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Risk as welfare

Food versus cash debates obscure questions of financing and design of an effective social protection strategy.

Written by Shrayana Bhattacharya |
August 16, 2013 12:10:04 am

Food versus cash debates obscure questions of financing and design of an effective social protection strategy

So,where do you stand? Fiscal realism or fiscal fantasy? Food or cash? Teach them to fish or give them fish? First principles of economics or first principles of rights? Recent debates on the food security ordinance and the direct benefit transfer shrink “welfare” to binaries — large clunky investments in the public distribution of in-kind materials,or trimmer investments in the public distribution of cash. While binaries make for great soundbytes,they obscure more than they reveal. India is in the midst of major economic,social and political shifts,with an increasingly mobile population both between rural and urban areas and across states and people shifting from agriculture to diversified occupations and enterprises. Food versus cash is the tip of the iceberg. Looming underneath is the question of the financing and design of a pan-national social protection strategy.

Growth is change,and change is risky. Countries become richer not by doing more of the same thing,but by doing new things. Pratap Bhanu Mehta has argued that the process of economic growth in India is no less than a social revolution. This revolution is largely positive,but requires enterprises and individuals to take risks — and even people trying not to change will be buffeted by opportunities and shocks. Social protection strategy is about helping people manage the risks they face as they seek to better their circumstances. Such risk management has three broad categories.

First,risk prevention strategies to avoid adverse shocks. These operate at the macro level,such as labour policies to increase employment growth and the household level,such as livelihood promotion. Second,broad risk-mitigation strategies for shocks we all face. Health shocks can create catastrophic financial losses. Old age insurance,whether familial and informal or formal,is central. Third,“risk coping” strategies that seek to mitigate the impacts of shocks after they have occurred,which would classically be social assistance programmes,whether in kind or cash.

Currently,the public sector plays a small role in how households in India cope with risks. Most people have to rely on themselves and family and social networks. But traditional support networks are under strain. Declining intergenerational co-residence,rising migration and urbanisation strain familial and caste networks. Economic transformations weaken traditional patron-client relations. Migrants often lack social networks and even face hostility as “outsiders” in various states,making it tough to even find shelter. Weaker social networks may make it harder for urban households to cope with insecurity and the threat of crime.

In a society where men,marriage,family and caste continue to be the source of provision and protection for vulnerable individuals,being a non-conformist and deviating from discriminatory relationships is a serious risk. Moving to an alien city,or women deciding to work outside the home,challenge traditional norms of who does what,where,for whom and when. Often,moving to cities asserts greater personal independence,but the repercussions and social isolation can be a major shock. However,such risk-taking behaviour ultimately enhances not just growth but also wellbeing,as it bolsters the socio-economic status or bargaining position,as economists would say,of women or lower caste individuals and allows people to feel more empowered and productive.

Positive social changes in Indian labour markets are a source of shocks and social risk management can,if not reward,at least facilitate people in seizing these growth-enhancing opportunities. If individuals are to be encouraged to take up work and move away from traditional occupations,public commitment to insurance mechanisms is a must.

International evidence suggests that effective social protection systems contribute to growth by enabling higher risk/higher return productive activities and by cushioning the impacts of growth-enhancing reforms for those who lose out from them in the short run. If welfare programmes and entitlements are meant to be strategic investments in growth,rather than mere grants to avoid destitution,then social protection strategy must improve our ability to manage risks. This leads to a different set of design principles.

First,increasing preventive programmes that help those vulnerable to poverty to anticipate and manage risks and shocks better,not simply attempt to provide chronic transfers. While India’s range of programmes is impressive for a developing country,the current social policy architecture in spending and priorities remains strongly focused on chronic poverty and rural areas. Historically this made good sense. In a nation where most households are too poor to insure against risks and where a majority have already experienced the shocks before contributory schemes existed,social assistance is the appropriate intervention. But social protection policy has not yet responded to the evolution of risk-profiles,living standards,changing demographic realities and an emergent mobile — and vulnerable — middle class. The future will bring increasing demands for expanded coverage of social insurance. This social protection architecture need not be a massive fiscal burden,if the design is self-financing by helping to control additional demands on safety nets that might otherwise arise due to factors such as preventive risks,which can push households into capability and debt traps. Thus,an increased emphasis on interventions that promote ex ante management of household risk should be expected,particularly in medium- and high-growth states. This implies an increased emphasis on insurance-based interventions.

Aam Aadmi Bima Yojana (AABY) and Rashtriya Swasthya Bima Yojana (RSBY) are exciting and rapidly expanding initiatives that can provide a way forward. Health shocks are a major source of risk,and increased efforts to assist the poor and vulnerable in managing them will be a major challenge.

Second,social policies need to focus not just on the poor,but also on vulnerability to poverty. Poverty is increasingly not an unchanging characteristic of a fixed group. Those at risk of falling into poverty can be a greater share of the population than those currently poor. The literature on poverty dynamics and vulnerability in India suggests there is considerable movement in and out of poverty. In other words,regardless of the current poverty status,households may fall into poverty after exposure to large,severe and/or frequent shocks,especially when clustered close to the poverty line. For instance,between 1975 and 1985,88 per cent of households in ICRISAT villages experienced poverty in at least one year,even though only 22 per cent constituted the chronic poor. Since then,living standards in these villages have improved substantially,so that 57 per cent of households moved out of poverty between 1984 and 2001,while only 3 per cent fell into poverty. Similarly,the larger NCAER ARIS/ REDS panel of 250 villages indicates that 47 per cent of households moved out of poverty between 1970-71 and 1981-82,while another 26 per cent fell into poverty. Half the households in the sample remained chronically poor during this decade.

Finally,economic growth relies on change,and change in place is a big structural economic change. The increase in long-duration migration rates since the 1980s,combined with a continued reliance on seasonal migration as a coping or livelihood strategy,suggests the need for a significant departure from current social policies. Essentially,even though people are becoming increasingly mobile,the social protection system,as it currently stands,is designed for a static population. RSBY is one of the few portable schemes designed by the government. The direct benefit transfer experiment can help construct financial architecture to enable migrants to access services in different places. But who pays for them is yet to be discussed. In the destination villages or cities,migrants typically remain without an identity and hence are unable to draw on their entitlements or claim state resources for education,healthcare,water and sanitation and other basic services. A critical challenge is to design programmes that offer portable benefits,which can cater effectively to a population not defined by place.

Bhattacharya is an economist in the World Bank’s Social Protection Unit in Delhi. Pritchett is professor of the practice of international development at Harvard Kennedy School,US

Disclaimer: Views expressed in the column are personal

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