COMMENTARY

Economic & Political Weekly EPW september 20, 2014 vol xlIX no 38 19

Reforming Social Protection for Economic Transformation

Dev Nathan

This note is part of work supported by IDRC under SARNET, the South Asia Employment and Social Protection Research programme.

Dev Nathan (nathandev@gmail.com) is with the Institute for Human Development, New Delhi, and Duke University.

India is a low middle-income economy with a development policy that aims to promote it to a high middle-income economy, which requires both economic growth and structural transformation. This article turns the spotlight on some aspects of structural transformation, such as the movement to higher productivity jobs, the formalisation of the vast informal sector, and the promotion of women as economic agents. The experience of other economies shows there is room for a higher share of social protection expenditure in India, but bringing that about would depend on increasing tax revenue and reducing subsidies that are not for the poor.

India is now a low middle-income economy and the aim of develop-ment policy is to promote its passage to a high middle-income economy, which requires both economic growth and structural transformation. Attention is concentrated here on a few aspects of structural transformation, such as the movement to higher productivity jobs, the formalisation of the vast informal sector, and the promotion of women as economic agents. Emphasising the role of social protection in aiding economic transformation and growth does not mean neglecting its usually accepted objectives of increasing the well-being of households and individuals below an acceptable minimum standard, and of it being an income and consumption stabi-liser during economic downturns. Social protection is here taken to be a combina-tion of non-contributory social assistance, and labour programmes, such as the Mahatma Gandhi National Rural Employ-ment Guarantee Act (MGNREGA).

Setting the Scene

Two facts have to be stated before going on to the discussion. First, Indias level of social protection expenditure is low for a middle-income economy. The aver-age for middle-income economies is 8.9% of gross domestic product (GDP), while Indias is less than half of this (ILO 2011). Taking health expenditure alone, India is quite low in public contribution to health expenditure just 33% against BRICS (Brazil, Russia, India, China and South Africa) peers such as Chinas 56%, Brazils 46%, and South Africas 48% (World Bank 2014). Our middle-income neighbour, Sri Lanka, is at 40%, which itself is a comedown from 45%, very likely because of high military expendi-tures during the civil war.

Second, a number of countries Germany, Japan, and South Korea prominent among them had universal

health insurance, an important component of social protection, when they were still low-income or low middle-income econ-omies (Bender et al 2013). What the two facts show is that, on a comparative basis, there is room for a higher share of social protection expenditure in India. But bring-ing that about depends on increa sing the share of tax revenue to GDP and reduc-ing subsidies that are not for the poor.

Facilitating Transformation

Economic transformation is a painful process. It often involves the replacement of one set of economic activities by another. It could be industrialisation or mining in agricultural areas, or even the mechanisa-tion of agriculture. Over time, as econo mic growth takes place, new jobs will be crea-ted, but there is inevitably a lag between the destruction of old jobs and the acqui-sition of new jobs by those displaced.

If household consumption at least dur-ing the lag is covered by social protection, opposition to the adoption of new and more productive activities could possi-bly be less than otherwise. An analysis of pre-Industrial Revolution England (Sretzer 2007) points out that the exist-ence of parish-based social protection could have decreased opposition to the mechanisation of agriculture, which was much less in England than on the European continent, where such social protection did not exist.

Of course, social protection cannot recreate livelihoods. There will have to be a deliberate policy of creating suffi -cient numbers of low-skilled jobs for those displaced by mining and industri-alisation. But a social protection cover will facilitate any such movement from lower productivity agriculture to higher productivity mining or industry.

Should social protection to help the above type of transition be narrow or broad-based? A below the poverty line (BPL) type of identifi cation in the case of displacement will be too narrow, since even reasonably above the poverty line (APL) households will see a sharp fall in consumption when old livelihoods are lost. This would point to the need for broad-based social protection to facilitate economic transformation from lower to higher productivity activities.

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september 20, 2014 vol xlIX no 38 EPW Economic & Political Weekly20

Another reason for making social pro-tection broad-based and not just for, say, workers in the informal sector is that such restriction makes the transition from informal to formal status more dif-ficult. In an informal enterprise, wages are subsidised by social transfers. But in a formal enterprise, where employers have to make various contributions, such as provident fund or health insurance, employers in effect pay a tax on wages. The subsidy through social protection and tax through employer contributions increase the productivity gap that needs to be covered to promote formalisation of enterprises (Levy 2008). Not restrict-ing state-provided social protection to the informal sector alone would reduce the barrier to formalisation. Another aspect of economic transfor-

mation is migration, drawing out sur-plus labour from agriculture. Unlike dis-placement, migration is based on an as-sessment of the difference between po-tential earnings in the destination and source areas. But even where potential earnings are much higher in destination areas, there would be, at the least, a time lag before destination earnings actually become greater than source earn-ings. The availability of social protection would support the migrating households

consumption in the interim, and thus reduce the social cost of migration. Here too, the earlier mentioned analy-

sis of pre-Industrial Revolution England points out that parish-based social pro-tection helped promote migration to London and other rising economic cen-tres. But for this beneficial effect, social protection rights needed to be portable, something that individuals and house-holds can take with them. This is unlike the MGNREGA, where the employment-based income benefit is only available in a persons village of residence. From the above, one may conclude

that to promote the process of economic transformation, social protection meas-ures should be both broad-based and portable. Further, social protection is now largely based on the household and not the individual. There are a few transfers, like the old-age pension, that are given to the individual, even if the household takes it. But food security, kerosene, or liquefied petroleum gas (LPG) transfers are to the household. Is there a case for shifting to individual-based transfers, particularly to women? In the first place, individual-based

transfers would support womens emer-gence as economic agents and not just subsume everything under the household.

Further, women, in the conventionally defined labour force, are mostly self- employed persons in low-earning activi-ties. Their gendered responsibility for household maintenance, combined with their general lack of assets, makes them risk averse and unable to invest in higher-earning, but more risky activities. Pro-viding them independent access to social protection transfers could increase their ability to invest in riskier but higher-earning activities. When these transfers are in the form of cash (or direct benefits transfer as the roundabout jargon that has come up in India has it), it is easy to make all transfers to each adult in the household instead of to the so-called head of the household.

Patronage and Leakages

A major problem with BPL-related target-ing is that it often requires political patron-age and/or some payment to secure inclu-sion in the BPL list. This reduces the actual income transferred to the poor. It also subverts democracy, since access to in-come transfers can be translated into votes. On both of these counts, it is desirable to move away from a BPL-identification based targeting. But does moving away from BPL targeting mean that everyone will have to be paid the transfer amounts?

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Employment schemes, especially those based on provision of manual labour at or around prevailing wage rates, have a self-targeting character. They are less likely to lead to an exclusion error, while also not including many above the poverty line. For other schemes, there could be some simple and easily verifi able selection criteria, such as excluding all above a certain size and quality of house. Mak-ing social protection universal does not mean making transfer payments to all, but utilising both self-selection and easily verifi able, broad criteria for exclusion.

But there will be some increase in cover-age, which makes it all the more important to reduce leakages and the cost of delivery. The public distribution system (PDS) provision of food has two major types of increases in the cost of delivery. One is the sheer warehouse-cum-transport based cost of physical delivery. The other is the pilfering of food through ghost and dupli-cate cards. In erstwhile Andhra Pradesh, for instance, there were more ration cards than households in the state. In MGNREGA employment, such ghost workers are a source of pilfering of money from the exchequer. A biometric identifi cation system, such as Aadhaar, is a big step in reducing the cost of delivering social protection by eliminating the stealing of funds through duplicate and ghost cards.

The other measure that would reduce the cost of delivery is, of course, that of switching from provision of goods to trans-fer of money. The logistic cost of deliver-ing food and other commodities would be eliminated by the shift to money transfer. And, instead of a separate delivery mecha-nism for each type of transfer, there would be just one delivery mechanism.

In addition, cash transfer would allow individuals and households to decide on their priority uses of the transfer pay-ments at any time. For instance, at the beginning of the school year, school expenses may be the main priority. Or, at harvest time, when labourers are paid in kind, they would not need extra grain through the PDS.

Social Protection and Growth

Social protection expenditure is usually seen as consumption, a deduction from revenues, competing, for instance, with

government investment. There is admit-tedly a short-term resource allocation problem. But does not social protection also contribute to growth? This is a topic not often discussed in the social protec-tion literature, though some like Lindert (2004) have been arguing that social protection is, in fact, a free lunch in that it pays for itself by increasing producti-vity. Can social protection not be social consumption but social investment?

One way in which social protection can be investment is through linkages with investment in the workforce. For instance, the mid-day meal scheme (MMS) is an income transfer to poor stu-dents. It has been instrumental in increa-sing school registration and attendance. At the individual level, literate adults can earn more than those who are illiterate. And, since in most jobs we can assume literate workers to be more productive than illiterate workers, the MMS defi nitely contributes to increas-ing growth. Again, the availability of health cover could induce workers to seek care in the early stages of an ill-ness and not postpone it till the condi-tion becomes serious. This too could reduce worker absenteeism and thus reduce production costs.

To summarise, social protection can have an impact on productivity and thus growth at three levels (Alderman and Yemtsov 2012). It works at the micro level through increasing worker producti-vity and enabling the self- employed to take up more productive, though risky investments. It can work at the meso or community level by building community assets, for instance, through effi cacious use of the MGNREGA. And, it can also have benefi ts at the macro level by stabilising aggregate demand, as occu-rred in India at the beginning of the recession. Even more important at the macro level, social protection can help promote political acceptance of the transformations that are key to building a modern economy.

An area of social protection that has received little attention in India is related to the growing demand of employers for fl exibility in employing labour. But along with fl exibility, which could be pro-moted by abolishing Section V-B of the

Industrial Disputes Act requiring state permission to retrench workers (without going into the whole gamut of labour legislation that needs rationalisation), there is the need for the consumption security of retrenched workers and their families. One proposal has been to in-crease the compensation for retrench-ment to up to two months of salary for every year worked (Papola and Pais 2007). But consideration needs to be paid to the extent to which the state can provide the needed well-being security during employment transitions, as is done in east Asia and Europe. Similarly, shifting the burden of bearing maternity costs from the employer to the state could reduce the bias against employing women as skilled workers.

In going into the next stage of Indian economic development, it is necessary to pay attention to ways in which social protection can promote structural trans-formation, contribute to increasing pro-ductivity and thus economic growth, and enable a fl exible labour policy while protecting workers well-being in transi-tions. Changes, particularly those that involve increased government expendi-tures, can, however, only be undertaken step by step and that too to the extent that the share of tax revenue to GDP increases and some subsidies that do not reach the poor are reduced.

References

Alderman, Harold and Ruslan Yemtsov (2012): Productive Role of Safety Nets, Social Protec-tion and Labour, Discussion Paper, No 1203, March, World Bank.

Bender, Katja, Markus Kaltenborn and Christian Pfl eiderer, ed. (2013): Social Protection in De-veloping Countries: Reforming Systems (London and New York: Routledge).

ILO (2011): World Social Security Report, 2010-11 (Geneva: ILO).

Levy, Santiago (2008): Good Intentions, Bad Out-comes: Social Policy, Informality and Economic Growth in Mexico (Washington DC: Brookings Institution).

Lindert, Peter (2004): Growing Public: Social Spending and Economic Growth, since the Eight-eenth Century (Cambridge: Cambridge Univer-sity Press).

Papola, T S and Jesim Pais (2007): Debate on Labour Market Reforms in India: A Case of Mis-placed Focus, Indian Journal of Labour Eco-nomics, 50 (2): 183-200.

Sretzer, Simon (2007): The Right of Registration: Identity Registration and Social Development, World Development, 35, 2: 67-86.

World Bank (2014): World Development Indicators, http://data.worldbank.org/data-catalog/world-development-indicators