Plenary session 3: Finances

From reaction to readiness: On the need for more sustainable financing of social protection

Financing Universal Social Protection requires significant investment globally – an estimated USD 36.2 billion annually for low-income countries alone. The COVID-19 pandemic has shown that, when social protection is prioritised, more domestic financing can be mobilised. However, challenges are greatest in low-income countries where the needs are most pressing. Overall, there is a critical need for governments to move from reactiveness to readiness by putting in place the necessary systems and financing to comprehensively address shocks before and when they happen.

This was the subject of a plenary session on social protection financing – the third ‘building block’ of adaptive social protection – on day two of the Global Forum on Adaptive Social Protection, organised by Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) and the World Bank. A high-level panel discussed how to ensure financing for universal social protection that is ready to expand, as needed, to meet shocks. 

Three principles of social protection financing

David Stewart, Chief of the Child Poverty and Social Protection Unit at UNICEF, set the scene for the panel discussion, reminding delegates of the three principles for social protection financing, developed by the USP2030 Financing Working Group, which he currently chairs. The first – that with an estimated 659 million people still living in extreme poverty, the right to social security is a human right and this must not be forgotten in the drive for greater efficiency. The second – that social protection is a fundamental part of the social contract that binds governments to their citizens, and accordingly governments are the principal funders of social protection. And the third – that the poorest countries will continue to require external financial support to meet their citizens’ needs for protection.

David Stewart then asked: why, given widespread agreement on what needs to be done, has so little progress been made? He proposed that the discussion be framed from an advocacy perspective and informed by the responses to three simple questions:

What is needed, who can make it happen, what do they need to hear?

He started with the size of the challenge. The International Labour Organization (ILO) has estimated that more than USD 1.2 trillion will be needed to achieve the basics, that is, social protection and health care by 2030 for the most vulnerable, i.e. children, the elderly, people with disabilities and pregnant women. To achieve universal access to social protection that is ready to expand, as needed, to meet shocks, David Stewart said, governments will require strong foundational social protection systems, approaches to address loss and damage and more agile, adaptive systems financed through mechanisms such as disaster risk financing.

In order to reach SDG target 1.3, the ILO estimates that USD 36.2 billion annually is needed for low-income countries alone. To put these financing gaps into perspective, David Stewart pointed to various measures of global wealth.

We are reaching a point where we have to think differently if we want to achieve a just transition. It’s expected that the global market for mega yachts in 10 years time will be USD 33 billion. This could fund the entire coverage gap for children under five for social protection in low-income countries. Clearly, there is something very wrong with this system.

David Stewart

He then moved to potential financing sources, highlighting increased tax revenues, reallocation of funds and external aid, among others. However, he continued, countries in, or at risk of debt distress will have limited options for raising additional domestic financing. As of November 2022, 37 out of the world’s 69 poorest countries were at risk of, or already in debt distress, while one in four middle-income countries, which host the majority of the extreme poor, were at high risk of fiscal crisis.

Making a stronger case for investing in adaptive social protection

While there is robust and widely accepted evidence that investing in foundational social protection systems is a good thing, David Stewart suggested that we need to get better at making the case for investing in adaptive social protection. Building on foundation systems to establish more agile, adaptive systems can build resilience at the household level, helping to prevent migration and avoid negative coping mechanisms, such as asset selling. Adaptive systems can also strengthen the social contract and, as David Stewart stated, ‘there is really nothing more fundamental that a state can do than turn up when there’s a disaster’. And, as we saw during the pandemic, adaptive systems can help to prevent long-term economic damage.

Moving to the main plenary discussion, the moderator, Dr Alexandre Kolev, Head of the Social Cohesion Unit at the OECD Development Centre, then called on the four panel members from the Inter-American Development Bank (IDB), the International Monetary Fund (IMF), and the governments of the Republic of Indonesia and Zambia. A number of interesting themes emerged from the discussion.

Political economy questions are driving investment decisions

If the investment case is so strong, what are the main obstacles to channelling more financing to social protection? Vice Minister of Finance for the Government of the Republic of Indonesia, H.E. Suahasil Nazara, knows only too well the challenges his government faces in balancing the annual budget. He pointed to three critical budget functions, saying ‘it’s about allocation, about stabilising the economy and about distribution’. Referring to the competing demands from different line ministries, he said they should not come with a message of entitlement, but should understand what the Treasury needs to hear.

It is not about the money – the money is always there. It’s about what we do with the money. Line ministries need to show us that their programme matters – that it will touch the lives of the people and will improve distribution in the country.

H.E. Suahasil Nazara

Ministries responsible for social spending need to understand the priorities of budget holders and know what language to use. They must be able to present evidence-based, persuasive arguments, and understand when to do this. In short, they must understand the political economy.

Pablo Ibarrarán, Social Protection and Health Division Chief at the IDB also drew attention to the importance of understanding the political economy, particularly when it comes to politically tricky issues, such as removing fuel subsidies. There have been many unsuccessful attempts in Latin America to reduce or eliminate highly regressive fuel subsidies, which far exceed spending on cash transfers – the main conduit for social protection in the region. There will always be those who stand to gain and those who will lose from proposed budget changes, and part of the challenge lies in addressing the concerns of different interest groups. When it comes to elite interests in particular, they need to be consulted and their expectations managed.

We are already spending money on subsidies which are justified on the basis that they help the poor when in reality they do not. But, when you take a subsidy out, people will lose and you will have to compensate them. It’s about working towards a just transition.

Pablo Ibarrarán

Social spending is ‘macro-critical,’ declares the IMF

Delphine Prady, Senior Economist at the IMF Fiscal Affairs Department, said that earlier in the morning someone had approached her to say they did not know the IMF cared about social protection. In fact, she said, this could not be further from the truth; for the IMF, social spending is ‘macro-critical’; that is, crucial to the achievement of macroeconomic and financial stability. When fewer people are poor, countries’ fiscal space increases through rises in domestic taxation, a more educated populace and more productive economy, and lower costs associated with poverty, such as healthcare.

Echoing H.E. Suahasil Nazara’s point about the importance of looking at how funds are invested rather than being concerned only with whether they are available, Delphine Prady pointed to the need for financing and spending that is not only efficient and effective, but also progressive. This is particularly important in countries which have limited fiscal space, such as low- and lower-middle income countries. The IMF’s role is to support governments in raising fiscal space in three main ways: lending; surveillance; and capacity development for line ministries.

True, the IMF goes to countries in times of crisis, when it is key that social spending is spared – this is what the ‘floors’ are all about. But we also need a longer-term perspective – ‘beyond the floors’ if you like. How do you build up fiscal space for social spending? This is what we at IMF have in mind.

Delphine Prady

Financing adaptive social protection starts with financing foundational social protection systems

Pablo Ibarrarán of the IDB talked of the importance of having high-quality foundational systems in place, including the governance and architecture, on which to build the digitalised processes necessary for moving to more adaptive and responsive social protection systems. In answer to a question from Dr Alexandre Kolev about what has worked in terms of social protection financing in times of shocks, he said, ‘regular social protection needs to be sufficiently funded to begin with, because it creates the resilience of those who are most vulnerable. In Latin America there are about 120 million families receiving this type of assistance, and operating these programmes efficiently and sustainably is a very important starting point.’

Pre-positioning funds supports shock responsive social protection

Angela Kawandami, Permanent Secretary in the Ministry of Community Development and Social Services in Zambia, pointed to difficulties in making the case for investing in something that has yet to happen, particularly when one is competing with requests from sectors that generate income, such as mining.

There is a need to convince governments that investing in social protection will save money in the long run, in terms of people’s access to health and to education, allowing them to eat two meals a day, and so on.

Angela Kawandami

Countries such as Zambia as well as many others have learnt the hard way through experiencing repeated shocks, as Angela Kawandami explained, ‘as a country we experienced first a drought in 2019 and then the pandemic came and at that time, we were not ready and had to wait for funding in order to respond’. However, this situation has since changed in Zambia, and the government is in the process of passing a law that will compel the Treasury to set up fund for disaster response.

Delaying the response in times of a disaster has a huge impact on people’s welfare, and disaster risk financing mechanisms are one way to pre-position funds ahead of disasters to enable a more rapid response. As Pablo Ibarrarán said, ‘you don’t need the money now, but you need to know where you will get it from when disaster hits’. 

There are now some good examples to learn from. One is the Caribbean Catastrophic Risk Insurance Facility, which is a regional fund for Caribbean governments, designed to limit their exposure to the financial impacts of disasters such as volcanic eruptions and hurricanes. The Facility works with private insurers and international financial institutions to quickly provide short-term liquidity when a policy is triggered.

Indonesia’s Sovereign Wealth Fund provides a further example. As an archipelagic nation, Indonesia is highly prone to natural disasters, and the 2004 tsunami was particularly devastating for the country. When several smaller natural disasters followed the tsunami, it was clear that the time had come to re-think the mechanisms in place for responding to disasters. This process culminated in the 2018 Disaster Risk Financing Strategy and the creation of the Sovereign Wealth Fund. According to H.E. Suahsil Nazara, ‘this is our investment for the future; little by little we can accumulate the long-term financing we need for the sector’.

Reasons for optimism

For David Stewart, there are reasons for optimism: nearly USD 90 out of the USD 100 billion needed for climate adaptation was raised in 2020, and USD 10 billion has been pledged to the Green Climate Fund from 49 countries, regions and cities, including nine low- and middle-income countries. Furthermore, loss and damage discussions are underway, and there is growing momentum around the Global Accelerator for Social Protection and an SDG funding window for social protection. Meanwhile, richer countries are addressing debt distress and scaling up development financing.

Finally, Delphine Prady called for more exchanges like this one, bringing together delegates from the Global South and Global North and from many diverse and relevant organisations, saying, ‘the dialogue we are having today is really important and we need to keep on doing this. Collaboration is a source of optimism and, more importantly, it can make things happen.’