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Real people’s livelihoods and families are at the receiving end of the chain of shocks that have rocked the globe during the recent economic crisis. Many are now questioning the effectiveness of unfettered free markets to deliver sustained and broad-based economic opportunity and prosperity—not least because they have experienced economic crises before. The debt crisis in Latin America in the 1980s and the Asian financial crisis in the late 1990s raised important questions about the efficacy of market mechanisms left to their own devices. And yet here the world is again.
The Great Recession, like past crises, highlights deficiencies in the social protection systems that are, or should be, in place to promote broad-based economic growth and to help citizens cope with economic hardship. Strengthening or sometimes setting up these social protection systems is now more important than ever.
Public spending serves an important function in pursuing economic growth objectives while ensuring that the gains are widely distributed to promote broad-based increases in living standards. Effective government social protection systems have a critical role to play in ensuring the well-being of its citizens.
For these reasons, setting up social protection systems was stated as one of the top priorities of the heads of government who make up the Group of 20 leading developed and developing nations, as well as the other key international groups such as the Group of 8 industrialized democracies and the G8+5. The G8+5 leaders were perhaps the most explicit at their most recent summit in 2009 in L’Aquila, Italy, where they stated:
Concerned by the high social costs of the crisis in terms of unemployment and poverty, we are committed to tackle the social dimension of the crisis, putting people’s concerns first. We are modernising, reinforcing and increasing the efficiency of social protection policies, including safety nets, health and education. Strengthened and sustainable social protection, supporting employment and enhancing skills, will also help to sustain and rebalance global demand.
But the G20 is now the primary institution for global governance, and it must make social protection a priority in its actions, not just in words, especially at a time when several countries face pressures for fiscal consolidation. The G20 evolved from a meeting of finance ministers and central bank governors to a meeting of the heads of state from G20 countries in the fall of 2008 to jointly deal with the shock waves emanating from the U.S. subprime mortgage crisis and the ensuing global financial crisis. At the G20 summit in Pittsburgh in the fall of 2009, the leaders declared that their governments would “continue to provide income, social protection, and training support for the unemployed and those most at risk of unemployment.”
While G20 leaders at the summit in Seoul in November this year agreed in their communiqué to “put jobs at the heart of the recovery, to provide social protection, decent work and ensure accelerated growth in low income countries,” the communiqué is thin on laying out a plan of action beyond this statement. There has been little progress on these goals since the early G20 leader’s summits, and as the world economy has slowly started to recover, countries are casting coordination aside to solidify their own recovery and rebuild their own economies at the expense of jointly fostering global demand by focusing on just job creation.
Sustained, broad-based economic growth continues to elude several developed and developing economies alike, even as the global recession is slowly receding. New policies for fiscal consolidation threaten existing social systems, let alone support new ones. But it is imperative that the world’s leaders move beyond rhetoric to action. The G20 leadership must ensure that:
- All national governments make social protection systems a priority.
- All donors should provide technical and financial assistance to help the develop- ing world establish these social protection institutions.
- All multilateral development institutions such as the International Labor Organization, the World Bank, and regional multilateral development banks coordinate their efforts to achieve maximum and lasting impact in the establishment of these social protection systems.
Social protection systems are fundamental to stabilizing and rebalancing national economies as well as the global economy in the wake of the economic crises. These systems facilitate economic and social adjustments to smooth out the ups and downs of business cycles and provide a means of ensuring that the benefits of growth are widely distributed to achieve rising living standards. Widely enacted social protection systems can raise living standards in countries around the world, contribute to stimulating economic growth during downturns, and expand the global middle class to fuel and rebalance global consumption. Social protection systems help to reduce poverty, inequality, and exclusion, and thus strengthen the social contract between national governments and society, reinforcing social cohesion and global stability.
The absence of adequate social protections both prolongs the pain of economic crises and makes economic recovery more difficult. The Great Recession, for example, resulted in global unemployment of nearly 212 million in 2009. Such a stunningly high unemployment rate poses a serious problem in developed countries. In the United States for example, workers significantly tightened their belts as they lost their jobs, their incomes, and their employment-based health care, which sent shock waves through a global economy that had become highly dependent on American consumption to fuel world economic demand.
This contraction in the United States as well as in other developed nations highlights the importance of rebalancing the global economy in a way that reinforces domestic consumption instead of relying on export-led growth, particularly in key emerging markets such as China and India. A recent analysis by the Center for American Progress encapsulates the importance of this rebalancing to restore global economic prosperity:
Expanding the social safety net will directly tackle the primary cause of high sav- ings rate in China and spur domestic consumption, which would offset export declines in the short term and generate sustainable, balanced growth in the long term. For China, the massive 850 million yuan healthcare plan, alongside better labor practices and pension plans, and more available public goods together constitute a significant step toward establishing the necessary services that Chinese citizens would need to stop stowing away contingency savings at such high rates.
But consumption is difficult to boost in China, where most economists estimate that the savings rate is at roughly 50 percent of gross domestic product. Such high savings rates stem primarily from the fact that Chinese citizens need to plan for health-related contingencies in the absence of an adequate social protection system.
What’s more, the Great Recession adversely affected the export-oriented sectors of developing countries’ economies, adding to unemployment and informal employment as formal employment waned, mostly in manufacturing. Estimates suggest that the most recent global economic crisis will raise the number of people living below $1.25 a day by 50 million.
National leaders’ attention to the merits of social protection systems in rebalancing the global economy has diminished as the painful effects of an economic crisis start to abate for some, and as news coverage shifts to different subjects such as fiscal consolidation. Sustainable reforms are unfortunately frequently the loser when the long-term benefits of establishing social protection systems meet the short-term political needs of ribbons to cut and elections to win. The exception that proves the rule is the effort and strife to enact comprehensive health care reform in the United States.
This policy brief highlights the benefits and indeed the necessity of social protection. It is a call to the international community and national governments to keep the focus on establishing adequate, effective, and efficient social protection systems for countries around the world. It makes the economic case for enacting worldwide social protection systems and then presents some specific policy recommendations to achieve this critical goal.
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