Social Economic

Goal Social Justice Efficiency

Poverty/Inequality Output/ GDP growth

Priority State Market economy

Social spending Fundamental Luxury

Transformative

Children/childcare Important Unimportant

Outlook Dreamers Realist

Personality Nice Guys Mean machines
Social Protection, Redistribution
and Economic Growth

David Piachaud
 Outline

Types of social protection

Behavioural effects
Social protection and economic growth
- Human capital
- Investment
- Local economy
- Macro effects
Micro-simulation - South Africa
– Redistribution
– Economic growth
Conclusions
 Types of Social Protection

Social Assistance
Aka Safety net, Minimum income guarantee, Income support,
Negative income tax
Social Insurance
Aka Contributory social security, National insurance
Categorical Benefits
Aka Universal benefits, Basic Income, Citizens income,
Demogrant
Possible behavioural effects of social protection

Negative
Discourage private protection by individual – discourage work effort, saving,
investment
Negative or positive
Effects on household formation and separation
Effects on child-bearing
Effects on survival and mortality
Effects on family and community provision
Positive
Promote private consumption, maintain aggregate demand and employment
Promote local economy
Promote investment in human capital
Promote savings and investment and allow more risk-taking
Promote social cohesion and trust in government
 Possible effects on economic growth
The dismal tradition of economics
Four major reasons for hope
1.The protection and encouragement of human
capital formation
2.The encouragement of investment and
innovation
3.Promoting the local economy and using local
knowledge
4.Macro effects
 The protection and encouragement of human
capital formation

Social protection may:

Keep people alive
Enable children to be educated
Enable health clinic to be reached
But little solid evidence

Conditional Cash Transfers are Social Protection with

Conditions
Some evidence on their operation and impact

Evidence
 The encouragement of investment and
innovation

When consumption is minimal, reducing it so as to invest

is hard
Investment decisions of the poorest - what to plant,
when, whether to buy a tin sheet for roofing, whether to
kill a goat, whether to send a child to the city – are
critical. Far more hangs on these decisions than for
wealthy
If marginal propensity to consume declines with income
and marginal efficiency of capital declines as capital
increases, then social protection is good for investment
and innovation
Evidence
Initial production Production Average
Failure Success effect

A 100 50 150 140

B 200 100 300 280

A + Soc. Protn,
100 + 10 60 160 150
 The encouragement of investment and
innovation

When consumption is minimal, reducing it so as to invest

is hard
Investment decisions of the poorest - what to plant,
when, whether to buy a tin sheet for roofing, whether to
kill a goat, whether to send a child to the city – are
critical. Far more hangs on these decisions than for
wealthy
If marginal propensity to consume declines with income
and marginal efficiency of capital declines as capital
increases, then social protection is good for investment
and innovation
Evidence
 Promoting the local economy and using local
knowledge

Social protection allows people to spend on what

they want based on local knowledge potentially
aiding local economy with high local multipler
effects
By contrast, providing services provided by
teachers or doctors who live in more prosperous
areas provides little boost to local area
But if demand is for goods for which supply cannot
be increased the result may be inflation
Evidence
 Macro effects
Social cohesion
Social stability
Economic stabiliser
Trust in government
Confidence in the future
Evidence
 Social protection
A microsimulation of South Africa
Purpose – To review types of social protection, their
relevance, the issues for redistribution and economic
growth that they raise. Not to explore detail of income
distribution or existing social protection.
Data – National Income Dynamics Survey, 2008,
7,000 households, 28,000 individuals.
Unit of analysis – Individual
Measure of welfare – Household income per head
Poverty level – SA ‘Lower’ Standard
– Rand 515 per head per month
 The problem with social insurance

Of all those in poverty:

94.6% have no regular earnings from a job

Of all working age adults:

42.7% are employed
19.0% are unemployed
38.2% are economically inactive
 Policy changes simulated
Standard cost – 5% of all income – R85 pc

Social Assistance
SA1- Make-up to R450 pc, 100%withdrawal
SA2- NIT R625 pc, 50% rate

Categorical Benefit
CB1 – BIG of R85 pc
CB2- R264 per child aged 0-14
CB3- R1180 per person aged 60+
Policy changes simulated (continued)
Baseline – 5% of all income – R85 pc

F1- Tax 5% of all income

F2- Tax 6.6% of income above median

(R 545 pc)

F3- Tax 15.1% of income above top decile

(R 4108 pc)
 Effect of changes by income level
Percentile 10% 25% 50% 75% 90% 95% 99%

Baseline 159 284 545 1448 4108 7125 16092

SA1– Make-up +291 +176 - - - - -

SA2- NIT +233 +171 - - - - -
CB1 – BIG +85 +85 +85 +85 +85 +85 +85
CB2- Children +65 +116 +117 +65 +61 +31 -
CB3- Elders +1 +17 +52 +212 +90 +143 -

F1- 5% on all -8 -14 -27 -73 -105 -356 -804

F2- 6.6% above median - - -60 -235 -434 -1026
F3- 15.1% above top decile - - - -456 -1809
 Effect of changes on poverty

Proportion Poverty
in poverty Gap
Baseline 48.0% R 114

SA1– Make-up 48.0% R30

SA2- NIT 38.3% R39
CB1 – BIG 40.7% R76
CB2- Children 37.6% R74
CB3- Elders 45.6% R110

F1- 5% on all 49.9% R122

F2- 6.6% above median No change
F3- 15.1% top decile No change
 Effect of changes on inequality

10% 90% 90/10 95% 99%

ratio
Baseline 159 4108 25.8 7125 16092

SA1– Make-up 450 4108 9.1 7125 16092

SA2- NIT 391 4108 10.5 7125 16092
CB1 – BIG 244 4193 17.2 7210 16177
CB2- Children 224 4170 18.6 7156 16092
CB3- Elders 160 4198 26.2 7268 16092

F1- 5% on all 151 3903 25.8 6769 15288

F2- 6.6% above median 159 3873 24.3 6691 15066
F3- 15.1% top decile 159 4108 25.8 6669 14282
 Effect of changes on increased marginal tax
rates
Increase in marginal tax rates

0% 6.6% 50% 56.6% 100%

SA1 + F2 7.4% 50% -- -- 42.6%

SA2 + F2 0% 45.6% 50% 4.4% --

CB1/2/3 + F2 0% 50% -- -- --
 Conclusions

1 Social protection is not one entity. Clarity has been in short supply.

2 Discussing benefits without considering costs is nonsense.

3 Distributional and behavioural effects of different types of social protection are very different.

4 At least as important as redistributional effects are effects of social protection on economic

growth. These have been largely ignored.

5 There is a need for carefully designed and monitored experiments that will investigate
positive and negative effects of social protection.

6 This must be said with caution and humility since which prosperous nation has conducted
such experiments in the past 40 years?

7 Social protection may promote economic growth through its effects on human capital,
investment, the local economy and macro effects.