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Money Matters: Social Policies Need Sustainable Financing

6 Jun 2011

Policy debates about the prospects for implementing and expanding social policies in developing countries often revolve around costs and affordability. It is argued that poor countries cannot afford to provide public social services due to a lack of fiscal resources and the low contributory capacity of the working population, especially those working in the informal economy.

With the most recent global crisis going into its third year now, the picture is becoming gloomier: after fiscal stimulus measures were taken in many countries with initial success, countries and taxpayers have started to pay the bill for bank bail-outs, industry subsidies and job losses. These are difficult times to argue for the extension of social policies and institutionalization of social rights. Will the UN’s efforts to advocate for increasing investments in a Social Protection Floor, accelerate progress toward the MDGs and fight crisis-led unemployment through a Global Jobs Pact produce responses on the ground?

Countries that had already established comprehensive social systems can be deemed lucky: they are not only better prepared to deal with the adverse consequences of the crisis, but the legal protection and broad-based support of acquired social rights might prevent policy makers from resorting to radical ad hoc cuts that could threaten development achievements that have taken time to bear fruit.1 In addition, research has convincingly shown that a comprehensive, universal approach does not only deliver better with regard to social development by linking individual improvements in well-being and income security with greater macroeconomic and political stability (see the UNRISD flagship report), but it also tends to be more cost-efficient by avoiding expensive targeting mechanisms.

In order to make a strong case for social policy investments, it is imperative to tackle the financing question early on and to develop convincing strategies for revenue and expenditure policies in tandem. A strategic approach toward the financing of social policy requires:
  • reliable calculations on the estimated costs of planned programmes over longer periods and taking into account different scenarios;
  • evaluation of different financing techniques and their pros and cons from a political, economic and social point of view;
  • analysis of relevant experiences in other countries; and
  • early dialogue with relevant stakeholders, including social and finance ministries, external donors, international organizations, social partners and civil society organizations.
The mobilization of revenues that are stable and equitable, and contribute to the redistributive goals of social policy without undermining economic stability is necessary to guarantee the long-term success of social policies. Over the last years, UNRISD has conducted research on this subject, exploring the developmental impact associated with different financing techniques and revenue sources.2 Poorer countries often rely on external rents such as aid, remittances or revenues from a dominant commodity sector, whereas revenues from taxation including social insurance contributions are comparatively low. External resources are, however, far from being a panacea: they are fraught with volatility, policy conditionality and Dutch disease effects.3 In addition, they do not function in the same way as taxation or social insurance systems to establish interclass and intergenerational linkages that contribute to progressive redistribution, social cohesion and stronger citizen-state relations. Countries should therefore strive to strengthen their domestic revenue base, even if they continue to rely on external funds in the near future.

A specific challenge occurs in contexts of mineral-led development. The fact that many mineral-rich countries have not performed well in terms of growth, development and democracy has given rise to a strand of literature postulating that resource-abundant countries are actually cursed, not blessed by their endowments. UNRISD research challenges this deterministic viewpoint by showing that the minerals sector can indeed be a leading sector for the economy as well as a source of revenues for financing public policies. Recent pension reforms in Chile and Bolivia that have moved retirement systems toward greater universal coverage gained the broad support of policy makers because of the perceived fiscal space created through increased state revenues from copper in Chile and hydrocarbons in Bolivia. This is not necessarily a smooth process: distributional struggles around natural resource rents can be harsh, and a national consensus has to be created. The capacity of countries to manage the sector productively, to achieve tax compliance and favourable contracts with foreign investors, to maintain a stable economy, and to deal with the social and environmental consequences of mining are other preconditions before capturing rents and channelling them into public policies.

There are no quick fixes to the financing challenge and no magic bullets at hand: in times of crisis, countries try to adjust budgets through expenditure cuts, and targeted social protection is often the easy choice.4 The lesson is that the more a country displays institutionalized labour rights and social policies and a strong public sector, the better it copes with the ups and downs of our global economy.

1. Paul Krugman has a different story to tell about budget cuts in Texas. See his article in the New York Times, Leaving Children Behind, 28 February 2011.
2. Hujo, Katja and Shea McClanahan (eds.). 2009. Financing Social Policy: Mobilizing Resources for Social Development. UNRISD/Palgrave, Basingstoke
Leonith Hinojosa-Valencia, Armando Barrientos, Anthony Bebbington and Tony Addison. 2010. Social Policy and State Revenues in Mineral-rich Contexts. Social Policy and Development Programme, Paper No. 44. UNRISD, Geneva.
3. Dutch disease refers to rising inflation rates and exchange rate appreciation produced by capital inflows. As a consequence, domestic production becomes less competitive in world markets, adversely affecting the country’s trade balance. In the longer term, investors tend to shift their resources into the non-tradable sector.
4. Kyrili, Katerina and Matthew Martin. 2010. The Impact of the Global Economic Crisis on the Budgets of Low-Income Countries. A research report for Oxfam, July 2010.



This article reflects the views of the author(s) and does not necessarily represent those of the United Nations Research Institute for Social Development.