Creating Fiscal Space for Social Protection Programs in Asia

Senior citizens in rural Mongolia.
Senior citizens in rural Mongolia.

By Sri Wening Handayani

Countries in developing Asia can extend basic and robust levels of social protection to the “missing middle,” but whether there’s enough political to do so is another matter.

In Asia, the share of people not covered by any type of social protection programs ranges from 50 to 90% of national populations. These are the so-called “missing middle” that work in the informal economy, and belong neither to the poorest of the poor who may receive social assistance, nor to those employed in the formal sector who are covered by social insurance.

Recent studies indicate that total public social expenditure as a percentage of gross domestic product (GDP) in Asia ranges between 1.2% in Indonesia and 13.2% in Mongolia, with the regional average at 5.2% if we include developed economies. Roughly about three-quarters of total social protection expenditure in Asia is devoted to social insurance with the bulk allocated to pensions for formal sector workers.

The wide range of spending rates reflects the diverse social and economic histories of the countries in the region. Azerbaijan, Mongolia, and Uzbekistan (all of which inherited Soviet socialist systems) spend over 6% of GDP on social protection programs, while the People’s Republic of China (PRC), the Republic of Korea, and Thailand allocate between 4.4% and 7.5%, and South Asia spends less than 3%, compared to an average 22% for OECD countries.

The Republic of Korea has comprehensive social protection programs—about 7.5% of GDP)—and the Korean experience shows that  an increase in spending of 2-3% of GDP, can close major gaps in providing social protection for the “missing middle.”

Despite overall low levels of social protection spending (except in countries that inherited socialist social protection systems) and the wide range of social protection expenditure among countries with the same level of per capita GDP, there is definitely scope to include the “missing middle” in existing social insurance schemes. How? By finding fiscal space for more social spending.

Evidence from several countries shows that fiscal space for new social protection expenditure can be extended without detriment to economic growth. Additional revenue is required to finance substantial social protection for all citizens without crowding out the financing of other essential government services.

One way to do this is by increasing tax rates, introducing new taxes, broadening the tax base, and improving tax collection.

Historically, most countries in Asia have low tax collection. To address this problem, a 2011 IMF report recommends strengthening the tax administration system, including tax audits and enforcement, to reduce inefficiencies in tax collection. According to the report, the average difference between amount of taxes collected and the amount that should be collected when all tax rates were perfectly applied to the full tax base in the 10 Asian countries analyzed (Armenia, Bangladesh, PRC, India, Indonesia, Pakistan, Papua New Guinea, the Philippines, Sri Lanka, and Thailand) is only 53.3%, compared to the 63.2% global average for lower middle-income countries.

Improving tax collection without increasing tax rates can therefore be used to help close the gap on expenditure for social protection programs such as pensions, public health insurance, and unemployment subsidies.

Countries in developing Asia therefore can extend basic and robust levels of social protection to the “missing middle” population. Whether there’s enough political will to accomplish that is the next question.