The webinar Strengthening social contracts in South Asia in the aftermath of the COVID-19 crisis: the adequacy of social protection responses in the short term and the future role of universal social protection was the second event of the Social Protection in South Asia webinar series. It took place on June 25, 2020 and was jointly organised by the IPC-IG, UNICEF, and Development Pathways. The webinar was moderated by Louise Moreira Daniels (UNICEF Sri Lanka) who was joined by presenters Abdul Alim (UNICEF ROSA), Fabio Veras (IPC-IG), and Stephen Kidd (Development Pathways).
The webinar addressed crucial questions brought up by the COVID-19 pandemic in South Asia: To what extent have existing social protection responses succeeded in tackling the immediate impacts of the COVID-19 crisis? To what extent have the shortcomings of the responses and the severity of the crisis been exacerbated due to structural issues that have hindered the development of strong and inclusive social contracts in South Asian countries? And, most importantly, to what extent can universal transfers enhance the shock-responsiveness of existing social protection systems while also strengthening social contracts in South Asia?
The social contract in South Asia: state nations but no nation state
To provide a background for the following presentations and highlight the institutional setting that social protection and the COVID-19 crisis encounter in the region, Abdul Alim started by giving some critical context of the structural deficiencies that undermine social cohesion in South Asia. His first remarks were dedicated to the political history of the region: making considerations on how the social contract that has been shaped in South Asia relates to the colonial origins that formed states in the region.
The concept of a ‘nation state’ lies at the very core of the idea of social contracts: the political boundaries of the state are congruent with a common cultural identity among its citizens which forges a social bond between them. This common identity would be what builds trust in the institutions of the state and nurtures the solidarity that underlies a social contract. Conversely, political borders in South Asia were mostly established by colonial powers and without regard for a sense of cultural belonging among the citizens of the states they established. In consequence, the region was left with state nations but no nation state after the colonial rulers departed.
The multi-ethnic, multi-religious, and multi-national states found in the region to date thus make for a much frailer fundament on which to build a social contract than is the case in Europe, for example. Even on a regional level, the legacy of state formation has persisted to the present day. South Asia remains one of the least integrated regions in relation to intra-country trade and the political relations between states have been shaped by the delicate origins of state formation in the region. As a consequence, South Asian countries continue to struggle for the formation of a national identity until today.
Low trust, weak institutions: the fissures in South Asian states exposed by COVID-19
As opposed to being set-up to prioritise the common good, institutions in South Asia were established to benefit a ruling minority. The extracted and extracting institutions the colonisers left behind still undermine state effectiveness today and have seen an insufficient overhaul. As a result, trust in institutions is extremely low as is reflected by:
- Low tax to GDP ratios.
- High informality.
- Low social spending (perhaps with the exception of Nepal) which includes social protection expenditure remaining well below the 4% of GDP magnitude observed in other regions.
Despite high levels of economic growth in recent years, COVID-19 has not created new cracks in the fundament of South Asian states but rather exposed some of the fissures that have been long existing.
- Health sector spending remains one of the lowest in the world: most countries in the region spent around or below 1% of GDP on public health before the pandemic.
- Public services are being replaced by private investments: in India and Pakistan, almost 75% of health expenditure is out-of-pocket expenditure having to replace public social welfare.
- Social welfare services, such as health care, that should lie within the mandate of the state to safeguard adequate coverage of the vulnerable have effectively become a business fuelled by private investments.
A low development equilibrium
Consistently low levels of social expenditure have brought about a situation characterised by a “low-development equilibrium” in the region. As a consequence, South Asia is trapped in a vicious cycle: low social expenditure that stymies human capital formation, which in turn would lead to low tax revenues that prevent an adequate investment in social protection and public welfare. One of the symptoms of this adverse dynamic is the country’s high dependence on remittances brought about by low levels of human capital and the subsequent exodus of (low-skilled) labour. Together, the region faces a trinity of weaknesses that COVID-19 has laid bare:
1. Social contracts are weak in South Asia, which
2. is reflected in low trust in institutions, and
3. traps South Asia in a low-development equilibrium.
How is this possible despite democracy being fairly widespread in the region? Basing on colonial institutions, there is still often only partial representation of public interest in government institutions in South Asian states. Hierarchical, divided societies with institutions founded on a history of extraction would thus leave room for policies that benefit the few, not the many.
From vicious to virtuous cycle: universal and inclusive social protection systems
In many ways, the current crisis has acted as a catalyser for the chasms in South Asian societies. Protests and social divide have sparked off and might continue to drive society apart for as long as the current vicious cycle remains. One of the ways to achieve both, an adequate response to the ongoing crisis and building a functioning social contract in the region that bases on trust in institutions, is by promoting inclusive social protection systems.
This would build up the confidence in the state that underlies social cohesion and could mean a vital step towards a virtuous, not vicious, cycle driven by universal social protection systems.
The COVID-19 pandemic in South Asia
After these initial remarks, Fabio Veras moved the focus toward the socio-economic impact of COVID-19 in the region and the policy response to the crisis. The analysis he presented is based on an IPC-IG Policy Brief on the COVID-19 crisis in South Asia, currently under development in collaboration with the UNICEF ROSA. A special focus of this work is the so-called ‘missing middle’ not covered by social assistance or social insurance and suggestions for a revamped social protection landscape that includes these mostly informal or unpaid workers.
On the epidemiological side, the region is still seeing increased numbers of COVID-19 infections with India emerging as one of the global hotspots of the pandemic currently. While the outbreak was causing serious impacts around in other regions, South Asia started to be heavily affected at a comparatively late point. This gave its countries the chance to adopt stringent social distancing measures from mid to late March on to avoid overburdening their underdeveloped health systems as had been pioneered in other countries elsewhere before. The responses taken in the region have varied in stringency and timing. However, overall, lockdowns were near full in all countries in the region, but Afghanistan and Bhutan by early April. Common measures adopted across South Asian countries were school and workplace closures, and severe restrictions on public transport.
Strict lockdown measures took an economic toll, particularly on those in the informal sector. Under the imperative of saving livelihoods, countries in the region have thus started to loosen restrictions again recently. This has sparked a debate in the region on the need for further general, as opposed to local (“smart”) lockdowns, and an apparent trade-off between “lives vs. livelihoods”.
A dire outlook: the economic impacts in the region
COVID-19 presents somewhat of an atypical economic shock. In essence, it is constituted by three interrelated shocks that have an impact on economic activity in the region. Furthermore, they have the potential to exacerbate each other leading to a protracted economic crisis:
1. A negative supply shock brought about by closed shops and venues that cannot operate during (strict or partial) lockdown.
2. A negative demand shock due to an internal slump in demand and spillovers from developed countries hit by the crisis reflected in lower demand for tourism and export products.
3. A global financial shock causing capital withdrawals from emerging markets, increases in interest costs for developing countries and currency depreciation.
Due to the uncertain nature of “second-round effects”, economic shocks across the globe negatively impinging on each other, and the further development of the pandemic, quantifying the economic impact of the crisis is somewhat speculative at this point and comes with significant downside risks. This is also reflected in the optimistic bias of earlier estimates of the economic impacts of the crisis where the pandemic was not yet in full swing and a V-shaped, sharp recovery seemed the widespread assumption.
The most recent estimates forecast recessions in most South Asian countries with the economic slump dragging on into 2021.
With incomes falling, private household consumption is expected to diminish as well. This would also be reflected in a considerable setback in reaching SDG 1, an end to poverty in all its forms everywhere. Preliminary estimates here suggest that extreme poverty might increase by 1.8 to 2.3 percentage points in South Asia or that up to 42 million new people fall below the World Bank’s $1.90 threshold. Consistent with their population sizes, the majority of these decreases would accrue to India, Bangladesh, and Pakistan. Again, these estimates have continuously worsened as the pandemic progressed in South Asia and might not have seen their peak yet.
While economic impacts severely affected economic growth across the region, poverty effects are especially concerning for South Asia due to the region’s composition of employment. Lockdowns during the crisis posed a serious threat mainly to labour-intensive sectors such as wholesale and retail trade and manufacturing, as well as the food, tourism and hospitality sector. These sectors feature high levels of informality in South Asia of which over 90% will be significantly affected by the crisis.
Attenuating the fallout: policy responses to the crisis
In order to support firms and households, central banks have reduced policy rates and enhanced credit provisions including flexibilizations in serving existing debt. These had the foremost goal of keeping firms and households’ liquid during times of reduced revenues or incomes. In response to the strain of the pandemic on national health systems, all countries increased their spending on the health sector and reductions or deferrals in tax filing deadlines were also common policy tools employed in the region.
In the realm of social protection, countries have introduced vertical (increases in benefit amounts to those already covered) and horizontal (extending coverage to new beneficiaries) expansions and, furthermore, introduced measures enhancing the comprehensiveness of social protection systems (extending the scope of risks covered). A strategy employed by most countries here was to provide the poor and vulnerable, including informal workers, with a limited-time cash transfer to safeguard subsistence in the face of livelihoods at risk. Moreover, all countries have put labour retention measures in place that were meant to secure formal sector jobs and allow for a quicker restart after lockdowns end.
Reaching the ‘missing middle’
Different to previous shocks, COVID-19 affected incomes across the distribution and threatened livelihoods far beyond the poorest in society. While social assistance typically only covers the poorest quintile in the region, social insurance is underdeveloped and hence similarly fails to cover the majority of the population – the “missing middle”. At the advent of the crisis, this meant low overall coverage rates and a lack of shock-responsive features in place in South Asian social protection systems that would automatically act as a safety net for all those (marginally) non-poor affected by the crisis. An important challenge for the emergency social protection response, therefore, was to quickly expand coverage to previously uncovered groups. Important vehicles for this strategy were existing social registries and extraordinary registration campaigns, many of which were conducted remotely and/or digitally.
How adequate were benefit amounts given to households during the crisis? As a rule of thumb, the literature on cash transfers suggests that in regular times they should cover around 15% to 20% of average household income of the poorest quintile, a threshold reached by most emergency cash transfers in the region.
An important concern moving forward is that this expansion of social protection is limited in time, whereas the economic impacts of the crisis and the threat of future shocks to the missing middle will last. As a consequence, policymakers need to draw lessons from the current crisis and expand regular social protection coverage in compliance with universal coverage across the lifecycle. To do so, countries should employ a dual strategy:
- Social protection floors must be expanded to provide minimum safety for all. A possible tool here would be universal child benefits (UCBs) that are still unutilised opportunities in much of South Asia. To complement such an expansion, it is instrumental to foster complementary expansions of national ID ownership, the unification of social registries, and promote the financial inclusion of poor and vulnerable groups.
- Social insurance must be extended to those in the missing middle to provide coverage in the face of idiosyncratic or covariant shocks. This can be facilitated by opening social insurance accounts for own-account workers and formalising quasi-dependent employment relationships.
Three people in space but millions of poor on the ground: High-quality public services as the gateway to more prosperity
Equipped with this call-for-action, Stephen Kidd took over and highlighted the benefits of universal social protection and the potential to strengthen the social contract in South Asia in the wake of the crisis. He characterised the basis of any social contract as an agreement in which citizens’ exchange tax contributions for high-quality public services. This, however, would currently not be the case in South Asia: government revenues far below the 35% of GDP threshold required a well-functioning welfare state, and neglect of social protection in government spending would mean a highly inadequate situation for state’s social mandates. A symptom of this issue is a large missing middle in South Asia.
As a consequence, nations such as India would have aspirations to send three people to space in the next years while 85% of its population live under $1.40 on the ground. Furthermore, targeting efforts of social protection to “deserving” beneficiaries would be highly inaccurate, tilting social systems in South Asia in favour of the rich paying low taxes while maintaining decent social security. This perceived breach of the social contract is reflected in people’s reluctancy to contribute to it, reinforcing the problematic already brought up by Abdul Alim. An exception here might be Nepal, and to some degree the Maldives, which have started to universalise social protection and are starting to reach into the missing middle.
The investment case for universal social protection in South Asia
In summary, the COVID-19 crisis met a social protection environment that was already leaving large parts of the population uncovered before the crisis and in which most incomes are very low. To break out of this low-quality public services cycle, more and more actors, including formerly very critical voices such as the IMF and the World Bank, have started talking about universal social protection and a lifecycle approach.
What could we expect from an investment of around 2% of GDP in this kind of protection against contingencies across the lifecycle? Depending on the respective country’s demographics, coverage would be in the high 90% for a universal child benefit and thus almost universal with meaningful transfer sizes.
Drawing on Development Pathways’ work in Sri Lanka, lifecycle programmes could wipe-out, on average, any negative income due to COVID-19 of almost the poorest 40% of households while reducing the crisis’ economic fallout across the income distribution. Furthermore, such stimulus could aid economic recovery and set countries on a long-run growth trajectory. This would, in turn, facilitate higher tax revenues fuelling the social investment that fosters prosperity in the region.
Lifecycle transfers of 2% of GDP for six months in 2020 with continuation costs of just 1.5% of GDP between 2021 and 2038 could thus be an essential tool for policymakers in the region, as they could be key to overcome the adverse impacts of the pandemic, end the plight of the social contract in South Asia, and break the development deadlock in which low-quality public services have kept the region.
The webinar concluded with a rich Q&A session, accessible here.
IPC-IG and UNICEF ROSA (forthcoming). “IPC-IG Policy Brief: Socio-Economic Impacts of Covid-19 and Policy Responses in South Asia.” IPC-IG Policy Brief. Brasilia and Kathmandu.
Kidd, S., L. Moreira Daniels, D. Athias, A. Bubbico, A. Tran, A. Peebles-Brown (2020). “Tackling the COVID-19 economic crisis in Sri Lanka: Providing universal, lifecycle social protection transfers to protect lives and bolster economic recovery.” United Nations Working Paper, UN Social Protection Work Group, Colombo.
UNICEF (2020). “Emergency Universal Child Benefits: Addressing the Social and Economic Consequences of the COVID-19 Crisis in South Asia.” UNICEF Regional Office for South Asia Working Paper, Special Series Paper 1: Responding to Covid-19 crisis in South Asia, Kathmandu.
This blog post summarises the second webinar of the series ''Social Protection in South Asia – the landscape before the Covid-19, and a snapshot into responses to the crisis and the paths ahead'', jointly organised by the IPC-IG, UNICEF Regional Office for South Asia (ROSA), and Country Offices. Also, this was the seventeenth session of the “Social protection responses to COVID-19” webinar series. The series is a joint effort initiated by the IPC-IG, GIZ, and DFAT in collaboration with the socialprotection.org platform, and in cooperation with partners from different organisations. Join our online community ''Social protection responses to COVID-19 [Task force]'' to learn more about the initiative and the future webinars.