Not only does social protection promote economic growth; in fact, growth cannot be sustained without strong social protection.
I have been in several discussions recently in which people have argued that there is a definite trade-off between promoting economic growth and supporting inclusiveness. In particular, social protection is considered part of a set of welfare-oriented “populist policies” which is a drain on national budgets, as opposed to real investment to spur economic growth. I argue that well-designed social protection policies and expenditures can, in fact, promote economic growth.
Supporting social protection achieves inclusiveness and can promote economic growth, through the following pathways.
One, social protection improves productivity by building human capacity. No country can achieve and sustain high economic growth if only a small section of population makes most of the contributions. We need all the cylinders to fire! Household expenditures on health and education are highly sensitive to external shocks. Evidence shows that, during a crisis, poorer households withdraw their children from schools and do not send them back even after the crisis is over. Evidence from Latin America shows that conditional cash transfer programs bring large improvements in health and education, particularly for women and girls.
I see no trade-off between promoting economic growth and supporting inclusiveness through social protection.
Two, social protection discourages inefficient precautionary savings by providing security. The large household saving rates typically seen/prevalent in Asia and the Pacific are partly attributed to weak social protection systems. The deep-rooted culture of “saving for a rainy day” stems from vulnerabilities to weather-, economic or health-related shocks faced by the poor, and the lack of adequate systems to mitigate them. Precautionary savings to meet future contingencies are problematic on two accounts.
- Households save by reducing necessary current consumption—by compromising on nutrition, education of children and other long-term investments, which especially negatively affects the welfare of children and women
- Given the weak banking infrastructure in the region, such savings are not invested productively. The fascination for buying gold in many countries in the region is perhaps linked to the need for precautionary savings.
Three, social protection stimulates growth by encouraging consumption. Income transfer to the poor provides immediate stimulus to growth, since the poor have a higher propensity to consume than the non-poor. In particular, the demand for local goods and services goes up, helping reduce dependence on external demand as a source of growth.
Four, social protection strengthens social cohesion by reducing inequalities. Rising social tensions in many countries in the region reflect the perceived unfairness of the growth process and the resulting increase in inequalities. Social tensions discourage investments and retard growth. Strong social protection measures can help.
This tells me that not only does social protection promote economic growth; in fact, growth cannot be sustained without strong social protection. I see no trade-off between promoting economic growth and supporting inclusiveness through social protection. Do you?