Public Policy and Development Masters Programme

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1 Public Policy and Development Masters Programme Paris School of Economics Course on Social Policies in Developing Countries Lecture 3: Policy objectives, constraints and domains. Francisco H. G. Ferreira

2 Plan of the Lecture 1. Social policy objectives in LDCs 2. Constraints on policy design 3. Policy domains Human development Asset (and access) redistribution Market regulation Social Protection

3 1. Social policy objectives in LDCs 1. Poverty reduction / elimination: The incidence of poverty The poverty gap The severity of poverty 2. Risk management Health Unemployment Weather Late / early death (as seen in Prof. Pestieau s half of the course, for developed countries) 3. Promoting equality of opportunities 4. Maximizing the capabilities of the least advantaged

4 P(2) 1. Social policy objectives in LDCs If the chosen policy objective is to reduce poverty, then: a) Enormous practical importance is attached to the poverty line. Although it is essentially an arbitrary threshold, it then becomes a line above which the government is indifferent to welfare. b) It is essential to focus on a measure that is sensitive to the depth and distribution of poverty, such as FGT (α > 2). P ( F( y); z, α ) = p( y) z y R+ p( y) = z otherwise α z α df( y) p(y) 1 P() P(1) z y

5 1. Social policy objectives in LDCs Policy instruments aimed at helping households manage risk: Are justified by the absence or imperfection of insurance markets. Often have a rationale analogous to social protection policies in developed countries: Public health systems and subsidized health insurance Public pension schemes Unemployment insurance But may have features specific to local conditions Weather-based crop insurance Workfare programs that complement unemployment insurance in contexts where most of the labor force is informal.

6 1. Social policy objectives in LDCs Equality of Opportunities: F ( u) = F ( u), i, j T i T j But: (i) levels matter; and (ii) there may be aversion to absolute deprivation in the space of outcomes. To maximize the future welfare of the least advantaged type, subject to a no absolute deprivation constraint: max min Φ Φ t subject to j t u e ij s δ ( t s) j µ ( Φ )ds s u i, j, s s t t Bourguignon, Ferreira & Walton, JEI, 27.

7 1. Social policy objectives in LDCs Deconstructing the equitable development policy problem: max min φ Φ t T t e δ ( t s ) µ T s ds Growth matters subject to u it t u i, T, t t Permissible Policy Set: Technical feasibility and social acceptability Poverty eradication as a constraint. Rawlsian criterion. All weight on the least advantaged.

8 1. Social policy objectives in LDCs 1. A distribution of opportunities is a set of conditional advantage distributions. The concept is thus contingent on both the choice of advantage, and on the partition of the population into types. 2. Like capabilities, opportunities move the currency of egalitarian justice to a space of potentials, rather than actuals. Both are measured consequentially but, unlike capabilities, opportunities are measured one dimension at a time.

9 A non-income example: child survival Source: WDR 26

10 2. Constraints on policy design 1. Budget constraints. Although government budgets can be increased by taxation, taxes should not exceed the point at which the marginal social benefit of public expenditures equals the marginal social value of private income. 2. Administrative capacity constraints. It is what can be done on the ground, rather than what can be written into law, that matters. 3. Participation and incentive compatibility (i.e. incentive ) constraints. Example: child enrollment (i) into any school; (ii) into private schools. 4. Ethical or political constraints on the set of permissible policies. Example: mandatory restrictions on fertility? Forcible policies against assortative mating?

11 3. Policy Domains Different policy entry points along the process of determination of individual well-being Box 1: Schematic Representation of Household Income Determination I (Z, w) P (X, Z, w) V(J) D( p(x, Z, J), X, Z, J, w) G(ω, w) Investment in Human Capital The Matching Function Remuneration in the Labor Market Household Formation F(y) Redistribution H(y+t)

12 3. Policy Domains Different policy entry points along the process of determination of individual well-being Box 1: Schematic Representation of Household Income Determination I (Z, w) P (X, Z, w) V(J) D( p(x, Z, J), X, Z, J, w) G(ω, w) Investment in Human Capital The Matching Function Remuneration in the Labor Market Household Formation F(y) Redistribution H(y+t)

13 Source: Paxson and Schady, JHR, Policy Domains 1. Human Development: ECD, Health, Education Cognitive test performance by children in Ecuador by wealth quartiles by maternal education

14 3. Policy Domains 1. Human Development: ECD, Health, Education Mental development of undersized children (low height for age): The Jamaican Study Source: Grantham-McGregor et al., 1991.

15 3. Policy Domains 1. Human Development: ECD, Health, Education

16 3. Policy Domains 2. Re-distribution of other assets. E.g. land. Source: WDR 26

17 3. Policy Domains 2. Re-distribution of other assets. E.g. access to infrastructure Water sources and water price in Niger Source: WDR 26

18 3. Policy Domains 3. Fair treatment in markets, and by other institutions Between the extremes of redistributing assets (ex ante) and incomes (ex post), lies the realm of regulating markets and institutions. Combat discrimination in labor markets. Combat segmentation in asset and labor markets. Reduce barriers to entry (in capital and other markets). With the exception of labor markets, where monopsony arguments apply with special force, competition on the supply side is likely to be both equitable and efficient. Always mind the impact of policies on individual incentives to participate and produce. The distribution of power matters for how institutions work.

19 3. Policy Domains 4. Ex-post redistribution: social insurance and social assistance. Social protection systems in most LDCs and certainly in LAC are usually truncated. The provision of social insurance in LAC is based on a contributory system (Bismarckian system). Workers in the formal sector make contributions via payroll taxes in return for the promise of a set of benefits that include pensions, health insurance, insurance against professional risks (work-related disability), etc. By virtue of this arrangement, coverage of welfare systems is determined by the nature of the labor contract. On one hand, a segment of population comprised of formal employers and employees enjoys coverage of a relatively generous and multidimensional package of social benefits. On the other hand, there is a group of individuals either in the informal sector or unemployed that have a much more limited access to formal and comprehensive social risk management strategies. Source: World Bank (29): Building an Effective and Inclusive Social Protection System in Latin America: Diagnosis and Policy Directions (draft report).

20 This leads to coverage rates that are typically low Figure 1.2: Contributory Pension Coverage in Latin America and the Caribbean, 199s to 2s [1] (Percent of economically active population contributing to pension systems) 's 2's

21 and which generally excluded those most in need. Figure Error! No text of specified style in document..1: Contributory Pension Coverage Rates in Latin America and the Caribbean, 2s, by Quintile of Per capita Income (Percent of economically active population contributing to pension systems) Paraguay Nicaragua Honduras Dom. Rep. Bolivia Peru Ecuador Guatemala El Salvador Colombia Venezuela Mexico Argentina Panama Brazil Uruguay Costa Rica Chile

22 The same pattern is true for contributory health insurance coverage in most countries (although Costa Rica is a noteworthy exception). Figure Error! No text of specified style in document..1: Contributory Health Insurance Coverage in Latin America and the Caribbean, mid-2s, by Decile of Per capita Income (Percent of population covered) Honduras Nicaragua Paraguay Jamaica Ecuador Peru Guatemala El Salvador Mexico Colombia Argentina Chile Uruguay Costa Rica

23 Relatively recently, non-contributory pension and health insurance schemes have been introduced to combine the risk-pooling and poverty-reduction functions. Figure Error! No text of specified style in document..1: Contributory and Non-contributory Pension Coverage among the elderly, 2s, by income quintiles and source (percent of population over age 65) Bolivia Ecuador Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Costa Rica Chile Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Source: World Bank staff calculations; adapted from Rofman, Lucchetti, and Ourens (28)

24 Where they have been introduced, these NCP&HS have substantially broadened the reach of social protection to the poor. But in the developing world as a whole, they are still relatively rare. Figure Error! No text of specified style in document..1: Contributory, Non-contributory, and Combined Health Insurance Coverage mid-2s, by income quintiles and source (percent of population covered) Peru Mexico D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 Colombia Chile D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 Uruguay Costa Rica D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 D1 D2 D3 D4 D5 D6 D7 D8 D9 D1

25 Broader, non-contributory social insurance schemes complement a growing array of (explicitly anti-poverty) social assistance instruments, such as CCTs and school feeding programs. While these generally have a progressive incidence, they seldom cover the entire target population. Figure Error! No text of specified style in document..1: Social Assistance Coverage: Food/School Feeding Programs (percent of households) School Feeding (Uruguay) School Feeding (Honduras) D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 School Feeding (Nicaragua) Vaso de Leche (Peru) D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 School Feeding (Paraguay) Vaso de Atol (Guatemala) D1 D2 D3 D4 D5 D6 D7 D8 D9 D1 D1 D2 D3 D4 D5 D6 D7 D8 D9 D1

26 3. Policy Domains 4. Ex-post redistribution: social insurance and social assistance. Despite recent progress, the incidence of social protection expenditures in LAC still varies dramatically, implying plenty of room for reform. Concentration coefficients for programs in Mexico. PROGRESA school PROGRESA food Lower sec. education Primary education Health (SSA) PROCAMPO School breakf. (DIF) Upper secondary education ALL (excl. Pensions) Tortilla (FIDELIST) Electricity Subsidy Health (IMSS) Active workers (IMSS) GINI Health (ISSSTE) Tertiary education Milk subsidy (LICONSA) Pensioners (ISSSTE) Pensioners (IMSS) Active workers (ISSSTE) Source: de Ferranti et. al., 24

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