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Key Text Financing Social Protection

Author: A Barrientos
Date: 2004
Size: 25 pages (152 KB)

Summary

What is the role of international donors in financing social protection? This paper, prepared for the Department for International Development, examines the opportunities, constraints and options available to a bilateral donor in the financing of social protection. It also considers financing of social protection by governments. Donors can play a major role in financing social protection, through, for example, budget support and providing start-up funds for social protection programmes.

Social protection can be defined as all interventions from public, private, voluntary organisations and informal networks to support communities, households and individuals to prevent, manage and overcome a defined set of risks and vulnerabilities. It helps address poverty and contributes to growth and development. Different sources of financing for social protection include international aid, government expenditure, private, community and non-governmental organisation (NGO) financing and household saving and expenditure.

Governments support social protection through macroeconomic policies, social service expenditure, tax policy and regulations like labour standards. Potential sources of international aid include structural adjustment finance, budget support and programme or project aid, but not all of these types of aid are necessarily appropriate for social protection.

Channels for strengthening social protection include increasing government expenditure, developing a social protection policy framework and budget support from donors. Financing from donors can be crucial for social protection as governments face significant constraints in increasing expenditure. Major issues include:

Switching government resources towards social protection is a long-term process. Governments in developing countries also have limited capacity to raise revenues through taxation.
There are welfare costs to raising taxes but taxation can also lead to double dividends by correcting market failures and raising revenues for social protection.
The effectiveness of budget support depends on adequate budgetary planning, control and management as well as agreement on policy priorities between donors and the government.
Aid for projects that demonstrate the effects of successful social protection programmes helps generate policy support for social protection.
Medium and long-term social protection interventions are most effective, but donors prefer financing short-term, sectoral and infrastructure programmes.
Start-up funds from multilateral organisations have been important in establishing long-term social protection programmes.

Strengthening social protection in developing countries may involve partnerships with civil society around integrated policy interventions. Donors can provide start-up funds and know-how for long-term programmes. Other options include one-off contributions to commodity and fiscal stabilisation funds, which mitigate the impacts of production risks and macroeconomic shocks. Some factors to consider are:

The social dividends, or the cost of uninsured risk and the gains from social protection need to be quantified to generate support for financing social protection.
Increased expenditure on social protection may divert resources away from poverty reduction programmes. To avoid this, social protection financing should be additional.
The mix of consumption and investment in social protection programmes can be influenced to account for donors’ preference for investment. For example, cash transfers can be conditional on a minimum level of investment.
DFID can provide support to the development of a social protection policy framework.
DFID should focus on partnerships with donors working on social protection, and ensure that social protection remains focused on the poorest and most vulnerable. It should utilise its expertise in education, health and HIV/AIDS and its work with civil society.

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Source: Barrientos, A., 2004, ‘Financing Social Protection’, Draft Theme Paper 2, report prepared for DFID, Institute of Development Policy Management (IDPM), Manchester
Author: Overseas Development Institute (ODI), http://www.odi.org.uk/