Social Protection, Efficiency and Growth

Social protection can play an important role in poverty reduction and making growth inclusive of the poor. At times, it is also argued that social protection can directly contribute to growth and economic efficiency. The paper revisits the evidence on the cost of social protection to reduce poverty, and its contribution to efficiency and growth. As social protection may overcome market failures in credit and insurance, the paper also considers the role of alternatives, such as micro-credit and micro-insurance. The evidence on social transfers (in cash or in kind, conditional or not) suggests that while they have substantial poverty and equity impacts, their efficiency and growth impact is unlikely to be high - not dissimilar to the limited growth impact of microcredit. The implication is that the main motivation for social transfers must lie in their equity or poverty impacts. The evidence on contingent transfers, made in response to shocks such as illness, drought or unemployment, as in social insurance, is that their contribution to resolving market failures may be higher, leading to potentially more substantial gains, especially where children are targeted. Given the problems with developing market-based solutions via micro-insurance, there is a strong case for social protection initiatives in this area from an efficiency point of view, to complement contributions-based social insurance and micro-insurance initiatives. Conditions in conditional cash transfer can also be used to enhance efficiency gains, for example if conditions target activities or investments with clear social externalities. The paper ends with three areas where there could be potentially high growth impacts: social protection focusing on children, especially before the age of five; social protection measures to make migration smoother and cities more attractive places to live for low skilled workers, possibly via urban workfare schemes focusing on urban community asset building; and social protection targeted at adolescents and young adults, including transfers conditional on training focused on urban labour market transitions. In all these cases, standard cash transfers may be too blunt to have high impacts, suggesting the need for more context-specific ‘smarter’ social protection schemes