Unit 3 Social Protection: Foundations, instruments, challenges Flashcards
What are the ethical, normative foundations of social protection?
- RIGHT TO LIFE:
3 interwoven dimensions as defined in Indian Constitution 2003, as well as in Western nations late 19th and 20th century:
- moral entitlement to subsistence (moral outrage at deprivation and suffering)
- minimum standards, basic needs (22% live below poverty line, unable to live a healthy, productive life); absolute needs and culturally defined, based on values
- dignity and decency as aspects of well-being, human development (in normative terms and based on evidence); implies social acceptability, meaningful life - HUMAN SECURITY
= Freedom from risk and uncertainty;
relevant to 1900 UK working poor, and insecurity in poor countries (epidemics, famine…) leading to extreme deprivation. Normative and empirical (Chambers, Narayan) perspectives about importance of secure life.
3. HUMAN AGENCY = Freedom, autonomy, capacity to choose one’s life. Deprivation cripples human agency, because survival needs take precedence over other needs (e.g. autonomy); poverty restricts agency by limiting material choices, by undermining sense of self-worth. Underlying notion (Sen, Dreze): Development = expansion of human freedom or capabilities
3.1
Objectives of social protection
o Protection: supporting minimum living standards in crisis (food aid, food/cash for work, crisis programmes)
o Prevention: providing security and insurance (non-contributory: health insurance unemployment benefits, maternity benefits, widows’ pensions)
o Promotion: (Guhan 1994 based on Sen’s entitlement framework for pathways out of poverty); measures to:
improve asset endowments of poor (land redistribution, productive asset provision)
improve exchange entitlements (employment programmes)
protect against destitution (here under Protection)
o Transformation
Redistribution, e.g. through taxation
Address discrimination, marginalisation, structural inequalities, roots of poverty; role of RIGHTS (soc., econ., pol.)
o Multiple objectives of any one programme (e.g. employment guarantee prevents and promotes)
o Addressing chronic poverty: promote, transform; transitory poverty: prevent, protect
3.1.2
“Equity”
“Pareto efficiency”
“utility possibility frontier”
“Kaldor-Hicks Criterion”
Equity: fair distribution of wealth and benefits across individuals in a society
Pareto efficiency: “(Theoretical) situation when it is not possible to find another feasible allocation of resources which makes at least one person better off, without making others worse off.”
Consumption: no way to redistribute goods among consumers…
Production: no way to produce more of some goods with given inputs without producing less of others
Output: no different mix of goods produced that would make some people better off without making others worse off, given existing technology and tastes
Utility possibility frontier = various combinations of utilities attained by two groups when economy is pareto-efficient; at each point of the UPF, no one’s utility can be increased without another’s utility decreasing.
Potential Pareto-efficiency (Kaldor-Hicks criterion): in practice there are always winners and losers from policy changes. Question is if increased output from policy change can compensate losers through transfer, so that everyone is at least as well off, while some are better off. Aggregate wealth is maximized, positive net benefits.
3.1.2
Impacts of social protection on efficiency
Negative impacts:
• 1. Disincentives to work: unemployment benefits incentivize prolonged job search /unemployment (supply side); demand for labour and wage costs increase (demand side) low labour growth rate and low economic growth
• 2. Disincentives to save and invest: Lower savings rates over lifetimes (reliance on pensions) -> lower capital in economy -> lower growth rate of output
• 3. Distortionary taxes: If SP is financed via general taxation, marginal tax rates discourage efforts to earn more income (e.g. by saving, working, investing more) because individuals will be subject to higher tax rates -> economic incentives distorted, growth dampened
Positive impacts:
• 1. Risk-taking and innovation encouraged in context of market, credit and insurance failure because SP gives security and reduces risk aversion -> higher rates of technical progress and growth.
• 2. Human capital development: Crises deplete human capital, with long term impact on productive capacity -> economic growth reduced. SP helps vulnerable households avoid human capital eroding coping strategies.
Caution: Evidence on relationship between transfers and economic performance inconclusive! Causality not established. 2 methodological issues: 1. Reverse causation (transfers cause longer unemployment or longer unemployment cause generous unemployment benefits), 2. Confounding factors (unaccounted elements influence benefits and unemployment levels).
3.1.2
5 conditions to be met for efficient functioning of insurance markets
- No covariance of risk: independence in event insured for any individual of that of anyone else; this allows risk sharing: transfers from lucky ones to unlucky ones
- Probability of the event is less than 1
- Probability of insured event is known or estimable (allows calculation of price of insurance)
Perfect information is necessary for market operation, but there is information asymmetry in insurance context: - No adverse selection “ adverse selection occurs when there is limited or asymmetric information between two parties. Limited information leads to high-risk individuals being more likely to demand insurance. Anticipating this, insurers increase their insurance premiums to reflect the higher underlying risk profile of insurance buyers. Higher insurance premiums discourage low-risk individuals. Thus, high-risk individuals are more likely to receive insurance than low-risk individuals”
- No moral hazard “moral hazard occurs when there is asymmetric information between two parties and the more informed party has an incentive to work less or take less care in his or her actions”; opportunistic behavior: risky behavior because insurance will pay for consequences of action.
- 2.1
2 broad types of community-based informal insurance
- self-insurance (loans, savings/buffer, coping-strategies)
- informal mutual support mechanisms among community members based on reciprocity, to share risks and provide relief in times of need (gifts, credit, shared resources, work-sharing arrangements).
- 2
4 features of community based mechanisms to overcome information and enforcement problems
- Peer monitoring (proximity of community members allows monitoring and access to information)
- Norms of reciprocity (altruism in communities enforced by social sanctions and penalization by declining help to those who act egoistically if needed in future)
- Enforcement capacity (scope for sanctions to enforce co-operation due to personalized nature of transactions: legal penalties, exclusion, disapproval, loss of reputation)
- Repeated interactions (self-interested individuals realize that benefits of drawing on informal insurance exceed costs of avoiding co-operation due to repeated, long-term interactions)
Example: Use of credit as insurance against income shortfalls, Nigeria; uncertain livelihoods due to shocks; informal credit, no interest rate or repayment date; loans paid according to lender and borrowers’ financial information; very few instances of loan default and opportunistic behavior, met with public shame and community sanctions.
Limitations of informal, community-based insurance
- Evidence shows mixed effectiveness in protecting against risk (imperfect risk-sharing): more effective if shocks are idiosyncratic, moderate, requiring frequent, small dispursements. Less effective for covariate, larger but rarer shocks. In Philippines, some risks (mild illness, unemployment of hh member, poor harvest, acute elderly illness) and groups (poorest, less connected) remained uninsured. Most common: self-insurance (buffer, borrowing), remittances.
- Fragility exacerbated in the context of socioeconomic change (inequality, mobility, urbanization): relaxes norms of reciprocity, increases moral hazard and adverse selection and exclusion (evidence of this is disputed).
(3. 2.2)
Efficiency arguments for state intervention
Examples of social insurance systems
- Functionalist perspective: market failure (imperfect information) justifies state intervention, welfare state to avoid provision gaps (inequitable outcomes)
- Comparative advantage of states: power of compulsion (e.g. compulsory health insurance) eradicates adverse selection, though it requires popular support in democracy (methods = regulation, price subsidy, taxation, transfers, public production, backed by institutions). Consequence is more efficient outcomes.
Examples of social insurance systems in OECD countries: unemployment requires state scheme for broad coverage, as private insurers exclude many workers due to moral hazard; retirement pensions involve inflation risk, violating the prediction and covariance of risk conditions for private insurance; insurance against illness suffers from adverse selection and moral hazard; those vulnerable to illness would be excluded by private health insurance; private insurance would be inefficient because of perverse incentives (? e.g. make more money if mediocre care is provided?); example: US private health care system, with public coverage to elderly and poor.
(3.2.3)
2 ways of determining if social security policies (government provision) reduce poverty
- Analyse FORMULA of contribution and benefits: how progressive are they?
Net transfer determines welfare impact and depends upon
• Benefit/contribution formula
- Benefits: related to past earnings, flat rate, income tested
- Contribution: regressive, proportional, progressive
- Income- tested progressive = most equity-enhancing, but potential efficiency costs (earning disincentives); related to past earnings regressive= least redistributive.
• Transfer size (Australia: highly redistributive but small size; Sweden highly distributive and high spending levels) - Look at LEVELS of incomes BEFORE AND AFTER TRANSFERS: how has poverty changed?
• In OECD countries (relative poverty, at 60% of median income); e.g. Sweden: 80% poverty reduction post to least transfer; US: least redistributive with 20% poverty reduction
• Welfare regimes: highest relative poverty reduction in Social Democratic/Nordic (e.g. Sweden 80%), followed by Corporatist (e.g. Germany 70%), South European (Italy 60%), Liberal/Residual (UK 57%)
(3.2.3)
What is a benefit-contribution formula?
Benefit/contribution formula helps evaluate how redistributive (poverty, inequality reduction) social security policies are.
- Benefits: related to past earnings, flat rate, income tested
- Contribution: regressive, proportional, progressive
- Income- tested / progressive = most equity-enhancing, but potential efficiency costs (earning disincentives); related to past earnings / regressive= least redistributive
(3.2.3)
History of SP in industrialied nations
o Pre-1850s: Minimal social protection in Western Europe; e.g. UK Poor Law Act from 1388 modified in 1601: local stigmatizing minimal relief system alongside charity or family assistance
o Post 1850s: Welfare state in Western Europe and America (context: urbanization, industrialization leads to adverse socioeconomic conditions, thus state organized insurance to protect citizens)
o Increasing SP spending as percentage of GDP, from under 2% (before 1913) to 11% (1960s) to 27% subsidies and transfers (1990); post-WWII, the welfare state developed in OECDs, covering components known today (sickness, work injury, maternity, old age, invalidity, death, unemployment, family allowances).
(3.3.1)
Relationship between social security and economic growth
o 1800 industrialisation, specialization, urbanization; involves transition from self-employment / home production to wage labour (“modern” employment relationship) causing insecurity, sudden (vs, prior gradual) retirement.
o Traditional means of social protection break down, new forms needed to maintain labour participation in sectors contributing to economic growth
(3.3)
3 core components of OECD social security systems
objectives, targets, funding, universal vs. targeting
1. Social insurance programmes (security, lifecycle support for unemployed, sick, disabled, retirement, bereavement) – Contributory funding from employment by employees and employers – Broadly universal; 3/5 of ss expenditure
2. Social assistance (poverty relieve: minimum level guarantee to poor individuals or families [legacy of “poor relief], or in emergencies) – Tax financed – means tested targeting; 1/3 or ss expenditure
3. Categorical transfers (poverty-relief, pro-natalist etc, for elderly, disabled, children) – Tax financed – universal targeting within category; flat-rate benefits for given group.
(3.3)
Importance of Beveridge report
Beveridge’s of plan for social security to UK parliament, forms basis of UK post-WWII welfare state development (“Beveridge report”): Social insurance, National minimum offered by state, social security for lifecycle expenditure; UK living standards rise but WANT not insignificant; Efficiency costs of social insurance: redistribution can increase wealth, human capital; avoid administrative waste and incentive reduction with proper design, control and finance.
(3.3)
