Social protection is defined as the set of policies and programs that help individuals and households, especially the poor and vulnerable, cope with crises and shocks, search for work, improve productivity, invest in the health and education of their children, and protect the elderly. Examples of current social protection programs in the Philippines are the Pantawid Pamilyang Pilipino Program (4Ps), a conditional cash assistance to poor families, and the universal health care insurance for all Filipinos. So, why do we need these programs?
Periods of reduced or absent working capacity (childhood, old age, illness) are experienced by everyone. Furthermore, there are times when capabilities are underutilized (lack of demand, unemployment, and underemployment); or when the return from labor is too low (e.g., because of low production due to disasters); or when there are emergency needs (e.g., health issues). Solutions to these kinds of problems are implemented through social protection programs. They fill up the income and capacity gaps during these periods in one’s life cycle. In short, social protection serves as an instrument for consumption smoothing in a life of ups and downs.
During their entire lives, all men and women are subjected to a wide range of unforeseen events. Exposure to risks is, indeed, a normal aspect of living. These hazards come from adverse shocks resulting from natural, health, social, economic, political, and environmental risks. Risks are either idiosyncratic (specific to an individual) or covariant (simultaneously occurring to a group of individuals). Some of these risks are from acts of nature, while others are “man-made.” These risks do not occur evenly among all men and women. Certain individuals and groups have a much higher exposure to risk than others because of socio-demographic characteristics, economic status, physical or mental condition, age, lifestyle, etc. Vulnerability is a term used to describe this state of high exposure to certain risks, coupled with a limited ability to cope against their negative consequences. Social protection programs shield these vulnerable individuals from the diverse risks and assist them to become resilient whenever shocks hit them.
Determinant of inclusive growth
Social protection, according to an OECD study, promotes inclusive growth through its direct impact on individuals and households by: (i) enabling households to accumulate productive assets; (ii) preventing the loss of productive capital after a shock; (iii) enabling innovation and entrepreneurship; (iv) affecting labor market participation and savings positively; and (v) supporting investments in human capital. However, it may have a negative growth effect induced by creating dependency and adverse incentives to work and save. This is what economists call a moral hazard problem. For example, unemployment insurance may encourage individuals to stay out of work and simply rely on the insurance payouts. Thus, social protection programs must be designed well to avoid such a problem.
Social protection can guarantee a minimum level of economic and social wellbeing while functioning as safety nets for marginalized and vulnerable households and individuals to mitigate the risk of poverty. It also serves as a catalyst for improved social mobility and help close inequality gaps. By improving access to opportunities, individuals and households may transcend resource constraints, enabling them to further develop their human capital or engage in more productive economic activities.
Increased aggregate demand
The OECD study also notes that social protection also affects growth at the community (meso) and national (macro) levels. At the meso level, social protection programs can produce multiplier effects from increased local consumption and production and facilitate the accumulation of community assets. At the macro level, social protection can have wide growth-enhancing effects on the economy by increasing aggregate household productivity, stimulating aggregate demand and, thus, increasing employment, in particular through counter-cyclical spending during economic downturns, and raising consumption and income tax revenues. In addition, indirect effects such as facilitating economic reforms, building human capital, enhancing social cohesion, and influencing fertility can further help spur growth.
Social protection as economic stabilizer
Social protection and social policy—in particular, unemployment insurance, cash transfers, and minimum income support—have significantly contributed to the reduction in the intensity and the length of recessionary episodes and in stabilizing labor markets. Not only does social protection provide a safety net for vulnerable groups which have been hurt by the crisis, it also has a stabilizing effect on the overall demand for goods and services produced in the economy, as the latter experiences its boom-and-bust cycles. And if the social protection programs are well institutionalized, they become automatic stabilizers in the macroeconomy.
In sum, social protection is an economic tool that enhances inclusive growth and stabilizes household consumption and the aggregate demand in the macroeconomy.
Dr. Fernando T. Aldaba is Professor of Economics and former Dean of the School of Social Sciences at Ateneo de Manila University.