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ILO study

Developing countries opting for social protection over fiscal consolidation

An ILO report launched ahead of the meeting of Economic and Social Councils in Seoul, South Korea, points to divergent trends: while many countries are moving towards more fiscal consolidation and less social spending, several developing countries are boldly expanding social protection schemes.

Press release | 17 November 2014
© ILO / Ferry Latief
GENEVA – While the majority of countries around the world are expected to cut public expenditures in 2015 and beyond, others will be moving in the opposite direction to expand social protection measures, says a new policy paper by the International Labour Organization (ILO).

According to the ILO’s “Social protection global policy trends 2010-2015”, 120 countries will be slashing public expenditure in 2015. Of these, 86 are developing countries. The overall number is expected to rise to 131 countries in 2016.

But while many countries are making cuts to public spending, most middle-income countries are boldly expanding their social protection systems, with immediate impacts on reducing poverty and inequalities, thereby contributing to their domestic demand-led growth strategies.

“This presents a powerful development lesson,” said Isabel Ortiz, Director of the ILO Social Protection Department. “As this study shows, even in the poorest countries there are options available to expand fiscal space for social protection.”

Countries like Argentina and South Africa have introduced universal child benefits in recent years. Others, like Bolivia, Botswana, Brazil, China, Maldives, Namibia, Panama, South Africa, Swaziland and Timor-Leste, have achieved universal or nearly universal coverage of pensions. Many others have introduced social transfers for the unemployed, mothers, children and older persons.

Some lower-income countries have also extended social protection mainly through narrowly targeted temporary safety nets with very low benefit levels. However, in many of these countries debates are underway to build more comprehensive social protection floors.

Impact on employment, poverty and inequality

The worldwide trends towards fiscal consolidation, that is, austerity measures, can be expected to aggravate the employment crisis and inequality trends, the report says. In Europe, these measures have contributed to increases in poverty or social exclusion, now affecting 123 million or 24 per cent of the population of the European Union.

In developing countries that are not investing in social protection, adjustment measures are expected to negatively affect millions of households that have been coping with fewer and lower-paying job opportunities, higher food and fuel costs, and reduced access to public services since the crisis began.

The ILO paper builds on the World Social Protection Report 2014/15: Building economic recovery, inclusive development and social justice and uses the latest IMF fiscal projections from the World Economic Outlook (October 2014). It was launched ahead of the International Conference on the Role of Economic and Social Councils and Social Dialogue in Promoting the Social Protection Floor, held in Seoul, South Korea.

The study analyses social protection policies between 2010 and 2015. It shows that in the first phase of the crisis (2008–09), fiscal stimulus plans were launched in about 50 countries and social protection played a strong role in the expansionary response.

However, in the second phase of the crisis (2010 onwards), many governments in Europe and elsewhere embarked on fiscal consolidation and premature contraction of expenditures, despite the urgent need for support from vulnerable populations.

A fifth of countries are undergoing excessive fiscal contraction, defined as cutting public expenditures below pre-crisis levels. These include countries with significant development challenges, such as Eritrea, Sudan, Yemen, Sri Lanka, Ethiopia, Nigeria, Guinea-Bissau, Guatemala and Burundi, among others.

Adjustment measures include the elimination or reduction of food and fuel subsidies; cuts or caps on the wage bill, including for health and social care workers; narrower targeting of social protection benefits; and reforms of pension and health care systems. Governments are also considering revenue-side measures, for example increasing consumption taxes such as value added tax (VAT) on basic products that are consumed by poor households.

“In many countries, policy responses to the global crisis have been taken behind closed doors, as technocratic solutions with limited or no consultation. This has often resulted in a lack of public ownership, civil unrest and adverse socio-economic impacts,” said Isabel Ortiz.

“Governments, employers, workers and civil society must come together in a national dialogue to ensure a socially-responsible recovery aimed at achieving inclusive growth, social protection and social justice,” she added.

The ILO Social Protection Floors Recommendation, 2012 (No. 202) reflects a consensus among governments and employers’ and workers’ organizations from 185 countries on the need to extend social security. The roll-out of social protection floors has also been endorsed by the G20 and the United Nations.

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