Social protection, redistribution and economic growth

Abstract

Social protection has conventionally been associated with redistribution and equity. This paper examines the effects of different types of social protection on economic growth. It looks at the possible effects on human capital formation, on physical investment and innovation, on the local economy and on the macroeconomy, discusses these effects in theory and reviews empirical evidence of such effects. It considers the widely varying impacts that different types of social protection can have on the distribution of incomes and on economic growth. The paper concludes that, in analysing, assessing and planning social protection, it is crucially important to consider the potential drawbacks – and the benefits.

Keywords:

• economic growth
• income distribution
• inequality and growth
• redistribution and growth
• social security
• South African income distribution

1. Introduction

This paper is concerned with the effects of social protection. Here the use of the term ‘social protection’ follows the United Nations Research Institute for Social Development definition:

As a key component of social policy, social protection is concerned with preventing, managing and overcoming situations that adversely affect people's wellbeing. It helps individuals maintain their living standard when confronted by contingencies such as illness, maternity, disability or old age; market risks, such as unemployment; as well as economic crises or natural disasters. (UNRISD, 2010:135)

The most obvious effect of social protection is that it redistributes income between members of the society. This may benefit those less well off, those exposed to certain contingencies or certain groups in society. Social protection schemes may also affect people's social and economic behaviour, which may in turn affect economic growth. These redistributional and growth effects may be thought of as, respectively, static and dynamic. Redistribution involves moving a fixed quantity of resources between people. If such redistribution affects economic growth, it influences the availability of resources and income levels in the future. Although redistribution has received the most attention, in the long run the effects on growth are most important for overall income levels, and differences in effects on growth at different income levels determine long-run distributional effects.

The relationship between the development of social security and economic development has been given little attention, whether in the social policy or the economic development literature. One notable exception is the work edited by Midgley & Tang (2009); in it, Midgley examines the concept and origin of social security and, drawing on his earlier work (Midgley, 1984), provides a typology or classification. The country case studies show the different ways in which social security has developed, or not, and how social security has been affected by and has affected economic development. The study is of pioneering importance in challenging the widely held assumption that social security impedes economic development. Midgley and Tang's approach is based on comparing national experiences. In this paper, the focus is on the processes or mechanics of the relationship between social protection and economic growth.

In discussing the distributional and growth effects of social protection, it is important to recognise that there is no one entity that is ‘social protection’. This may seem contradicted by recent reports from the OECD (2009) and the European Report on Development (2010) and major academic studies from Barrientos & Hulme (2008) and Ellis et al. (2009) – all of which have ‘social protection’ in their title. But the term ‘social protection’ is used, often loosely, to cover many different types of schemes. Clarity about what is under discussion is essential. It is also essential to consider costs as well as benefits. Redistribution involves some gains and some losses. Assuming that the cost can be met miraculously or from external sources is not at all helpful; every scheme has an opportunity cost.

The effects of social protection schemes depend on the social and economic context in which they operate: one size does not fit all. The objective here is to highlight and hopefully clarify some important issues that have been largely neglected in the past.

The paper proceeds as follows. Section 2 differentiates types of social protection, Section 3 describes a range of possible behavioural effects, Section 4 discusses theories of economic growth and considers how social protection may affect growth, Section 5 surveys empirical international evidence of the effects of social protection on growth, Section 6 discusses the redistributive effects and possible implications for economic growth of different types of social protection, and Section 7 concludes.

2. Types of social protection

Social protection in many industrialised economies has become frighteningly complex, requiring highly skilled advisers to advise claimants and undermining any sense of understanding and social solidarity supporting the social security system.

Most social protection falls into one of three types. These are:

•	Selective social assistance for the relief of poverty: Such assistance – often also called a safety net, a minimum income guarantee, a make-up level, an income top-up and many other names – is principally designed to relieve poverty. Negative income taxes and some tax credit schemes are also a form of social assistance. Income tax is usually paid by those with income above a certain level; in negative tax schemes, payments (or negative taxes) are made to those with incomes below certain levels. Such schemes are usually administered by tax authorities rather than social welfare agencies. For all these forms of social assistance eligibility is based on a test of income (and in some cases capital).
•	Social insurance: This form of social protection is usually for contingencies such as retirement, unemployment or sickness although it can be for other risks such as crop failure. Eligibility usually depends on contributions. It may be financed on a funded or a pay-as-you-go basis. It may involve some cross-subsidy to lower income groups, to those caring for children or to people living with disabilities.
•	Universal categorical benefits: These are benefits paid to people in certain circumstances without tests of income or capital. One type of universal benefit is a basic income grant (BIG), also known as a citizen's income or ‘demogrant’. It has been advocated by some as a replacement for all other social protection arrangements that would provide all citizens with a basic income, without any test of means, paid for out of taxation. Other universal benefits are restricted to only certain categories of people – including children, pensioners or people living with disabilities.

These three benefit types do not exhaust the range of social protection. Benefits can be both categorical and means-tested, as with the South African Child Support Grant. Social insurance can operate alongside social assistance, as occurs in the UK. Partial basic income grants have been advocated subject to tests of eligibility. Finance can come from diverse sources in different proportions with different degrees of progressivity. Any redistributional policy can only be assessed by taking into account both who benefits and who pays.

There are other important features that characterise and distinguish other aspects of social protection. These include:

•	Conditionality: How far benefits depend on meeting conditions relating to work, such as job search behaviour or accepting reasonable employment, to educational attendance of children, to health checks or other requirements.
•	The form of benefits: Whether they are paid in cash, food, food stamps or other ways.
•	The payment of benefits: Whether they are paid monthly or weekly and whether they are paid to heads of household, wage earners, mothers or other people.
•	The administrative structure: Whether benefits are assessed according to national or local rules, administered by government or agencies, what languages they are administered in, the accessibility of offices, the rights to obtain advice or appeal and many other important administrative aspects.

Here only the variations in types and finance of social protection are considered since these are most directly relevant to redistribution and economic growth.

3. Behavioural effects

This section sets out the range of possible effects – sometimes referred to as incentive effects – that social protection policies have on individuals, households, the wider society, the economy and the nation. In later sections these possible effects are discussed in relation to the different types of social protection and the different means of finance.

Claims about possible negative behavioural effects, which have been given considerable prominence in the discipline of economics, include the assertion that social protection may discourage private protection by the individual or family, thus discouraging work effort, saving and family support. Moreover, if the financing of social protection requires higher taxation or contributions it may discourage work effort or saving.

Behavioural effects may be negative or positive, depending on wider considerations. Such effects are:

•	Effects on household formation and household separation: Social protection may help individuals to live together with others or on their own, or hinder them from doing so.
•	Effects on child-bearing: Child support grants could encourage more births, yet if families become more prosperous as a result, they may decide to have fewer children.
•	Effects on survival and mortality: Social protection may enable more people to survive famine, yet if the population grows as a result, income per head may be lower, leading to increased mortality rates.
•	Effects on family and community provision: With more individual protection, families and the wider community may be encouraged to make greater provision without the fear of having to take on total responsibility; on the other hand, they may think less is needed from them and reduce their support.

Some behavioural effects are likely to be positive. Social protection may:

•	Promote private consumption, for example improving nutrition.
•	Promote investment in human capital and increase the return on past investment in human capital through education and health programmes.
•	Enable people to maintain contact with the labour market, which they may not be able to do if they become destitute.
•	Promote the local economy.
•	Maintain employment and the level of aggregate demand in the economy and keep down unemployment. Social protection may perform the role of automatic economic stabiliser.
•	Promote confidence in the future and thereby encourage savings and investment.
•	Promote social cohesion and stability.
•	Promote trust in the government.
•	Encourage growth in the economy as a result of reducing poverty and inequality.

To summarise, social protection may have negative or positive (or neutral) behavioural effects. A balanced assessment of behavioural effects is crucial. These effects clearly depend on the form of social protection.

4. Social protection and economic growth in theory

The relationship between social protection and economic growth has received remarkably little attention from social scientists. For example, the important recent books on social protection by Barrientos & Hulme (2008) and Ellis et al. (2009) barely mention possible effects on growth.

If social protection simply achieves a redistribution of income between individuals and households and has no effect on behaviour in the short or long run, it may reduce poverty and inequality yet will have no effect at all on economic growth. However, there can be little doubt that if social protection involves a substantial redistribution of income it has a significant effect on economic growth.

The influence of social protection on economic growth cannot be discussed without first examining what is meant by economic growth and how it is to be measured. Conventionally, economic growth is measured by estimating the change in aggregate national production or income and adjusting for price changes (and adjusting for population change to obtain per capita growth). This method measures aggregate economic growth. A very different measure is to take all the income units and measure their change of income and then take the average of these changes. If all units experienced the same growth, the aggregate and average growth rates would of course be the same. In a very unequal economy such as that of South Africa, it is possible for income to increase in the top decile but to fall in all other deciles and still record positive growth overall. If, however, growth was pro-poor, i.e. higher for the poor, the average growth rate would exceed the aggregate growth rate. It is therefore important to consider possible effects on economic growth not only in aggregate but also at different income levels.

Theories of economic growth have changed markedly over time. In the late 1940s and 1950s, the Harrod-Domar model focused on the rate of saving and capital accumulation. In the 1960s and 1970s, Solow stressed the importance of technical progress and Kaldor emphasised the importance of investment for technical progress. In the 1980s and 1990s, Romer and others pointed to the importance of endogenous growth, with technical advancement coming from people developing ideas, experimenting and looking for niche markets; there are externalities from new ideas and techniques.

All these theories are relevant to the discussion of how social protection could affect economic growth. It may also be useful to distinguish five types of capital that are relevant to economic growth: physical, financial, human, social, and natural or environmental. With the possible exception of the last, all these types of capital could be affected by social protection.

How then can social protection affect economic growth?

One answer is that it will inevitably reduce economic growth. Economics is sometimes known as ‘the dismal science’. Such is the dominance of free market ideology in most economists' thinking that any intervention in the market, including social protection, is assumed to be potentially damaging and to have only one possible effect, and that is to reduce the rate of economic growth. The greater the intervention, the more dire the effect. Such an assumption, or belief system, is rarely thought to need any empirical justification. Where justification is offered, it is often by reference to massively interventionist systems such as the ‘iron rice bowl’ system of pre-reform China in which social equalisation was imposed, together with rigid central planning of production, with negative effects on economic growth. Yet evidence from such extremes tells us nothing about the effects of more moderate and practical attempts at relieving poverty or reducing inequality.

In essence, social protection could:

•	Protect and encourage human capital formation.
•	Encourage investment and innovation.
•	Promote the local economy and make use of local knowledge.
•	Have positive effects on the society and economy.

4.1 The protection and encouragement of human capital formation

At the extreme, social protection keeps people alive. When a person dies their education and skills die with them. As John Donne wrote, ‘Any man's death diminishes me’. Without adequate income a child's education may be interrupted, a curable disease may be left untreated. Social protection could complement human capital formation and help preserve it. The adage ‘Give a man a fish and feed him for a day. Teach a man to fish and feed him for a lifetime’ is simple and appealing. It suggests education should take absolute priority over social protection. The reality is much more complex; feeding children may be a prerequisite for improving education.

4.2 Encouragement of investment and innovation

Whether struggling to feed themselves and their families or providing shelter, the poor are engaged in complex investment decisions – what to plant and when, whether to raise a goat or some chickens, whether to spend time rebuilding mud walls, whether to spend money acquiring a tin roof. When consumption is barely adequate for subsistence, reducing it further in order to invest is hard. Investment decisions made by the poor are critical. Far more depends on their investment decisions than on those of the wealthy.

Increasing income security may encourage risk-taking and promote investment in physical and human capital. Those on the lower income levels risk actual starvation if they make risky investments. Those on the higher income levels merely have to wait before replacing their car or manage without a second home. When those on the lower income levels are protected, their ability to invest – even in just the basics such as tools, seeds or a bicycle – is increased. Further, it is the poorest for whom the marginal efficiency of capital (the return on an investment) is likely to be the highest.

This can be illustrated with a simple example. Consider a possible investment in, say, a new variety of seed. The investment has a 90% probability of success (increasing income by half) and a 10% probability of failure (that income will fall by half). Table 1 shows the effects on A and B, who have respective initial incomes of 100 and 200 each. The average effect is the effect on income adjusted for the probabilities of gains and losses – in this case an attractive 40% gain on average. If A relies totally on the crop produced by this new seed variety, however, and the amount needed for survival is 60, then using the new seed involves a 10% risk of starving to death – hardly an attractive investment. If a social protection scheme boosts A's income by 10, the downside risk is no longer starvation and the innovation is far more likely to be adopted.

Table 1: Risk and investment

		Income
	Initial income	Failure	Success	Average income
A	100	50	150	140
B	200	100	300	280
A + social protection	100 + 10	60	160	150

Risks are inevitable for all. But, as Drèze & Sen (1991:3) write:

The lives of billions of people are not merely nasty, brutish and short, they are also full of uncertain horrors. An epidemic can wipe out a community, a famine can decimate a nation, unemployment can plunge masses into extreme deprivation, and insecurity in general plagues a large part of mankind with savage persistence.

The poorer a person is, the worse the consequences of adverse events. By reducing the possible adverse consequences of risky investment behaviour, social protection can encourage innovation and thereby promote economic growth.

4.3 Promoting the local economy and using local knowledge

Social protection allows people to spend money on what they want, and since their desires are based on local knowledge, their spending could aid the local economy with local multiplier effects. Providing social protection to the poorest is most likely to have the highest local multiplier effects as extra income is spent on local products produced by other low income earners. By contrast, many interventions designed to help the poor consist of doing things for the poor, to the detriment of the local economy. The distribution of international food aid for example generally undermines local agriculture. Teachers, doctors and other professionals who live in the more prosperous urban areas and provide their services in rural areas do not boost the local economy in the process. Yet this is an inevitable consequence of the top-down provision of services.

Injecting spending power into poorer areas has a number of benefits including the real possibility of a multiplier effect, which could eventually culminate in a higher level of prosperity for the community and greater transparency. As Bryden (2010:253–4) writes:

[T]here is a general issue of the gap between economic power and political democracy which applies at all levels of society and government, always made worse by inequality between citizens in income, wealth and education. With any given pattern of material inequality, the mechanisms of control at the local level are potentially more effective and less disastrous, since they are often more transparent and subject to scrutiny.

4.4 Macro effects

Poverty and inequality can undermine social cohesion and social stability. Lack of economic demand can lead to unemployment and economic depression. Responding to social needs through social protection can increase trust in and support for the government. The promotion of social justice can boost general confidence in the future and, as a result, investment in the economy and in the social fabric may increase. Through all these routes, social protection can encourage economic growth.

5. Evidence of the effects of social protection on economic growth

In theory, then, social protection could have positive consequences for economic growth, particularly in poor communities, and these benefits could outweigh the adverse effects predicted by many economists. But of course what really matters is what happens in practice. While empirical evidence to substantiate likely benefits is limited, research shows that there are indeed some positive connections. When considering the positive connections discussed below, it needs to be kept in mind, however, that generalisation about social protection is dangerous, as different types can have very different consequences and what seems effective in one context may not necessarily be effective in another.

5.1 Human capital

The most obvious effect of extra income is on food intake:

Not surprisingly, if poor households receive extra income, they increase their food expenditure and calorie consumption significantly. Empirical evidence – for example, for Bolivia, Brazil, Chile, Côte d'Ivoire, Ghana, India, Indonesia, Pakistan, Philippines, Malaysia, Nicaragua and Peru – also indicates the positive effects of family income change on child schooling. (Ranis et al., 2000:198)

How extra income is spent depends on the recipient of this income:

Where women control cash income, it appears that expenditure patterns are geared relatively more toward Human Development inputs, such as food and education. For example, among Gambian households, the larger the proportion of food under women's control, the larger household calorie consumption. (Ranis et al., 2000:198)

In South Africa, it was found that:

Over a quarter of Black South African children under age 5 live with a pension recipient. … pensions received by women had a large impact on the anthropometric status of girls …, but little effect on that of boys. In contrast [there was no] similar effect for pensions received by men. (Duflo, 2000:i)

A recent study of the impact of the South African Child Support Grant found that:

Early life receipt of the CSG (in the first two years of life) … improves height-for age scores for children whose mothers have more than eight grades of schooling. Since children's cognitive development depends on receiving appropriate nutrition in the first few years of life, this result provides important evidence of the CSG's role as an investment in human capabilities – a critical determinant of multi-dimensional poverty reduction … Children who enrolled in the CSG at birth completed significantly more grades of schooling than children who were enrolled at age six, and received higher scores on a math test … Analysis of adolescent risky behaviours provides evidence of the CSG's impact in significantly reducing six main risky behaviours – sexual activity, pregnancy, alcohol use, drug use, criminal activity and gang membership. (DSD, SASSA & UNICEF, 2012:iii–iv)

When looking at the effects of social grants on human capital, most studies have focused on conditional cash transfers (CCTs), where the social protection is granted subject to the existence of certain human capital related behavioural aspects. Bastagli (2010:9–10) provides a comprehensive summary of these studies, with a particular focus on Latin America, where CCTs were developed:

Studies show that, in some countries, CCTs improved intermediate education and health indicators in terms of service utilisation. … CCTs have been successful in increasing rates of school enrolment and attendance and in reducing dropout rates. In Mexico, PROGRESA [a government social assistance programme] led to increases in enrolment in secondary school, reductions in repetition and dropout rates in primary and secondary school and in years of schooling completed. In Nicaragua … [CCTs] led to an increase in school enrolment of 13 percentage points. Impacts on school enrolment in both countries are higher for poorer children, suggesting that CCTs help reduce inequalities, beyond income measures. However, there is no evidence of significant CCT effects on learning. For Mexico … longer exposure to Progresa/ Oportunidades has a positive impact on grades of schooling attained, but no effects on achievement tests.

CCTs have led to improvements in health care service use. Studies reveal positive effects on the use of preventive infant care, check-ups during pregnancy, after birth and in early childhood.

It is not always clear whether the effects of CCTs can be ascribed to the extra income or to the conditions that need to be in place in order for the transfers to be made. However, the laxity with which the conditions are often enforced does indicate that the effects can largely be ascribed to the extra income. As Bastagli (2010:9) writes:

The monitoring of conditionalities, involving the regular collection and transmission of information on beneficiary behaviour, has not been consistently implemented as envisaged by programme regulation … In practice, responses to non-compliance in some countries were not implemented or were only gradually administered as regular monitoring was stepped up. In Brazil, the first cancellation of Bolsa Familia benefits as a result of conditionality non-compliance took place in 2007, that is, four years after the launch of the programme.

5.2 Investment

There is a large amount of literature on the impact of risk on the economic behaviour of low income households. The OECD's explanation (2009:21) is perhaps most clear:

In order to reduce their vulnerability to unmanageable risks poor households often engage in low productivity and low profitability economic activities, only because they are also less risky than high productivity/ profitability alternatives. For example, poor farmers may adopt safer but lower yielding crop varieties, helping prevent a slide into absolute destitution but also foreclosing promising opportunities to break free from poverty … As a result, vulnerability to poverty is a major brake on human and economic development. In particular, lack of reliable risk management mechanisms is a major barrier to contributions by the poor to the growth process.

5.3 Local economy

A study of a pilot basic income grant scheme in Namibia showed that:

Income has risen in the community since the introduction of the BIG by more than the amount of the grants. There is strong evidence that more people are now able to engage in more productive activities and that the BIG fosters local economic growth and development. Several small enterprises started in [the central Namibian village of] Otjivero, making use of the BIG money being spent in the community. (Basic Income Grant Coalition, 2008:10)

By contrast, official development assistance has been criticised for focusing on the urban and industrial sectors, thereby increasing economic inequality between urban and rural areas. Food aid from overseas may undermine local farmers.

The great variety of agricultural conditions means that generalisations made by experts from distant cities or from abroad may be inappropriate. As Johnston wrote (in Riddell, 1987:240):

Given the complexity of the issues of agricultural development and the lack of knowledge concerning the distinctive and extremely heterogeneous characteristics of African agriculture, it is important to recognize that ignorance and uncertainty with respect to the design and implementation of agricultural strategies are unavoidable and serious handicaps.

While this ‘negative’ evidence of the limitations of external support does not prove that local knowledge is superior, it certainly indicates that social protection channelled through the local economy may be of greater benefit than external assistance. A Department for International Development review of cash transfers cited the following evidence:

In Ethiopia, 15 percent of participants in the Productive Safety Net Programme … used their transfers to invest in farming, and 8 percent purchased livestock. In Zambia, the Kalomo Social Cash Transfer Scheme led to an increase in the ownership of goats from 8.5 percent of households to 41.7 percent. It also led to four times more households engaging in investment activity, and a doubling of the amounts invested. In Malawi, a study of the Dowa Emergency Cash Transfer … programme found economic multiplier impacts exceeding two kwacha for every kwacha disbursed. In Paraguay, CCT beneficiary households invested between 45 and 50 percent more in agricultural production. The programme also increased the probability that households would acquire livestock by 6 percent. In Mexico, on average 12 percent of transfers from the Progresa/ Oportunidades programme were invested in productive activities such as microenterprises and agriculture. Average rates of return were 18 percent. The transfers allowed households to overcome credit constraints. The secure income may have made them more willing to take on riskier (but potentially more rewarding) investments. (DFID, 2011:36)

5.4 Macro effects

There is much evidence that inequality – which social protection tends to reduce – is harmful to economic growth. As Ranis et al. (2000:203) argue:

Recent empirical evidence suggests that the distribution of assets and income has an effect on economic growth, with a more equal distribution favouring higher rates of growth … [A]n unequal distribution of income may be associated with greater political and economic instability, more likely to interrupt economic progress.

Another review of the evidence concludes:

Macro-level studies … provide robust evidence that initial income inequality and subsequent growth are inversely related, and that better income and wealth distribution helps growth. (Mkandawire, 2004:9)

But this evidence is not undisputed. A meta-analysis by De Dominicis et al. of 22 studies containing 254 estimates of the link between economic growth and inequality, as measured by the Gini coefficient, concludes that:

In the empirical literature, the majority of cross-sectional studies have found a negative correlation between income inequality and growth. However, the negative effect disappears when the models are estimated using panel datasets and associated estimation techniques. (De Dominicis et al., 2006:21)

There is a further problem in that causation may run in two directions – inequality can affect growth, but growth can affect inequality.

It is almost impossible to say with certainty how social protection affects trust in government, social stability and general confidence in the future – all factors that affect economic growth. What can be said, going on the experience of industrialised nations, is that some degree of social equity is essential for social, economic and political stability, which in turn has formed the basis of economic growth. Social protection has been the principal means of achieving this equity. Without social protection, the political ramifications of unabated poverty would have severely curtailed the development of modern industrialised economies; social amelioration has been central to political legitimation. Yet separating social protection from the many other factors involved in estimating its precise contribution is probably impossible and has certainly never been achieved.

6. Types of social protection and their potential effects

It was stated in the Introduction that generalisations about ‘social protection’ are almost entirely devoid of meaning and that costs, or financing, must be considered alongside benefits. This section reviews the different types of social protection and clarifies the issues they raise for redistribution and economic growth. The types are those outlined in Section 2, although they cover many variants.

Social assistance policies can be divided into two broad categories:

•	Safety net or minimum income schemes: These schemes bring the income up to some minimum, with a 100% withdrawal or tax rate – i.e. those with zero income receive the minimum and those with the minimum from earnings or other sources receive zero.
•	Tapered or negative income tax type schemes: Those who earn some income retain a portion of this, often 50%, until the benefit is tapered to zero.

Social insurance policies are generally based on contributions and confined to those in the formal, waged economy. The contingencies covered have in most countries been old age, unemployment and sickness.

Universal categorical benefits can be divided into two principal types:

•	Those paid to all, such as a basic income grant.
•	Those paid only to certain categories of people, such as all children or all people over a certain age.

How then do the redistributive effects and possible behavioural and economic growth consequences of these types of social protection differ? This depends, of course, on how the social protection is financed; here it is assumed that it is financed out of taxation.

If behavioural effects are not taken into account, there is no doubt that targeted social assistance policies – safety net and to a lesser extent tapered or negative income tax schemes – are the most effective means of tackling poverty and reducing inequality. Social insurance, if confined to those in formal employment, is likely to exclude the majority of southern Africa's poorest citizens and is therefore extremely ineffective as a means of tackling poverty. Universal categorical benefits are redistributive providing they are paid for only by those in the highest income levels. Since children or older people may be significantly worse off than the general population, benefits targeted at them may be more redistributive.

In terms of behavioural effects and impact on economic growth, the different types of social protection are likely to have hugely different impacts.

Social assistance policies lead to strong disincentive effects for those directly involved. With the most targeted scheme (safety net policies), it makes no difference to net income whether original income is at the minimum level or is zero. There is, in effect, a 100% tax rate on any earnings up to the minimum level. With a tapered, negative tax scheme the tax rate is 50%. Thus, inevitably, schemes of this type will have major effects on behaviour. If, as is likely, work effort is reduced, economic growth will be reduced over the long term.

Social insurance schemes are essentially redistributive between stages of the life-cycle, between the employed and the unemployed, and between the healthy and the sick. There are no clear-cut or predictable effects on work effort or economic growth.

Universal categorical benefits have no dramatic incentive effects on the recipients, but the taxes levied on them can have some effects.

Overall, the social protection policies that seem most likely to be effective in tackling poverty while encouraging positive effects on human capital formation, investment and the local economy are universal categorical benefits focused on categories whose members are most likely to be poor; these universal categorical benefits policies should be funded by progressive taxation.

7. Conclusions

‘Social protection’ can mean many things. It can help poor people or it can benefit prosperous people. It can accelerate economic growth or it can destroy incentives and discourage growth. It has been argued that it can result in very different redistributive effects and that the implementation of social protection can have very different consequences for economic growth.

It might, therefore, be helpful if the term ‘social protection’ was never used again and, instead, specific types of schemes were clearly described – but this is not likely to happen. It would certainly be better if at all times schemes were presented as redistributive, with some gaining and some losing. And, most important of all, the behavioural effects need to be considered.

It has been argued that some types of social protection have positive behavioural effects that promote economic growth. The ready, and facile, assumption that has long been the conventional wisdom in the discipline of economics – that any form of social protection undermines the ‘animal spirits’ of the free market and damages economic growth – lacks any serious foundation. On the other hand, to assume that just any form of social protection is good is equally unjustifiable. The primary purposes of social protection have always been, and must remain, to reduce poverty, to relieve those suffering most severely from ‘the slings and arrows of outrageous fortune’ and create a more just society. Social protection has not been, and should not be, conceived of as primarily a policy to promote economic growth. Yet in the long run the dynamic effect that social protection has on economic growth – and the disaggregated effects on the growth of incomes of different groups – is as crucial to social justice as the more immediate redistributive effect.

This conclusion is not new, nor is it sufficient for social protection, or indeed any social policy, to be adopted. As Mkandawire (2004:9) has written:

[R]ecognition of the transformative and productivity-enhancing quality of measures that contribute to social development does not necessarily lead to their adoption, not even in democratic political settings where numbers would tend to favour the poor. Even the widespread recognition of ‘social capital’ has not been sufficient to place social policy at the core of development policies.

Why do ‘social’ policies continue to be seen as luxuries – desirable if and when they can be afforded – but not priorities or fundamental to economic performance? Few central bankers, economics ministers or professional economists show much interest in social protection. (John Maynard Keynes, as distinguished an economist as any in the last century, was one of the few who did.) There are four possible reasons. First, there is the mystique of the market and the implication that whatever distribution results from it must be for the best and that any interference will be damaging. Second, there is a prevalent view that social protection is only concerned with social ‘casualties’, the ‘losers’ and ‘also-rans’ in the economic race. Third, there is the suspicion that social protection is subverted or abused in practice. Fourth, there is the top-down detachment of the prosperous: the business community, economists and politicians who do not think the economic life of the poor is as important as theirs. Whatever the reasons for neglecting the economic importance of social protection, this paper has sought to show that such neglect is unjustified, indeed wholly wrong.

It does not follow that any form of social protection is right or good. As discussed in Section 6, different forms of social protection have entirely different effects on poverty and inequality and are likely to have very different effects on economic growth. What remains true is that there is considerable uncertainty about the effects of social protection, particularly its effects on economic growth. Although much evidence has been cited on the possible positive effects of certain types of social protection, this evidence cannot be transposed across time and place to predict future effects with any confidence. What this suggests is the need to experiment and to evaluate such experiments, in order to learn about actual effects on redistribution and on economic growth. Without experiments, separating the effects of social protection from all the other changes that occur in an economy is almost impossible. Yet experiments are expensive and difficult – particularly because many think that social protection, if it is to be fair and socially just, must be available to all. However, since, as is argued here, the effects of social protection on economic growth are uncertain, there is a real need to experiment and learn. In the long run that will make the greatest contribution to fairness and social justice.

If priority is given to targeting any social protection at the poorest, as social assistance schemes do, then this inevitably reduces incentives to individual effort – and can destroy them altogether. Thus concentrating social protection only on the poorest may superficially appear to be the fairest policy, but in the long run, through the effects on incentives and on economic growth, it is almost certainly a misguided polity. Equally, concentrating social insurance on those with stable, formal employment is likely to be of little help to most of the poor. Thus basing social protection on either income testing or insurance principles seems an unproductive route for progress. In southern Africa, universal categorical benefits appear to be the most promising basis for progress, with a focus on children probably being the most effective way of tackling poverty.

In the last few years, colossal sums have been taken from the public purse to bail out banks in many countries around the world; this is a form of social protection for the wealthiest in society that some see as robbery by the banks. How far the bail-out was necessary and desirable is beyond the scope of this paper. But if there is a case for protecting banks, how much stronger is the case for developing social protection as a central component of a more cohesive and faster-growing economy?

On the basis of both economic theory and the available evidence, the importance of social protection for both redistribution and economic growth means that it should be central not only to social but also to economic policy. The contribution social protection can make to economic growth is crucial.