Developing countries safety nets

All countries fund safety net programs for the protection of their people. Though an increasing number of safety net programs are extremely well thought out, adroitly implemented, and demonstrably effective, many others are not. This book aims to assist those concerned with social policy to understand why countries need social assistance, what kind of safety programs will serve them best and how to develop such programs for maximum effectiveness. 

Safety nets deserve a role in development policy in all countries. They mitigate extreme poverty through redistribution of resources they help households invest in their future and manage risks and they help governments make sound policy decisions in macro-economic, trade, labor, and many other sectors. 

Safety nets, while extremely useful, are never the only or wholly sufficient solution to poverty and risk. Rather, they are part of a country s development policy. To determine the parameters of their role and see how safety nets fit in with the other instruments a government uses to address poverty and risk, it is useful to examine which groups of households can and should benefit from safety net programs. 

The premier reason safety nets are not a headline social policy on the development agenda is concern over whether countries—especially poor countries—can afford to transfer meaningful resources to their poor. This is a complex issue, which involves many nuances and trade-offs chapter 3 provides a comprehensive treatment of the financing of safety nets. 

The theoretical model predicts that reduction in work efforts will he proportional to the size of the benefit (income effect) and the implicit marginal tax rate on earnings of the program (price effect). The theory thus supports the view that the impact of safety net programs on work disincentives should be smaller in developing countries, for four reasons ... 

Programs are less generous in developing countries most safety net programs complement, rather than substitute for, the earnings of ahle-hodied beneficiaries. 

In his classic treatise, Okun (1975) provides an intuitive explanation of what he refers to as the leaky bucket used to transfer money from better-off taxpayers to poorer ones. He enumerates the leaks as administrative costs, reduced or misplaced work effort, distorted saving and investment behavior, and possible changes in socioeconomic attitudes. Okun s idea of a leaky bucket is often cited by those who characterize transfers as costly and appropriate for only a small policy role, but Okun s comments on the size of the leaks in the bucket suggest that their magnitude is fairly modest, which recent research on safety nets in developing countries largely confirms. 

Administrative costs. These are the costs to the government of tax administration and to taxpayers of such items as recordkeeping. Okun deems that these are easily measured, are subject to policy control, and amount to only a few percentage points of overall costs at most. Experience in developing countries confirms that safety net programs can be run well for modest administrative costs a useful rule of thumb is roughly 10 percent of overall program costs (see chapter 9 for more on the topic). 

Debt financing may be particularly applicable for safety nets when they benefit future generations in ways that will raise their productivity, and consequently future tax revenues, or when a temporary increase in expenditures is needed, as after an economic crisis or a natural disaster. Both these conditions pertained in 2001 when Colombia and Turkey borrowed money from the International Bank from Reconstruction and Development to found CCT programs to ensure that the economic crises in their countries did not impair the poor s ability to build human capital for their children. At the same time, such programs do not always scale back automatically after a crisis. 

The OECD countries have essentially added their social protection systems to the list of other social service and infrastructure duties of government. Social protection has not come directly as a trade-off between, for instance, establishing universal education or good road systems, but in addition to them. In the low-income country setting, debates on safety nets are often couched as transfers versus development. Perhaps the issue should be rephrased in terms of whether safety nets are an important (additional) component of development policy. 

Levels and Patterns of Safety Net Spending in Developing and Transition Countries... 

Care should be exercised in extrapolating these results to other safety net programs in developed or developing countries where strictly enforced means-tested programs with positive tax rates on extra earnings are rare and programs are less generous. 

Relatively less empirical research on potential labor-market disincentives associated with transfer programs is available for developing countries. However, as shown in the following list, the few studies that have investigated the effect of safety net programs on adult work effort suggest limited labor disincentive impacts ... 

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