, look for gaps and overlaps in program coverage

10. Balance among programs: Bulgaria

12. Program analysis • Will cover only selected issues in this presentation, more covered in guidance note

13. Managing risks – a tension between fiscal risks and risk protection • PERs very concerned with fiscal risk • Adequate SRM and SSN implies programs with “entitlement” access • Argentina’s Trabajar program vs Maharasthra’s Employment Guarantee Scheme • very rare in practice because of fiscal issue (and sometimes administrative constraints) • Even counter-cyclicity rare:in LAC for each 1% loss of GDP, the amount of targeted spending per poor person declined by 2% (de Ferranti, et al 2000) despite protection of budget share

14. Fiscal Sustainability in Pensions Brazil: Critical Social Security Issues, June 2000.

15. Efficiency example 1 – unit cost analysis Ethiopia PER: average cost per ton of food delivered in various safety net programs (excluding administration and program implementation costs): International Price $130 /mt. International Shipping : $ 50 Transport Djibouti-Regional center $ 65 Local distribution & transport: $ 40 Total cost: $285 Add in administration and even “free food” cost 3 birr/kg Benchmark: open market price of 1.5-2 birr/kg Implies that cash transfers could be more efficient. But would equivalent cash be made available? Is food available on these markets?

16. Efficiency example 2 – inference from basic design features • Ethiopia PER compares public works there with “best practice” and finds shortcomings: • Value of works likely to be sub-optimal because: • Non wage costs at most 20%, much lower than international experience for well done, diverse portfolio of works • Planning process on-off; separate from investment process • Food typically arrives during rainy season when works can’t be done; • Transfer gains likely to be sub-optimal because: • Can’t enforce work requirement (due to rainy season issue) so self-targeting element weak (though this does reduce issue of foregone earnings) • Transfer too low to affect material welfare, too irregular to affect risk planning • Solutions are institutional and being addressed since the PER

17. Equity analysis • At first blush seems easy, but some real technical issues, to be discussed in Schwarz’s and Tesliuc’s complementary presentation within this session • NB:. • Equity is important in all sectors • Judgments about SP sector are based on more than equity. • Methodology of equity analysis is within SP session because as this course is designed, each sectoral session includes a “public good” of methodology

18. Equity is still an issue – social assistance • Coady, Grosh, Hoddinott 2004 review 122 targeted transfer programs in 48 countries and find: • Moderate results on average: Mean outcome delivers one quarter more benefits to poor than would universal transfer • Very much better results in best programs: top ten deliver two to four times more benefits to poor than would universal transfer • Significant targeting failures: one quarter of “targeted” programs are regressive. • So lots of progress yet to make

19. Equity is still an issue – pensions Source: De Ferranti et al. 2004, Figure 9.9

20. Equity is still an issue – pensions • Mexico results not unusual • But is the comparison fair? • If payments are deferred compensation (earnings) then poverty targeted expenditures the wrong benchmark. • But there are still issues of equity across generations, genders, income levels, work histories because pensions plans almost always have some internal redistribution • Moreover pensions commonly receive subsidies from general revenue and so are a mix of transfer and deferred compensation

21. Summary of SP in PER Guidance Note: • Sector wide view • Very brief synopsis of poverty, risk and vulnerability • Overview of budget allocation, trends, processes* • Individual program analysis • Adequacy • Equity* • Efficiency* • Contribution to risk management* • Delivery mechanisms • Sustainability • Impact * Denotes issues selected for discussion in rest of presentation

22. Hallmarks of good analysis • Numbers clearly defined and sources given. • Uses benchmarks extensively(not just on expenditures but on inputs, prices, outputs, ratios among these) • Chooses benchmarks wisely(e.g. neighboring countries, countries of similar income, others the country wants to emulate; or adjusts for differences in demographics or poverty profile) • Contrasts trends and point in time as applicable • Conveys enough of the storyline and details to persuade reader of recommendations • Crafts together story from available sources and literature outside of PER.