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OPINION: Can a global social protection fund prevent the next economic crisis?

by Olivier De Schutter | @srpoverty | United Nations
Thursday, 24 June 2021 12:25 GMT

FILE PHOTO: People queue for free food as Italians struggle to cope in a tough economic climate amid the coronavirus pandemic in Milan, Italy, December 14, 2020. REUTERS/Flavio Lo Scalzo/File Photo

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* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

With millions of people falling into extreme poverty due to COVID-19, social protection should be seen not as a cost, but rather as an investment

Olivier De Schutter is the United Nations Special Rapporteur on extreme poverty and human rights.

Can a global social protection fund prevent the next financial crisis?

On June 19, the International Labour Conference – the highest body within the International Labour Organisation (ILO) – requested the ILO to work on "a new international financing mechanism, such as a global social protection fund, which could complement and support domestic resource mobilisation efforts in order to achieve universal social protection".

The vote is the result of an effort that was launched almost 10 years ago. However, it is the current crisis that made this breakthrough possible.

As a result of the COVID-19 pandemic and the measures adopted to protect populations, an estimated 115 million additional people may have fallen into extreme poverty in 2020, and 35 million more may follow this year.

This social disaster could only occur because governments were taken by surprise. Before the crisis, 61% of the global workforce was still made up of informal workers or workers in precarious forms of employment, with little or no access to social protection.

Additionally, 55% of the world's population, 4 billion people, had no social protection whatsoever, and an additional 26% were covered only against certain risks.

When the pandemic hit, many countries adopted social protection measures to cushion the population from the shock. But the measures were mostly ad hoc and short term. Because social registries were often out of date or incomplete, many people were left out.

Even worse, the poorest individuals, those who were most in need of support, often could not file claims because of lack of information, lack of documentation, or lack of internet access. The social safety net appeared full of holes.

Low-income countries faced additional constraints. Many have been impacted by the loss of remittances, which fell by approximately 20% on average due to the crisis.

Some nations have suffered from the sudden freeze of the tourism sector, and the high levels of debt (they were at a historic high even before the crisis hit) made it difficult for them to borrow money on financial markets in order to finance social protection.

Initiatives such as the G20's Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI) were improvised to provide highly indebted countries some breathing space.

But this is at best a limited answer, since the countries which are meant to benefit fear – apparently not without reason – that if they seek debt restructuring, they will be poorly noted by rating agencies. This is why only three countries (Chad, Ethiopia and Zambia) joined the Common Framework.

The liquidity problems of low-income countries (LICs) have been made worse by the fall of commodity prices which much of their export revenues depend on, depriving them from access to the hard currencies required to reimburse foreign debt.

LICs are typically weakly diversified. As a result, they may be reluctant to set up standing, rights-based social protection schemes. These would guarantee entitlements to the population since these nations know that in times of crisis, their public revenues may fall at the same time that social needs, and the demand for social protection, increase.

A global fund for social protection would allow to increase support to low-income countries, helping them to establish and maintain social protection schemes for the benefit of their population, and to improve the resilience of social protection systems against shocks.

This is affordable. The ILO estimates that the funding shortfall for low-income countries, representing 711 million people, is $79 billion per year, including $41 billion for health care.

While this represents 15.9% of the GDP of LICs – an altogether unaffordable amount for these countries – this is just half the total level of official development assistance (ODA) provided by OECD countries in 2020.

Until now, social protection has largely been a neglected part of ODA. In 2018, it represented a meagre $1 billion, which is less than 0.7% of total ODA (or, including health, $3.5 billion, or 2.2% of total ODA). This is one 60,000th of the total wealth produced in OECD countries (which was around $60 trillion in 2018).

Social protection in any case should be seen not as a cost, but rather as an investment.

It allows poor countries to gradually create the conditions for an inclusive type of growth to better mobilise domestic resources for the financing of social protection floors. 

Firstly, there is the argument developed by the British economist John Maynard Keynes, who suggests that social protection plays a stabilising role in times of economic downturn because it raises consumption levels of low-income households.

Secondly, social protection strengthens the resilience of households, whose savings may protect them from having to sell productive assets in times of crisis and from being driven into destitution because of catastrophic health payments.

Finally, social protection has significant multiplier effects. It leads to increased school enrolment and success, improved health outcomes, and higher labour market participation rates which benefits local economies at large.

A report set to be presented on June 29 to the UN Human Rights Council meeting in Geneva, makes the case for a global fund for social protection. It argues that this crisis provides a unique opportunity to strengthen international solidarity in favour of social protection, and that this is an opportunity not to be missed.

The future state of the world economy is full of uncertainties. But one thing we do know is there will be more and more violent shocks. Preparing better by providing income support to people throughout their lives is not only a human rights obligation and an ethical imperative, it makes economic sense as well.

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