The Investment Case For Social Protection – Methodological Challenges and Lessons Learnt

1. The Investment Case For Social Protection – Methodological Challenges and Lessons Learnt Franziska Gassmann Andrés Mideros Cécile Cherrier Pierre Mohnen UNICEF Office of Research, Florence, 18 March 2013

2. Outline • Why focusing on returns of SP investments? • Understanding social protection as economic investment • Methodological options and challenges • An example: RoR study for Cambodia • Are there lessons to be learnt? • Conclusions

3. The usual arguments for extending social protection rely on… • Human rights • Empirical evidence on impacts • Pilot projects • Affordability studies

4. ‘Social protection is a human right’ • Art.22 and 25 of Universal Declaration of Human Rights (UN 1948) • Social Protection Floor: “a set of basic social rights, services and facilities that the global citizen should enjoy” (ILO&WHO, 2009:4) • Social assistance as entitlement – state obligation (Cichon et al., 2011) • But: • Insufficient domestic resources to ensure all basic human rights at once • Governments set priorities, but not necessarily SP

5. ‘We know it works’ • Large international evidence base on positive impacts of social transfers on poverty, inequality and access to basic sercives (e.g., EPRI, 2010; Barrientos & Nino-Zarazua, 2010; Arnold et al., 2011) • But: • In the absence of a national social transfer program, evidence needs to be drawn from other countries • Effects depend on program design and implementation – no blue print

6. ‘Let’s try and prove it’ • Social transfer pilot projects to generate country-specific evidence • But: • Frequently donor-driven and not aligned with national policy priorities/policy-making process • Weakly evaluated • Questions about scalability and financial sustainability

7. ‘We know it’s affordable’ • Cost-feasibility studies have been mushrooming (e.g. ILO, HelpAge, Unicef) • ‘Prove’ that the provision of a basic package of social protection is affordable • But: • Does not take into account output, outcome or impact measures

8. Rationale for investment case • Prejudices frequently prevail, difficult to fight • Additional arguments are needed to move SP up the national development agendas • Demonstrate value for money • Analyze fiscal sustainability • Prove cost-effectiveness, capture multidimensional effects • Compare with alternative investments • Develop economic argument for social protection • Costs AND benefits • Short term AND long term • Direct AND indirect

9. Non-contributory social protection as economic investment • Paradigm shift: SP not just as a cost for the economy • Source of resilience in tough times • Support for growth and productivity in good times • Mechanism for social inclusion • SP and economic growth (Alderman&Yemtsov, 2012) • Building and protection human capital, productive assets • Enhancing community assets, infrastructure • Stabilizer of aggregate demand, improving social cohesion, making reforms feasible • Supported by international evidence (Barrientos, 2012)

10. Socio Economic Development Poverty alleviation Taxes Long run Environment Institutional framework, social cohesion and structural conditions Economic growth Public goods and services Equity Production Human capital Health, education, livelihoods Labour productivity Households’ disposable income Taxes Labour supply In-kind transfers Taxes Cash transfers Savings Insurance Non-contributory Social Protection Investment Taxes Physical capital Demand Consumption

11. Methodological challenges

12. Quantifying costs – the easy part? • Assumptions: • Number of beneficiaries • Transfer value • Administrative costs (hypothetical) • Tools: • Pension Calculator (HelpAge) (online, many countries) • Basic Social Protection Costing Tool (ILO) • Basic Social Protection Floor Costing Tool (ILO&UNICEF) • Used in Argentina, Madagascar, Senegal • Rapid Assessment Protocol (+) (ILO) • Used in El Salvador, Indonesia, Burkina Faso • Outputs: • Costs as % of GDP • Hypothetical impact on poverty headcount and gap (RAP+)

13. Quantifying benefits (1) • Frequently focus on one specific impact dictated by policy objective, data availability, modeling skills • Mathematical models: • Use international evidence on impact to estimate potential country-specific impact given specific program characteristics • Examples: • DFID business case: Nigeria, Pakistan, Gaza • MBB (WB and UNICEF): Ghana (edu), Nigeria (health) • AusAID: Bangladesh, Cambodia, PICs • Hodges: Mauritania • Limitations: • Impact of social protection programs cannot be generalized; depend on economic, social cultural context and capacity • Findings sensitive to underlying assumptions if context differs

14. Quantifying benefits (2) • Microsimulation models: • Ex-ante analysis of potential impact at micro-level • Based on national household survey data • Examples: • Many single country studies • ADePT: e.g., Senegal • Limitations: • Static simulation (only few dynamic models) • Focus on distributional effects (poverty, inequality) • Strong assumptions, such as perfect targeting • Exclude second-round effects • Other models: • Macro models • Focus at aggregate level • Cross-country analysis • Comupatble General Equilibrium (CGE) models

15. Comparing costs with benefits • Challenge: assign monetary value to benefits, impacts • Express benefits in terms of impact on economic growth • Neglects distributional issues • Economic rate of return: • Benefits: sum of distributional and behavioral income effects • Costs: costs of proposed SP package • Dynamic: aggregate effects over time to estimate long-term impact

16. RoR study Cambodia What are the economic returns of social protection in the mid- and long-term? • Partial approaches: • Cross country analysis. • Computable general equilibrium model. • Cost-(effectiveness/benefit) analysis. • Treatment effects. • Microsimulation (can be extended).

17. RoR study Cambodia – Model • RoR: relation between net benefits and costs • Data: CSES (2004 and 2009)  Cambodia • Microsimulation (steps): • Static (cost-effectiveness): changes on poverty and inequality (direct distributional effect) • Returns of human capital (education) at the household level • Behavioural (income) effects (probabilistic models) • School attendance (education) • Nutrition (health) • Labour (participation and supply) • Dynamic: 20 periods

18. RoR study Cambodia – Model Social protection Direct (distributional) effects Poverty and inequality Behavioural (income) effects Education (school attendance) Human capital Household consumption Health (underweight) Labour participation Return Labour productivity Economic performance

19. RoR study Cambodia – Policy • Total costs is around 1.6% of GDP (USD 166 million, 2009).

20. RoR study Cambodia – Behavioural effects I

21. RoR study Cambodia – Behavioural effects II Labour participation – Multinomial probit

22. RoR study Cambodia – Results

23. RoR study Cambodia – Results • Rate of return Effect on total household consumption through human capital accumulation, due to higher school attendance thanks to social transfers.

24. RoR study Cambodia – Final remarks • Any model is always a simplification of real life. • Effects, benefits and returns may be higher if complementary policies are also implemented. • Improving health and education coverage and quality. • Enhancing sanitation conditions. • Fostering economic productivity, formal labour market, industrialization, innovation and technical change.

25. RoR study Cambodia – Final remarks • Additional effects may increase benefits and RoR. • Behavioural (non-economic) effects due to SPI design. • Spillover effects and regional multiplier. • Institutional change and social cohesion. • Health status improvements (e.g. nutrition). • Financing aspects (taxation), administrative issues (inefficiency) and targeting errors may reduce RoR. • Specific SPI design (e.g. targeting, conditionality, payment mechanism) may affect RoR.

26. RoR study Cambodia – Final remarks • Investing in social protection promotes equitable economic growth. • Solving human capital constraints, and fostering economic development at the micro level. • A basic package of SPI for poor rural individuals in Cambodia has a RoR of between 12% and 15%, after 20 periods (years). It becomes positive after 12 periods (years). • Dynamic microsimulation provides a novel approach to analyse economic returns of social protection. • Modelling options depends on data constrains. • Costs and specific impacts has been estimated. The model can be used to study a gap regarding economic returns in the mid- and long- term.

27. The role of CBA in policy making • Instrument to support evidence-based policy making and mobilize financial resources • Enable dialogue with ‘money keepers’ • Speek the language they speek • Build confidence of social ministries • Examples: Mozambique, Senegal

28. Conditions for success • Analysis as integral part of policy dialogue • Needs to be followed up with in-country support • Timing: a crisis may trigger interest • Policy options to be defined in consultation with national stakeholders • Robust and transparent methodology

29. But… • Evidence on costs versus benefits or rates of return alone does not do the trick • Policy makers are often prejudiced and myopic • Extending social protection is path dependent, depends on local preferences and capacities • Political will and strong leadership remain pivotal (South Africa, Lesotho, Brazil) • Strong impact evidence is crucial to build political support (Latin America in general) • CBA needs to be used with caution, aware of the inherent risks • Narrow focus on poverty reduction • Fragmented approach to social protection • Less attention to development process • Distraction from political economy

30. Conclusions • Despite compelling evidence on the positive impacts of social protection, many governments are yet to be convinced • Treating social protection as investment helps establishing the link between costs and benefits, taking into account the time needed to earn the money back • Economic analyses such as CBA/RoR are only one component of policy decision-making • Positive social outcomes and human rights remain valid arguments • Political will remains decisive for the expansion of social protection  It all comes down to politics! • More research needed on the underlying motives/incentives/processes of countries that successfully introduced/expanded social protection