Publicly funded, noncontributory transfer programs targeted to the poor and vulnerable have a long history. Free food distribution was a feature of Egypt in the time of the Pharaohs and of Rome during its Imperial age. England had a succession of “Poor Laws” dating from the 16th century that provided assistance to those unable to work, while Germany inaugurated components of the modern welfare state in the late 19th century. These programs, typically referred to as social safety nets or social protection programs, are now ubiquitous in developed countries and are becoming more common in developing countries. They are, however, controversial.
While proponents of such programs see them as a means of ensuring that the benefits of economic growth are shared widely, critics see them as squandering scarce public resources and doing little to promote longer term development, while at the same time discouraging work and investment. Overlooked in this often polemical debate is the contribution that social safety nets can make in promoting economic growth. This instrumental dimension of social safety nets is the focus of this brief.
Growth-Promoting Social Safety Nets:
Social safety nets can take many forms: transfers of cash through welfare payments, child allowances, or pensions; in-kind transfers, such as food aid or school feeding programs; subsidies on goods purchased by the poor; unemployment insurance; and public works or workfare schemes. Recent innovations in social safety nets include both the means to improve targeting, such as proxy means testing, and the means to increase the impact of transfers on capital creation—for example, through conditional cash transfer (CCT) schemes and interventions that link recipients of cash or food payments to other government services and public works programs. Social protection programs are targeted toward the poor or those individuals who may become poor as a result of adverse shocks. This, together with their noncontributory dimension, distinguishes them from programs such as occupational pension schemes, which—while sharing certain similarities with social protection programs—base eligibility and benefit levels on employment and contribution history, rather than, say, current poverty status.
The provision of safety nets is motivated by both equity and efficiency concerns. In part, safety net programs arise from a desire to assist the least well-off members of society. Additionally, such programs seek to offset credit and insurance market failures, which leave poor households unable to make investments that would raise their future incomes or protect them from adverse events. Thus, in addition to the intrinsic value of such transfers in creating a fairer society, social protection programs have an instrumental function in promoting economic growth. This works through five channels:
1. social safety nets help create individual, household, and community assets;
2. they help households protect assets when shocks occur;
3. by helping households cope with risk, they permit households to use their existing resources more effectively;
4. they facilitate structural reforms to the economy; and
5. by reducing inequality, they directly raise growth rates.