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on Domestic Demand
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Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Presenters and Discussants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
I Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Masahiro Kawai and Gloria O. Pasadilla
1
II Keynote Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Haruhiko Kuroda
25
Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Hyungpyo Moon
Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Yasuyuki Sawada
Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Hiroshi Yamabana
Foreword
The role of social policy in improving domestic demand will remain a relevant
issue in Asia for many years. The issue was highlighted at the ADBI’s 12th
Annual Conference. I am delighted to see the important contributions of
the conference now compiled in this volume. As I noted in my address at
the conference, the global financial and economic crisis has forced Asia to
re-examine its development strategy and explore sources of growth from both
domestic and regional demand. Moreover, enhanced social policies are an
important centerpiece to achieve a socially inclusive Asia and Pacific region.
ADB is committed more than ever to supporting regional economic
integration as a way to boost regional demand and to lessen the region’s
dependence on Western economies for growth. It is high time for the Asia and
Pacific region to be a locomotive of global growth instead of being highly reliant
on external demand, particularly from American and European markets. For
domestic demand growth—especially in countries with large current account
surpluses and domestic savings—improved social protection policies will play
a vital role in reducing excessive savings caused by precautionary motives.
As the chapters in this volume indicate, improved social policies have value
beyond their role in stimulating domestic demand. At ADB, enhanced social
protection policies are inextricably linked with our inclusive growth agenda.
Indeed, even before the crisis, ADB has long been involved in strengthening
social protection programs in developing member countries. But the global
economic and financial crisis has made our organization more acutely aware
that exposure to various sources of risk, such as economic shocks and natural
disasters, can leave a profoundly damaging impact on economic well-being
and human development when institutional structures such as those for social
protection are weak. Thus, ADB is even more resolute in its belief that there
is a need to strengthen institutional structures to help reduce vulnerability
and respond effectively to various risks.
The chapters in this volume are a welcome addition to the current discussions
on how to help countries in Asia and the Pacific improve their social protection
policies and make growth more inclusive.
Haruhiko Kuroda
President, Asian Development Bank
Preface vii
Preface
Masahiro Kawai
Dean, Asian Development Bank Institute
viii Effects of Social Policy on Domestic Demand
David Coady is deputy division chief of the Expenditure Policy Division, Fiscal Affairs
Department, IMF. Previously, he was a senior economist and technical assistance
advisor in the IMF’s Fiscal Affairs Department. He holds a bachelor of commerce
degree and a master of economic science degree from University College Dublin.
He also earned a PhD in economics from the London School of Economics in 1992.
Mr. Coady has written numerous papers and books on social issues and his teaching
experience includes development economics, public economics, cost-benefit analysis,
and environmental economics. He has also acted as referee for many academic journals.
He has served several institutions, including the World Bank, as a consultant.
Bart W. Édes is director of ADB’s Poverty Reduction, Gender, and Social Development
Division. Previously, Mr. Édes oversaw communications for SIGMA, the Paris-based
joint initiative of the European Union and the Organisation for Economic Co-operation
and Development (OECD), assisting central and eastern European countries with
public governance reform. Mr. Édes has a bachelor’s degree in government from
Georgetown University and a master’s degree in public policy from the University
of Michigan.
Masahiro Kawai is dean and chief executive officer of ADBI. He was an associate
professor in economics at Johns Hopkins University and professor of economics at the
University of Tokyo. He served as chief economist for the World Bank’s East Asia and
the Pacific Region, deputy vice minister of finance for international affairs in Japan’s
Ministry of Finance, and special advisor to the ADB president, in charge of regional
economic cooperation and integration. He has written books and numerous academic
articles on international economics, economic globalization and regionalization, and
regional financial integration and cooperation in East Asia. He holds a bachelor’s
degree in economics from the University of Tokyo, a master of science in statistics
and PhD in economics from Stanford University.
Haruhiko Kuroda has been ADB’s president since 2005. Previously, he was special
advisor to the cabinet of the Japanese prime minister and a professor at the Graduate
School of Economics at Hitotsubashi University. He represented Japan’s Ministry of
Finance at a number of international monetary conferences as vice minister of finance
for international affairs. Under his leadership, Japan supported Asian economies hit
by the 1997–1998 financial crisis and helped Asian nations establish a network of
currency swap agreements to avert another crisis. He holds a bachelor’s degree in
law from the University of Tokyo and an MPhil in economics from the University
of Oxford.
Hyungpyo Moon is a senior research fellow and managing director of the Economic
Information and Education Center of the Korea Development Institute. He was a
visiting scholar at the University of California at Berkeley and assistant secretary of
the Health and Welfare Division in the Office of the President of the Republic of Korea.
He earned a PhD in economics from the University of Pennsylvania in 1989. Moon
has written on numerous socio-economic issues, such as tax and fiscal policy, social
welfare policy, population aging, and pension systems in the Republic of Korea.
x Effects of Social Policy on Domestic Demand
Gloria O. Pasadilla is a research fellow at ADBI. She served as convener of the Asia-
Pacific Economic Cooperation Group on Services, and Philippine lead negotiator
for services for the Association of Southeast Asian Nations (ASEAN)-Australia-New
Zealand free trade agreement negotiations. She has advised the Philippines Bureau
of International Trade Relations of the Department of Trade, and the Office of the
Undersecretary for International Economic Relations of the Department of Foreign
Affairs on trade-related matters. She was senior fellow at the Philippine Institute for
Development Studies and assistant professor at the University of Asia and the Pacific.
She had brief stints at ADB, World Trade Organization, Southeast Asian Central
Banks Center, IMF, and Goldman Sachs. She holds a PhD in economics from New
York University and a master’s degree in international law and economics from the
World Trade Institute.
Yvonne Sin is head of investment consulting and director of PRC market development,
employee benefits, and actuarial services at Watson Wyatt. She was head of the global
pensions practice in the World Bank’s social protection department. Ms. Sin specializes
in social insurance and employee benefit issues, and conducts research on pensions and
investments. She has provided technical consulting to the PRC Ministry of Finance
and Ministry of Social Security since 1999. She is also an appointed adjunct professor
at the Nanjing University of Finance and Economics. She received her bachelor of
science degree in mathematics from the University of Toronto and graduated from
the World Bank’s pensions fellowship program.
Ming Yan is a professor at the Institute of Sociology and the Center for Social Policy
Studies, Chinese Academy of Social Sciences. She served as senior adviser to the China
Program at the University of Southern California, and as assistant/associate professor
in the Social Science Department, City University of New York–LaGuardia. Ms. Yan
was a visiting research scholar for the German Academic Exchange Service (DAAD)
and recipient of an honorary international visiting fellowship from the University of
Surrey. She holds a PhD in sociology from New York University. Ms. Yan has written
on numerous social issues, including housing policies, urban redevelopment, and
sociology in the PRC and has delivered lectures and presentations on migration,
urban issues, Chinese sociology, and social instability.
xii Effects of Social Policy on Domestic Demand
Abbreviations
I
Overview
1. Introduction
One of the most important insights from the 2007–2009 global financial and
economic crisis is that the world should realistically and bravely face the fact
that the global imbalance cannot go on ad infinitum. New sources of growth
other than external demand from developed countries need to be found. One
important source is domestic demand, erstwhile unnoticed while all efforts
have been geared towards the outside market. Particularly in East Asia where
many economies have been successful net exporters and have accumulated a
significant amount of current account surpluses mirrored in high domestic
savings, the strategic re-thinking asks: how can they be enticed to spend more? In
particular, to the extent that social protection impacts saving behavior, is there
a role for better social protection policy to help stimulate domestic demand?
Against the backdrop of the global rebalancing need, ADBI organized its
th
12 Annual Conference in December 2009 with this key question in mind:
Can improved social policies reduce savings in high-saving Asian economies
and induce a long-term increase in consumption spending? The conference
aimed to better understand the channels and linkages of social policies and
domestic demand. That domestic demand needs to adjust to address the
global imbalance—i.e., to rise in countries with high external surplus and
to decline in countries with high deficit—is a generally accepted conclusion
from the global financial crisis; reliance on external demand for growth is
no longer sustainable. But can social policies help change domestic demand
and, if so, how?
2 Effects of Social Policy on Domestic Demand
PRC+EMA = People’s Republic of China; Hong Kong, China; Indonesia; Korea; Malaysia; Philippines; Singapore;
Taipei,China; Thailand. GER+JPN = Germany and Japan. OIL = oil exporters. US = United States. OCADC =
other current-account-deficit countries. ROW = rest of the world.
Source: IMF (2010).
4 Effects of Social Policy on Domestic Demand
Institute 2009). The results revealed that Chinese urban consumers are primarily
motivated to save for education, while illness and expenses associated with
caring for elderly parents follow in importance (Figure 1.4). Chinese consumers
also save for investment, especially for home purchase4 or for business, as well
as for retirement and unemployment risks. Four of the major reasons for saving
are related to social safety nets, that is, illness, elderly care, retirement, and
unemployment risks. The modernization of the Chinese economy began in the
1980s and efforts to increase state-owned enterprises’ (SOEs) competitiveness
meant that SOEs were no longer responsible for many social welfare benefits
(Baldacci et al., Chapter 8; Yan and Pan, Chapter 6). This restructuring forced
households to save much more for contingencies, thus partly explaining the
surge in Chinese savings.
Examining urban households in the PRC, Yan and Pan (Chapter 6) found
that, from 1995 to 2007, the average savings rate rose by 10 percentage points.
There are various explanations for the surge in savings: thriftiness (culture),
demographic factors (aging), macroeconomic uncertainty or the “target saving
hypothesis.”5 Even the predominance of males in the population (sex ratio)
4
Interestingly, houses are the main asset type for households in the PRC, accounting for 71% of net
wealth, while bank deposits is a far second, with only a 16% share (Chen, Li, and Qui 2010)
5
This theory states that savings, brought down by weak returns on deposits, have to keep increasing
to maintain a savings target.
Overview 7
and the competitiveness in the marriage market have been suggested as
reasons for the high rate of Chinese savings (Wei and Zhang 2009). The
most popular of these factors and the one with the most robust empirical
support is the precautionary motive for savings, particularly the risk of large
health expenditures (Chamon and Prasad 2008). This result appears to be
corroborated by McKinsey Global Institute’s survey.
The inadequate public provision of many social sector services has
contributed to the high precautionary motive for savings. The Chinese
consumption profile shows increases in social security-related private spending,
in contrast to the decline in the share of public social spending. In 1992,
the share of these consumption expenditures constituted about 17% of total
urban consumption expenditures; by 2001, this share had almost doubled
(Zhang 2008). In particular, for health spending, McKinsey Global Institute
(2009) reported that out-of-pocket health care expenditures, currently 10%
of urban consumers’ consumption, is projected to reach 14% by 2025. In
contrast, the government’s share in total health spending declined. In 1986,
the share of public health spending was 39%; by 2007, this had dropped to 20%,
while personal spending on health care rose from 26% to 45% of total health
expenditures (Yan and Pan, Chapter 6, Table 6.4). Clearly, if the government
provides more health care funding, this would abate the financial strain from
health expenditures and reduce precautionary savings.
Private education expenditures in the PRC have, likewise, increased due
to ballooning education costs. In fact, education spending per capita is more
than five times greater than health spending (Barnett and Brooks 2010),
suggesting that increased government provision of education services, more
college scholarships for example, would have an even greater impact in reducing
household savings. Current government spending on education is geared
heavily toward primary and secondary education, while household savings
for education are targeted toward higher education.
equal. Japan’s household savings peaked at 23.1% in 1975 from 14.7% in 1960
and then declined slightly to 21.7% in 1977. Similarly, the PRC’s household
savings rose to 27.5% in 2007.6
More than household savings, corporate and government savings are
what actually drive high aggregate savings in the PRC. From a low rate of
12% of national disposable income in 1992, the corporate savings rate rose
to 23% in 2004 before subsequently declining to 18% in 2007. In contrast,
the household savings rate remained almost the same as in 1992 at 22%
(Figure 1.5). High corporate savings is attributed to large profits that
enterprises—particularly SOEs—derive from a lack of private competition
especially in strategic industries. The industrial restructuring in the past
that removed social welfare responsibilities from SOEs, plus state-sanctioned
monopoly power, has helped SOEs to achieve dominance in industries such
as banking, mining, telecommunication, oil refining and distribution, and
utilities (Xing, Chapter 7).
Figure 1.5: Trend in PRC Saving Rates (by sector, as % of disposable income)
% of disposable income
6
However, Xing argues that the high housing burden, particularly commercial housing in urban areas,
makes the de facto household savings rate lower than what the ‘high’ saving ratio implies.
Overview 9
Significantly, Yan and Pan (Chapter 6) also hold that while the household
savings rate in the PRC may appear relatively high, parsing it between urban
and rural savings or among quintile groupings in the population reveal an
important distribution pattern that has significant impacts on consumption
spending. First, in contrast to the steady increase in the saving rates of urban
households, rural savings have, in fact, declined since 1999. Moreover, when
households are grouped into income quintiles, the top 20% income group
contributes the lion’s share of household savings: 64% of both urban and rural
household savings. If this group’s savings were removed, the remaining 80%
of urban households have a savings rate of only 8.8%, while rural households
save at only 9.2%.
Decomposing savings has important policy implications on how social
policy will impact consumption demand. Depending on who actually saves,
policy solutions could be tailored to reduce savings and to expand consumption.
If, for argument’s sake, we accept that household savings in the PRC is not
excessive, then government policies that try to lessen household savings would
have limited effect in boosting consumption.
Instead, policies that try to extract part of SOEs’ profits in the form of
dividends to the state that would then be redistributed to households may
lead to better results in boosting consumption, especially if the redistribution
comes in the form of higher government social sector expenditures.
Targeting these social expenditures on lower income quintile groups that
have a higher propensity to consume could translate to a higher impact on
consumption.
7
The highest personal income tax rate in the PRC is 45% and the lowest is 5%.
Overview 11
health and education charges or by raising pension benefits, an expansion of
government social expenditures increases lifetime resources and thus boosts
current consumption. Second is the redistributive channel: the consumption
impact is greater if social policy spending is targeted toward households with
relatively high average propensities to consume. This is done, for example, with
pension transfers to the elderly and resource transfers from low to high average-
propensity-to-consume households (i.e., from high-income households to rural
or low-income ones). The third channel is the insurance effect: households
reduce precautionary savings because of lower future health and education
costs or higher retirement incomes.
How much would the impact of social policy be? Using the PRC’s household
survey data and applying a generational accounting framework, Baldacci et
al. (Chapter 8) estimate the income effect of 1% of GDP increase in each of
the social sectors on consumption. Table 1.1 shows that the impact of pension
reform equivalent to 1% of GDP translates to a 1.42% increase in consumption.
For health and education expenditures, the impacts on consumption are 0.8%
and 0.5% of GDP, respectively. Moreover, though the simulation appears to
have a bigger impact on urban consumption, when government spending is
adjusted for differences in urban and rural expenditures,8 social spending
in rural areas has a higher per unit impact. In Baldacci et al.’s (Chapter 8)
simulation, the income effect on consumption of pension expenditures in
rural areas is 67% higher than in urban areas ((0.5/0.25) / (0.9/0.75)); for health
8
Baldacci et al.’s (Chapter 8) simulation assumed 75% of government pension spending is for urban
areas and 25% for rural areas; 69% of health spending for urban areas and 31% for rural areas; and
58% of education spending for urban areas and 42% rural areas.
12 Effects of Social Policy on Domestic Demand
and education spending, rural income effects are 56% and 55% higher than
those in urban areas, respectively.9
When translated into actual yuan and dollar values, the effects found
by Baldacci et al. (Chapter 8) are not very significant. For example, given
the PRC’s 2008 GDP of CNY30 trillion (approximately, US$4.4 trillion
assuming CNY6.835 to the dollar exchange rate), a 1.42 % of GDP increase
in consumption is equivalent to about CNY426 billion additional consumption
(or US$62 billion). Government health and education spending will generate
approximately US$31 billion and US$22 billion of additional consumption,
respectively. Therefore, the combined effect of pension, health, and education
spending, or 3% of GDP increase in government social spending, will increase
consumption by US$115 billion. This amount does not appear to be sufficient
to solve global rebalancing, given that US private consumption expenditure
is more than US$10 trillion.10
Nonetheless, though the additional consumption boost from social
policy improvement appears modest, improving the PRC’s social safety net
is a critical step forward in its economic development for reasons that go
beyond demand growth (McKinsey Global Institute 2009). It will improve
citizens’ living standards and ensure that more people benefit from the PRC’s
economic progress. And, if complemented by other structural reforms that
increase wage share in national income, the total consumption increase would
be even greater.
Some caveats, however, are worth pointing out. One is that Baldacci et al.’s
(Chapter 8) estimates assume that the increased government social spending
is funded by excess government savings or SOE savings. If tax financing is
factored in, the impact on consumption will likely be more modest than the
authors’ estimates.11
9
In addition, using a very rudimentary calculation of the insurance effect, the authors found an additional
0.3% of GDP increase in spending for pensions, 0.18% for health, and 0.2% for education. Similarly,
Wang (2010) found differential impact of social spending among different income groups. An increase
of social security coverage ratio has a marginal effect of CNY13.37 on per capita consumption in the
lowest income quintile group, while its marginal effect in the 75th quintile group is only CNY10.37.
10
Other studies have found slightly higher effects of government social spending on consumption. For
example, Barnett and Brooks (2009) reported a 2% of GDP increase in consumption resulting from
1% government health spending, but little evidence for effect of education spending. McKinsey Global
Institute’s (2009) study, however, was roughly in line with Baldacci et al.’s (Chapter 8) projections.
11
In anticipation of a future tax increase, Barro’s “equivalence” theorem implies that the impact on
consumption would be less because savings will not decline as much (compared to the situation without
tax financing).
Overview 13
Another caveat is the application of the same policy recommendations
of greater social spending in other East Asian countries that do not have the
same macroeconomic conditions as the PRC, i.e., do not enjoy the same high
level of public savings and current account surplus. While there, too, social
protection policies need to be reinforced because current social protection is
relatively low (Édes, Chapter 3), their own macroeconomic conditions could
constrain an expansion of social spending. The current Greek saga caused by
very generous social benefits without adequate financial resources is a specter
that should not be lost to many developing countries aspiring to spur demand
through social policies. If countries want social benefits to be sustainable,
Park (2009) warns against fiscal policy activism, particularly for countries
that have less fiscal space.
Pasadilla and Wiradisuria (Chapter 9) likewise point out various findings
from the literature that shows an attenuated link between safety nets,
particularly social security spending, and savings. As the literature shows,
social security has potential adverse-incentive effects on labor supply, retirement
decisions, and economic growth in general.
Finally, along with demand-boosting government social policies, addressing
supply constraints in the social sector should be part of a comprehensive policy
reform. For example, a mere increase in government spending on health
insurance, will not lead to a decrease in precautionary savings for health
expenditures if there is not enough access to high quality public healthcare
facilities or if there are not enough trained health personnel in the public sector
as consumers will still save in order to afford better healthcare (McKinsey
Global Institute 2009).
protection in the context of social security and abstract away other components
like active labor market programs, social assistance or safety nets.
Many studies on the subject have found a negative relationship between
social security and aggregate savings, though others also find ambiguous
correlations.12 The negative relationship comes about as a result of a “wealth
replacement effect”, that is, the expectation of income to rely on upon retirement
obviates the need to save more. However, the introduction of a public old-age
pension system could induce people to retire earlier, and this in turn will
encourage them to save more (“induced retirement effect”). The net impact
of public old-age pensions on household savings depend upon the relative
strengths of these two offsetting effects (Horioka and Yin, Chapter 4).
Horioka and Yin’s (Chapter 4) study notes that the relatively stable social
benefit ratio13 compared to the declining trend in saving rates in Organisation
of Economic Co-operation and Development (OECD) countries suggests
a weak link between the two. The authors’ cross-country regressions of
OECD countries’ savings rates indeed show that social benefit ratios explain
savings variation only to a limited extent. Other factors like population aging
and financial market conditions (credit constraints) seem more important
in explaining variations in saving rates. In particular, Horioka and Yin’s
results suggest that as a country’s elderly population increases, its saving
rate decreases; moreover, a country that has more domestic credit flows
as a percentage of GDP (a proxy for fewer credit constraints) has a lower
savings rate.
In the PRC, the evidence appears to support the negative relationship
between social security and household savings. Figure 1.7 illustrates the
difference in saving behavior of urban households with social security coverage
and those without it. Across various quintile groups, aside from the lowest,
households without social security coverage save more than those with coverage.
The highest income group has the largest difference in saving rates, with
households without coverage saving 46% of income compared to 21.5% for
those with social security (Wang 2010). Similarly, an urban consumer survey
suggests that those without health insurance save approximately 1.5 times more
of their disposable income than their neighbors who are insured (McKinsey
Global Institute 2009). These various pieces of evidence indicate that increased
12
For example, Hagiwara (2009) posited that the extended coverage of the social security system that
happened in the 1990s in the Philippines contributed to the decline in the country’s saving rate.
13
Social security receivable income divided by household disposable income.
Overview 15
Figure 1.7: Urban Household Saving Rates with and without Participation
in Social Security
Urban Savings Rate %
4. Reform Challenges
While the conference’s focus was on the contribution of social policy to boosting
domestic demand and rebalancing growth, our analysis of Chinese households’
under-consumption has spawned other related policy issues. Social policy
reform is one small contribution to domestic demand growth and global
rebalancing, while a larger set of challenges form part of an “unfinished
agenda.” A few of these are macro-related, while others are more directly
related to social protection policy reform challenges.
14
Arguably, the underdevelopment of the PRC’s financial market may have also partly contributed to
the rise in corporate savings shown in Figure 1.5. Because state-owned-banks tightened borrowing
conditions after the banking crisis in mid-1990s, firms (both SOEs and non-SOEs) have stronger incentives
to hold larger retained earnings. Some (e.g., Xing, (Chapter 7) argue, however, that a major part of
high corporate savings, especially SOE savings, has been due to extraordinarily huge profits reaped
from highly subsidized operations and from factor market distortions (e.g., land and energy subsidies)
that are skewed in favor of SOEs. From somewhat different perspectives, Aziz and Cui (2007) argued
that the heavy reliance of Chinese firms on bank borrowing and the banking crisis in mid-1990s that
led to more restrictive borrowing conditions have increased the financing cost of business operations
and, consequently, have put substantial downward pressure on real wages. The induced lackluster
growth in wages resulted in decline in household income and private consumption. IMF (2009) claims
that the rise in corporate savings reflects a combination of rapid growth, limited competition, and
financial underdevelopment.
18 Effects of Social Policy on Domestic Demand
15
Central SOEs are a group of SOEs that are controlled directly by the central government, i.e., the State
Council, rather than being controlled by provincial or metropolitan city governments. The dividends
collected by the Ministry of Finance are placed in a special account designed to support reorganization
and development of SOEs (State Council 2007).
Overview 19
IMF (2009) presents econometric estimates of how much impact improved
corporate governance policies in Asia would have. The IMF estimate suggests
that if Asia had the same level of corporate governance that Group of Seven
economies have, corporate savings would decrease by 2.4% of GDP. This
impact shows that reforming corporate incentives should be an integral part
of regional rebalancing policies.
Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Source: Yamabana (2009).
and the high administrative costs of reaching the informal and rural labor
sectors. In the PRC, the fragmented pension system and absence of a centrally
administered pension system adds to the low coverage of migrant workers.
The coverage challenge can be met by enhancing the administrative
capabilities of pension system institutions and improving programs’ financial
capacities. To increase social security coverage and address old-age poverty,
some low- and middle-income countries have adopted “social pension” schemes,
which are essentially retirement income transfers (Asher 2009), that are either
universal or means tested.16 Others have reorganized the employer-employee
relationship to include membership of informal sector labor in community-
based groups like cooperatives that act as premium collectors and benefit
facilitators, roles that corporations carry out among formal sector labor.
16
Providing benefits to “deserving” beneficiaries through resources or means testing is hampered by
poor targeting capabilities in many countries.
Overview 21
It is one thing, however, to have a generous pension program; it is another
to have the capacity to fulfill it. The problem in these cases is whether the
cost of social security is indeed affordable and sustainable. If the country
cannot afford and sustain a generous pension system, the high replacement
rate is illusory.
The rapidly aging population compounds the financial sustainability
challenge. This is not a problem in Asia alone. Even in Europe, the financial
sustainability concern is forcing a re-examination of some pension policies,
e.g., age of retirement and years of contribution, among other things. Current
projections indicate that the required fiscal revenue to address demographic
aging in Europe is unattainable.17
Sustainability-enhancing reforms are needed everywhere, but especially
in countries with relatively generous pension promises and rapidly aging
populations, as in Western Europe. These reforms can encompass parametric
change: e.g., increasing the retirement age, reducing promised benefits, or
increasing the number of years for required contribution, among others. For
confidence in the system, it is important that social benefits and contribution
arrangements are credibly designed and perceived to be sustainable; otherwise,
households’ precautionary savings will not decrease to support consumption
growth.
17
The European Commission (2009) pointed out that projected fiscal revenue of 5% to 6.5% of GDP
is necessary to address population aging. This required revenue increase is unattainable as even the
most ambitious tax reforms that countries can undertake generally do not yield more than 1%–2% of
GDP (Asher, comments on Chapter 4).
22 Effects of Social Policy on Domestic Demand
References
Asher, M. 2009. Extending Social Security Coverage in Asia-Pacific: A Review of Good
Practices and Lessons Learnt. International Social Security Association Working
Paper No. 6. Geneva: International Social Security Association.
Aziz, J., and L. Cui. 2007. Explaining China’s Low Consumption: the Neglected Role of
Household Income. IMF Working Paper No. 07/181. Washington, DC: IMF.
Barnett, S., and R. Brooks. 2010. China: Does Government Health and Education
Spending Boost Consumption? IMF Working Paper No.10/16. Washington, DC:
IMF.
Chamon, M., and E. Prasad. 2010. Why Are Saving Rates of Urban Households in China
Rising? American Economic Journal: Macroeconomics 2(1): 93–130.
Chen, Y., F. Li, and Z. Qui. 2010. Accounting for Household Saving Rates in China.
Presentation available at: http://hdl.handle.net/10086/18551.
European Commission. 2009. Sustainability Report 2009 (provisional version). Brussels:
Directorate General, Economic and Financial Affairs.
Hagiwara, A. 2009. Explaining Filipino Household Declining Saving Rate. ADB
Economics Working Paper Series No. 178. Available at: http://www.adb.org/
Documents/Working-Papers/2009/Economics-WP178.pdf.
Huang, Y. 2010. Fixing China’s Current Account Surplus. East Asia Bureau of Economic
Research Newsletter. January.
IMF. 2009. Regional Economic Outlook: Asia and the Pacific. October. Washington, DC:
IMF.
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Jha, S., A. Terada-Hagiwara, and E. Prasad. 2009. Saving in Asia: Issues for Rebalancing
Growth. ADB Working Paper No. 162. Manila: ADB.
Loayza, N., K. Schmidt-Hebbel, and L. Servén. 2000. What Drives Private Saving across
the World? Review of Economics and Statistics 82(2, May): 165–181.
McKinsey Global Institute. 2009. If You’ve Got It, Spend It: Unleashing the Chinese
Consumer. Beijing: McKinsey Global Institute.
Park, D. 2009. Aging Asia’s Looming Pension Crisis. ADB Economics Working Paper No.
165. Manila: ADB.
State Council, PRC. 2007. Guidelines on the Pilot Program for Preparing the Account of
State Assets. State Council, No. 26, 2007 (in Chinese).
Singh, A. 2009. Asia’s Corporate Saving Mystery. iMF Direct Economic Forum blog.
Available at: http://blog-imfdirect.imf.org/2009/11/08/asia%E2%80%99s-
corporate-saving-mystery/.
Wang, D. 2010. Can Social Security Boost the PRC’s Domestic Consumption? ADBI
Working Paper No. 215. Tokyo: ADBI.
Wei, S. and X. Zhang. 2009. The Competitive Savings Motive: Evidence from Rising Sex
Ratios and Savings Rates in China. National Bureau of Economic Research (NBER)
Working Paper 15093. Cambridge, MA: NBER. Downloadable at: http://www.
nber.org/papers/w15093.pdf.
24 Effects of Social Policy on Domestic Demand
World Bank. 2010. World Development Indicators Online. Available at: http://publications.
worldbank.org/WDI/.
Zhang, Y. 2008. The Empirical Analysis of Social Security Level and Consumer Trends.
Xiandai Jingji 12: 105. (in Chinese)
Keynote 25
II
Keynote Address
12th Annual Conference on
Effects of Social Policy on Domestic Demand
Let me share some important related research findings from ADB on social
protection and domestic demand that may contribute to your discussions. The
Asian Development Outlook 2009, released in March this year, argued for two
kinds of policies that can strengthen domestic consumption. First are policies
that transfer more corporate savings to households; and second are policies
that reduce the precautionary motive for savings among households.
Studies of the PRC, the Philippines, and Taipei,China show that the
precautionary saving motive has been important in explaining household
saving behavior. Development of the social security system, including social
health insurance, has been seen to substantially weaken this motive for saving.
The availability of health insurance is particularly important for the aging and
elderly because of rising health care costs. The availability of a credible pension
system is likely to boost household consumption once individuals become
certain about their future income stream in the post-retirement period. And
increased provision of public education could also lower household saving by
reducing a family’s need to save for their children’s education.
Hence, policies that rationalize public spending to increase social transfers,
reform pension systems, and provide universal health care insurance and
education are top potential contributors to domestic demand growth. These
policies will not only generate short-term demand for education and health
care services, but also ensure long-term human capital investment, promote
lifetime earnings, and create greater economic potential.
The effect is stronger if more support is targeted to those with higher
spending propensities, including the poorest people. Policies to shore up
domestic demand should therefore include the poor through targeted transfers.
When directed to the poor, such funds will not be saved, but instead used to
buy goods and services, thereby supporting the broader economy.
Our research also pointed out that the buildup of savings in Asia might
have been smaller if income prospects were more stable and financial markets
had been more developed. Uncertainty in labor markets and income flows
strengthen precautionary saving motives. Lack of access to finance can also
play an important role in driving up saving rates despite rapid income growth,
especially among younger households. Those who cannot borrow against their
lifetime income are likely to save much more to provide for contingencies
than they would if credit were more easily available.
Thus, labor market reforms to increase employment of young adults,
improve flexibility and relevance of skills training systems, and create more
secure jobs with adequate social protection can reduce uncertainty in income
Keynote 27
prospects. Reduced uncertainty would lessen excessive precautionary savings
and increase consumption.
Financial sector reform can also reduce the need for saving by providing
access to borrowing and investment opportunities, through development of
consumer credit and mortgage markets. While not strictly a social policy, this
too is an important determinant of saving.
Today’s conference will present a wide range of topics for discussion and
much food for thought. The analysis of theoretical and empirical research
will provide an important backdrop to the discussions on savings and social
protection. It is indeed important to understand the welfare implications and
costs of social protection expenditures to properly assess how far economies
can and should extend social benefits. The examination of income distribution
policies between capital and labor could assist policymakers in deciding
on possible shifts in policy to bolster household income. Demographic
considerations are, likewise, vital not only for savings but also for long-term
sustainability of social security systems. Finally, the analysis of the impact of
changes in social policies on Asian economies will provide important policy
implications in promoting the growth of domestic demand.
Thank you for your attention and your participation in this comprehensive
dialogue on an issue of much relevance for Asia today. I wish you all the very
best in your discussions.
28 Effects of Social Policy on Domestic Demand
Social Protection in Developing Asia and the Pacific 29
III
Social Protection in Developing Asia
and the Pacific
Bart W. Édes
1. Introduction
The author acknowledges with gratitude the helpful comments of Camilla Holmemo,
Celine Peyron Bista, Davide Furceri, and Karin Schelzig Bloom.
1
The strategy noted here subdivides social protection into five components: labor markets, social
insurance, social assistance, micro- and area-based schemes to protect communities, and child
protection.
30 Effects of Social Policy on Domestic Demand
and survivorship. Social assistance refers to transfers that are not based on
prior contributions but instead are financed from the general tax system.
Such transfers are intended to assist low income and vulnerable groups, such
as poor children, victims of natural disasters or armed conflict, handicapped
persons, and single-parent households. A range of targeting methods can be
adopted to identify beneficiaries, ranging from self-selection and categorical
targeting, to full means testing. Each targeting method implies trade-offs in
terms of program cost and accuracy.
In addition to their other contributions to a society’s well-being, social
protection benefits act as automatic stabilizers in the economy by minimizing
the fall in consumption during a period of slowing growth.
Countries tend to build up their social protection systems as they rise up
the economic ladder. Not surprisingly, the states with the most extensive,
well-funded social protection systems are industrialized countries, with those
in Western Europe standing out as the most comprehensive.
Having made unprecedented gains in lifting hundreds of millions of people
out of extreme poverty over the past three decades, and boasting the highest
growth rates in the world, the Asia and Pacific region is now giving greater
attention than ever before to social protection. The industrialized countries of
the region with a high per capita GDP have constructed the most substantial
social protection systems, e.g., Japan and Korea. But middle-income countries,
such as Thailand, have also introduced basic elements of social protection to
protect their most vulnerable, and to ensure that poverty reduction gains are
protected through good times and bad.
Virtually all developing countries in Asia and the Pacific have some kind of
public social protection system, and most of the region’s poor people benefit
from at least some social protection. However, overall coverage in the region
is only about 35% (Wood 2009). Provision of social protection in Asia and
the Pacific is highly influenced by the traditionally modest role of the state
in mitigating individual risk and vulnerability, viewing this responsibility
primarily as a matter for one’s self, family, and close community.
India, Indonesia, Philippines, PRC, and Viet Nam are examples of countries
that have begun to integrate contributory benefit programs, basic health-care
provision, and social assistance into their development strategies. Beyond
the benefits that they provide to poorer population groups, these initiatives
help rebalance national economies, making them less vulnerable to external
shocks, and providing more inclusive and broader development (International
Social Security Association [ISSA] 2009).
Social Protection in Developing Asia and the Pacific 31
This chapter reviews the state of social protection in developing Asia
and the Pacific. This comes at a time when the world is recovering from a
serious economic downturn that has forced millions out of their jobs and
into impoverished or vulnerable conditions. The chapter compares the level
of social protection across countries and subregions, and examines the social
protection response of governments to the recent global economic slowdown.
Finally, this chapter looks at three of the key challenges for efforts to strengthen
social protection in Asia and the Pacific: climate change, aging populations,
and coverage of migrants.
This chapter concentrates on developing countries in the region, although
occasional references are made to high-income countries for comparison
purposes. The primary focus is on state-provided social protection programs,
though it is recognized that social networks and private social protection
arrangements are often the first or most important measures that people
rely upon to address risk and vulnerability. The paper does not attempt the
tackle the critical issue of financing social protection, a topic well covered in
other recent publications (see, for example, Grosh et al. 2008).
republics that were part of the former Soviet Union, as well as Mongolia, appear
in the upper one-third of the rankings due to their reasonable provision of
social protection, a legacy of the communist era. Several Pacific and low-income
countries in different parts of the region appear toward the bottom of the
Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Source: ADB (2008).
Social Protection in Developing Asia and the Pacific 33
index. Sri Lanka, India, and the PRC are situated very close together (places
9 to 11, respectively), below some of the former command economies.
As mentioned previously, one of the four components of the SPI is social
protection expenditure. ADB has calculated that the region-wide mean for
social protection expenditure as a share of GDP is 4.8% (the median is 4.0%).
Japan spends by far the most (16.0% of GDP), followed by the Marshall Islands
(13.5%), Uzbekistan (11.1%), Kyrgyz Republic (11.0%), Mongolia (9.8%), and
Korea (7.5%). The highest figure for a South Asian country is recorded by Sri
Lanka (5.7%), followed by Bangladesh (5.3%).
In Southeast Asia, Viet Nam spends the most on social protection as a share
of GDP (4.1%). The social protection expenditure for the PRC is 4.6% of GDP,
for India, 4.0%. Countries spending 1.5% or less include (from the highest
spenders to the lowest) the Maldives, Bhutan, Cambodia, Lao PDR, Tonga,
Vanuatu, Tajikistan, and Papua New Guinea (only 0.3% of GDP).
While the pattern of social protection expenditure varies considerably
between countries, in most cases it is dominated by social insurance programs
which, with a few exceptions (e.g., central Asian countries, Japan, Korea), are
largely confined to the public and formal sectors, thus excluding most of the
population.
Subsidized
Minimum Food
Young Employment/ Rations/
Child Free Living Maternity Vouchers/ Old-Age
Feeding/ School Standards Nutrition/ Community Social SPa
Country Nutrition Meals Guarantee Entitlements Kitchens Pensions Grade
Weighting 17% 17% 17% 17% 17% 17%
India Medium High Medium No Low Medium C
Bangladesh Low No Low Low Low Low D
Viet Nam No No Low Medium No Medium D
China,
People’s
Rep. of No No Low No No Medium E
Cambodia Low No No No Low No E
Pakistan No Low Low No No No E
Nepal No No No No Low No E
a
SP Grade is on a scale of A to E, where A is high.
Source: ActionAid (2009).
security: young child feeding and nutrition, free school meals, minimum
employment/living standards guarantee, maternity nutrition/entitlements,
subsidized food rations/vouchers/community kitchen, and old-age social
pensions. ActionAid’s methodology is simple compared to the SPI, and is
inspired by an interest in what governments are doing to address hunger.
Nonetheless, the results for countries that appear in the ActionAid study
are similar to those of the SPI.
Social Protection in Developing Asia and the Pacific 35
Virtually every country in the Asia and Pacific region has a formal social
insurance system. However, these systems are generally limited to workers in
the government and formal employment sectors. These systems, therefore,
have little relevance to the informal and rural sectors, where most people
live and work, especially poor people. However, Japan and Korea—and some
of the central Asian republics—have more comprehensive systems. The PRC
has a comprehensive system for its “legal” urban population, but is only now
extending this system to its large rural population (ADB 2008).
In OECD member countries, which include Japan and Korea, the average
share of the labor force covered by mandatory pension schemes is 83.3% (95.3%
in Japan). This compares to 35.6% in Sri Lanka, 27.1% in the Philippines,
20.5% in the PRC, 16.2% in Viet Nam, 9.1% in India, and 6.4% in Pakistan.
Few countries in the Asia and Pacific region have social pensions that provide
safety net retirement income for people who are not members of formal schemes
(OECD and World Bank 2009).
The region is characterized by considerable heterogeneity in the institutional
nature of its national social security systems—including social insurance
programs, national provident funds, tax-financed programs, mandatory
occupational schemes—as well as in the scope of benefits and breadth of
coverage provided. Most countries in the region provide benefits for work injury,
old age, disability, and survivorship. However, the development of programs
for sickness and maternity benefits, family allowance, and unemployment
benefits is patchier (ISSA 2009).
Governments in Asia and the Pacific often use cash transfers to support the
purchasing power of vulnerable populations. The overall impact of these schemes
depends largely on their ability to reach poor people with minimal targeting errors.
One increasingly popular tool is the conditional cash transfer (CCT), which is a
cash benefit provided to a poor family only if the targeted recipient carries out a
specified, socially desirable action, most often involving investment in children’s
human capital. Such an action can include ensuring children’s attendance at
school, taking the children to the doctor for regular check-ups, attending nutrition
seminars, or ensuring that children are fully immunized.
CCTs are used to reduce current poverty, increase access to social services,
and reduce the chances that the next generation will live in poverty. Originating
in Latin America in the 1990s, CCTs have now been adopted by some Asian
governments. For example, in 2007, Indonesia launched Program Keluarga
Harapan (the Hopeful Family Program). This program, financed by savings
from the removal of a universal fuel subsidy, targeted more than 15 million
households, and was later expanded to more than 19 million households,
representing 35% of the country’s population. Implemented by the Ministry
of Social Affairs, Program Keluarga Harapan families can receive up to about
US$220 per year (depending on their size and composition) on the condition
that specific health- and education-related obligations are met. The Indonesian
Post Office’s extensive network is used for the payment of benefits.
% of People
Universal Amount Paid over 60 Low- (L)
(U) or Monthly in % of Receiving Cost or Middle-
Age Means US$ and Local Population a Social as % of Income (M)
Country Eligibility Tested (M) Currency over 60 Pension GDP Country
US$2
Bangladesh 57+ M BDT165 6 16* 0.03 L
US$4
India 65+ M INR200 8 13 0.01 L
US$2
Nepal 75+ U NPR150 6 12 ** L
63+ men US$3
Tajikistan 58+ women M TJS12 5 ** ** L
US$9
Thailand 60+ M THB300 11 16 0.01 M
US$5
Viet Nam 60+ M VND100,000 7 2 0.02 L
US$5
Viet Nam 90+ U VND100,000 7 0.5 < 0.005 L
provided by these systems are small relative to the national poverty line.
A much larger share of social protection expenditure in Central Asia is
dedicated to social assistance (24%) than in the Asia and Pacific region as
a whole (17%) (ADB 2008).
Under communism, central Asian countries maintained very high
employment ratios. The greatest challenge now for contribution-funded systems
in the subregion is the fall in employment in the formal sector, in particular in
the public sector, which has led to a rise in system dependency rates and the
erosion of what has hitherto been an almost universal entitlement. Retirement
benefits make a far larger contribution to household incomes than social
assistance payments, and are also of greater consequence in fiscal terms than
other social spending. In the course of the 1990s, however, pensions lost much
of their purchasing power, not least because of the sharp drop in contribution
receipts at a time of declining real wages and open unemployment. Many
pensioners therefore continue to be gainfully employed, are supported by
their relatives, or are affected by poverty (Müller 2003).
Although social expenditures are high by an Asia-wide standard, per
capita government spending on health in all central Asian countries (except
Social Protection in Developing Asia and the Pacific 39
Kazakhstan) is too low to guarantee basic medical care for all. Patients and
their families must therefore make “informal payments” to be assured of
medical treatment. Social protection expenditures are so low in Tajikistan that
poverty is widespread (Müller 2003). Tajikistan does not optimize design and
implementation of social expenditures, spending mostly on utility subsidies
that do not effectively reach poor people (World Bank 2008).
Some of the lower-income former Soviet republics have developed elements
of effective social assistance, typically a single well-targeted program focusing
on poor families. One such example is the Unified Monthly Benefit in the
Kyrgyz Republic. Similarly, in former Soviet republics in the Caucasus region,
Azerbaijan and Georgia operate targeted social assistance programs, and
Armenia maintains a family benefit program (World Bank 2008).
2
HIV = human immunodeficiency virus, AIDS = acquired immunodeficiency syndrom.
42 Effects of Social Policy on Domestic Demand
health care through the provision of free insurance to poor people and ethnic
minorities in disadvantaged parts of the country.
In Cambodia, the limited public resources aimed specifically at social
protection have gone to the formal sector, such as civil servant pensions and
veterans’ allowances. Initiatives to expand access of poor people to education
and health are part of wider poverty reduction efforts. Over 60% of budget
allocations for poverty alleviation go to rural areas, and include attention to
more and better health services, educational facilities, improved incomes
through rural livelihood activities, and upgraded rural infrastructure. However,
recognizing its vulnerability to international financial crises, the Government
of Cambodia is in the process of developing a national social protection strategy
for its poor and vulnerable citizens.
Although the government has promoted universal access to health and education
services as a means to promote equality and improve living standards, it provides few
other formal social safety net programs. Instead, community and church organizations
are very active in providing social services, particularly to vulnerable groups including
people with disabilities, women suffering from domestic abuse, and children from
low-income households. The public sector has no services directed to the disabled
or the mentally ill, or for palliative care.
The government recognizes that areas for improvement remain in the setting of
priorities, targeting, and delivery of services used by vulnerable persons. Among
the planned steps is commissioning an expenditure-tracking system for health
and education to provide information for improved decision-making on targeted
expenditures. In parallel, the Ministry of Health will undertake a targeted review
of existing facilities and equipment to ensure that these support the provision of
services in the outer islands and districts, and community health centers.
In continuing to address the needs of the vulnerable, the government will put in
place delivery structures for a new community development program, the goal of
which is to reduce hardship and poverty by strengthening communities, civil society
groups, and organizations. The government will work in partnership with the program
to identify, prioritize, and address their own development needs. The expenditure
tracking and community development program will provide useful information for
the strengthening of policy formulation.
With the support of the ADB-financed Economic Support Program, an issues paper
on vulnerable persons will be prepared for consideration by the Government Cabinet.
The paper will identify vulnerable groups, the adequacy of social safety net systems,
and options for enhanced social protection policies.
Social
Security Social Assistance
Afghanistan ¸ ¸ ¸ ¸
Bangladesh ¸ ¸ ¸ ¸ ¸ ¸
Bhutan ¸ ¸ ¸
India ¸ ¸ ¸ ¸ ¸ ¸ ¸
Maldives ¸ ¸ ¸ ¸
Nepal ¸ ¸ ¸ ¸ ¸ ¸ ¸
Pakistan ¸ ¸ ¸ ¸ ¸ ¸ ¸
Sri Lanka ¸ ¸ ¸ ¸ ¸ ¸
development (United Nations Economic and Social Commission for Asia and
the Pacific [UNESCAP] 2009).
The program has many benefits, including the reduction of distress migration,
employment generation in the most distressed areas, and improvements in
the natural resource base of livelihoods in poor communities. NREGA is
an example of a self-targeted program, characterized by low administration
costs and high accuracy in reaching the targeted population. By guaranteeing
income support to anyone willing to participate in unskilled manual labor
at low wages, and only for 100 days in a year, the program ensures that only
the neediest will apply (UNESCAP 2009). Central government outlays for
schemes under NREGA total an estimated US$8 billion for the fiscal year
2009–2010.
Formal, compulsory social security is available throughout South Asia for
government civil service, staff in public sector enterprises, and employees of
large-scale private enterprises. This is in the form of a guaranteed pension and
other coverage such as health care benefits. Such formal social security, however,
excludes the vast majority of people in South Asia, who are not connected to
government or formal employment. In India, for example, 85% of the adult
population work in the informal sector.
In India, the long-time policy approach to social security provision,
particularly for old age and workers in the formal economy, has been
through large-scale administrative institutions of the provident fund type,
supplemented by social insurance created mainly to provide rapid access for
workers to relevant health-care services. More recently, India has partially
transformed its provident fund into a social insurance pension scheme. The
main deficiency of this approach in practice has been the failure of outreach
to the vast majority of workers in the unorganized sector. Further, the level of
health funding through social security in India remains very low (International
Labour Organization [ILO] 2008).
No government in South Asia has established a full-fledged, comprehensive,
and interlinked social protection system. Therefore, in most instances,
households and individuals in South Asia primarily rely on informal social
protection networks of family, community, women’s groups, or savings
cooperatives, such as rotating chit funds (based on money pooled by a group
of people and auctioned at the end of a specified period, rotating among the
group members), and informal credit markets.
Nevertheless, the situation continues to evolve, with many government-
based social protection instruments coming onstream over the past decade
Social Protection in Developing Asia and the Pacific 47
A 2007 World Bank report observed that Pakistan has many social protection
programs, ranging from cash transfers to pensions. The country’s social assistance
has included two main federal cash transfer programs, Zakat and Bait-ul-Mal, and
small scattered programs that provide social welfare and care services to persons
with disabilities, child laborers, and others. Zakat, a common practice in the Muslim
world, is a welfare contribution to poor or disadvantaged persons. It is based entirely
on voluntary contributions from wealthy individuals, and uses community structures
to deliver benefits. In contrast, Bait-ul-Mal, introduced in the early 1990s, is funded
and administered by the government. In addition, micro finance programs provide
poor people with access to credit.
Pakistan’s social security system offers pension (old-age, survivor and disability)
benefits to formal sector workers. Public sector workers are provided with civil service
pensions, while private sector workers enjoy access to pensions from the Employees
Old Age Benefits, but also provincially based pension and non-pension programs,
such as the Workers Welfare Fund and Employees’ Social Security Institutions.
More recently, Pakistan has introduced a third major federal cash transfer program,
the Benazir Income Support Program.
or so. In fact, the South Asian region has a long history of formal sector social
security, and there is also a set of non-contributory social assistance-type
transfers taking many different forms. Historically, many of these schemes
have their roots in the independence and post-war welfarist tradition, and, in
some cases, in the British-influenced public administrative service.
Social assistance in the form of in-cash or in-kind transfers not based on
prior direct contributions takes many forms. It includes social pensions for
people living below the poverty line; a few child grants; and sector-specific
48 Effects of Social Policy on Domestic Demand
Bangladesh is home to the third highest number of poor older people in the world
(after India and the PRC). The Boishka Bhata, or old-age allowance, started in
1998. The scheme is designed to reach the oldest and poorest 20 people in each
ward (rural district).
The old-age allowance is means tested and recipients are selected by the community.
Eligibility starts at age 57, and half of the recipients have to be women. Additional
criteria for selection are a lack of land or an annual income below BDT3,000 (US$43),
chronic poor health, and inability to work.
The scheme is administered by the Ministry of Social Welfare and financed out of
the state budget. The old-age allowance makes up 0.03% of the GDP. In 2006, 1.3
million people received the allowance.
Research shows that the old-age allowance is spent on basic needs such as food
(60%), health care (30%), and income-generating activities (10%), such as tea-stalls,
handicraft businesses, goat-rearing, and growing vegetables.
The ecnomic slowdown has tended to impact the near poor more than
those in chronic poverty, including those working in low-paying industries.
Young urban workers, those in export-dependent industries, and migrants
are among those hard hit. Very poor people are also affected through spillover
effects. Informal workers are in a particularly precarious position as only
a small minority have social security coverage, and they have experienced
greater job competition from workers laid off in the formal sector.
In the PRC, researchers at the Chinese Academy of Social Sciences (CASS)
estimate that up to 41 million workers lost their jobs during the economic
slowdown (CASS 2008a), and the urban jobless rate reached 9.4%, more than
twice as high as official estimates (CASS 2008b). About 670,000 SMEs closed
during the slowdown (Ping 2009). The Philippines lost an estimated 950,000
jobs between the fourth quarter of 2008 and the first quarter of 2009 due to
the slowdown (Son and San Andres 2009).
The social impacts of the slowdown have had different implications for
men and women. The difficult economy has often forced women to take
on additional, informal, and even degrading work to make ends meet. In
Cambodia, for example, 70,000 workers lost their jobs in the garment industry,
most women and typically single females in their twenties whose rural families
depend upon them for remittances. Many of those laid off have sought work
in the entertainment industry, putting them at risk of exploitation and abuse.
Enterprises surveyed in the Indonesia furniture export industry showed quite
distinct gender-based patterns. As women workers were usually involved in
aspects of the production process that were considered less critical, such as
packaging, they were the first to lose their jobs (Durano and Hung 2009).
In Thailand, female workers were particularly hard hit by the slowdown,
with consistently lower employment in industry in 2008 and 2009, whereas
their male counterparts experienced significant reductions in employment only
in the first quarters of 2008 and 2009. This could be because female workers
in industry are more likely to accept contractual jobs and would thus be the
first to be laid off in times of economic trouble (Son and San Andres 2009).
In the Asia and Pacific region as a whole, growth rates have bounced back,
aided by fiscal stimulus packages launched by many governments. Large-scale
public investment programs have provided more fiscal space for infrastructure
investment, tax cuts, and enterprise promotion. However, comparatively
little has gone toward increased social spending. Nonetheless, all of the fiscal
stimulus packages have included some social protection components. The share
of each package varies widely between low- and middle-income countries, from
Social Protection in Developing Asia and the Pacific 51
Table 3.4: Summary of Social Protection Components of Fiscal Stimulus
Package
Social protection interventions can help address the global economic slowdown
and underpin other investments in development in different ways. In particular:
They can provide effective instruments for reducing poverty and destitution in
many countries.
By maintaining and building human capital and reducing social risk, they promote
long-term human capital development, livelihoods, employment, and economic
risk.
By providing poor people with a stake in the economy, they promote social cohesion
and facilitate the implementation of other necessary reforms.
5. Emerging Challenges
There are a variety of serious challenges confronting the further development
of social protection systems in developing Asia and the Pacific. Administration,
finance, governance, and technological support of social protection schemes
are among such challenges. Others include reaching remote rural and ethnic
minority populations, and ensuring gender equity.
54 Effects of Social Policy on Domestic Demand
working overseas, the Philippine Social Security System took major steps to
provide voluntary social security coverage for such workers. Through monthly
contribution remittances made at an authorized foreign bank or remittance
center, the covered overseas worker is entitled to benefits granted to voluntary
members of the social security system. In addition, since 2002, the social
security system introduced the Flexi-Fund Program, which is a tax-exempt
provident fund featuring flexible payment terms and easy withdrawal of
savings. In Korea, a 2007 amendment to legislation on national pensions
allows foreign workers who pay into the pension system to receive a lump-
sum refund of their contributions when they return to their home country
(ISSA 2009).
Japan, meanwhile, has agreed with the Philippines and Indonesia on
special arrangements to admit hundreds of nurses and caregivers annually
from each country. These labor arrangements may be replicated by other
countries with aging populations, since they provide an orderly way of
introducing foreign workers needed to address growing social and health-
care needs.
6. Conclusion
Developing countries in the Asia and Pacific region have made remarkable
progress in reducing the percentage of people living in absolute income poverty.
However, the economic growth that has successfully reduced the incidence
of poverty has also been accompanied by growing inequality. Further, given
population growth rates, very large numbers of people in the region remain in
poverty, in conditions vulnerable to poverty, or without access to basic social
services. Realization has grown among policymakers that more active and
comprehensive social protection measures are required to forge a sustainable
and inclusive pattern of growth.
The recent global slowdown has made clear that Asian and Pacific countries
need to reduce their economic dependence on importers in Europe and North
America, and boost domestic consumption and intra-regional trade. Yet efforts
to boost consumption will run up against a deeply ingrained tradition of
high savings. It will take time for more comprehensive and dependable social
protection systems to be constructed, and to gain the trust of the people.
In any case, the incentives to strengthen social protection systems have
become greater with time and the region’s development. Recovery from
the global economic slowdown will be accompanied by the introduction of
new social protection initiatives. The effective targeting of social assistance
programs, and long-term financial sustainability of pension schemes, will be
among the issues receiving attention in deliberations on how to reduce social
vulnerability and risk.
Social Protection in Developing Asia and the Pacific 59
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62 Effects of Social Policy on Domestic Demand
Household Saving Rates and Social Benefit Ratios: Country Comparisons 63
Country Comparisons
IV
Household Savings Rates and Social Benefit Ratios:
1. Introduction
It is often asserted that social safety nets will reduce household savings rates
because households will not feel the need to save (self-insure) if social safety nets
are adequate. This chapter presents multi-country data on household savings
rates and social safety nets and analyzes the determinants of differences in
household savings rates among countries with an emphasis on the impact
of social safety nets, the age structure of the population, and borrowing
constraints on the population.
The chapter is organized as follows: In Section 2, we survey the theoretical
and empirical literature on the impact of social safety nets on the household
savings rate. In Section 3, we present data on household savings rates for OECD
member countries. In Section 4, we present data on the social benefit ratio
(the ratio of social contributions and social benefits receivable to household
disposable income) for the OECD member countries. In Section 5, we examine
whether and to what extent the household savings rate and the social benefit
ratio are correlated. In Section 6, we conduct a regression analysis of the
determinants of the household savings rate. Section 7 concludes the chapter
and discusses the policy implications of the findings.
This chapter finds that there are considerable and stable differences
among countries in their household savings rates and social benefit ratios
The authors are grateful for valuable comments from Mukul Asher, Davide Furceri, Masahiro Kawai,
and the other participants of ADBI’s Annual Conference.
64 Effects of Social Policy on Domestic Demand
but that the latter can explain the former only to a limited extent, with
the age structure of the population and borrowing constraints being more
important as determinants of differences among countries in household
savings rates.
Figure 4.1: Household Savings Rates and Social Benefit Ratios, 1996
Household Saving Rate
AUT = Austria, BEL = Belgium, CAN = Canada, CZE = Czech Republic, DEN = Denmark, FIN = Finland,
FRA = France, GER = Germany, ITA = Italy, JPN = Japan, NET = Netherlands, NOR = Norway, POL = Poland,
POR = Portugal, SLO = Slovak Republic, SWI = Switzerland, UK = United Kingdom, US = United States.
Note: Blue lines represent means.
Source: Tables 4.1 and 4.2.; OECD (2003, 2009a), OECD (2009b).
70 Effects of Social Policy on Domestic Demand
Figure 4.2: Household Savings Rates and Social Benefit Ratios, 2007
Household Savings Rate
AUT = Austria, BEL = Belgium, CAN = Canada, CZE = Czech Republic, DEN = Denmark, FIN = Finland,
FRA = France, GER = Germany, HUN = Hungary, IRE = Ireland, ITA = Italy, JPN = Japan, KOR = Republic of
Korea, NET = Netherlands, NOR = Norway, POL = Poland, POR = Portugal, SLO = Slovak Republic,
SPA = Spain, SWI = Switzerland, UK = United Kingdom, US = United States.
Note: Blues lines represent means.
Source: Tables 4.1 and 4.2.; OECD (2003, 2009a), OECD (2009b).
both years and Italy in 2007) have a high household savings rate as well as a
high social benefit ratio.
It is curious that the negative relationship between the household savings
rate and the social benefit ratio is observed in some countries but not in others.
This is presumably because factors other than the social benefit ratio more
than offset the impact of the social benefit ratio and cause a low household
savings rate in some countries even though the social benefit ratio is high
and a high household savings rate in some countries even though the social
benefit ratio is low.
The OECD publishes asset and liability data on households for the Group of
Seven countries, and these data can shed light on whether borrowing constraints
are an important determinant of differences among countries in household
savings rates. According to the OECD data, the ratio of household liabilities to
household disposable income was highest in the UK (1.857) in 2007, followed
by the US (1.410), Canada (1.389), Japan (1.277), Germany (1.022), France
(1.001), and Italy (0.725). These data indicate that borrowing constraints are
much more strict in France, Germany, and Italy, which can explain why the
Household Saving Rates and Social Benefit Ratios: Country Comparisons 71
household savings rate is relatively high in these three countries despite their
relatively high social benefit ratios (except for Italy in 1996). Conversely, the
aforementioned data indicate that borrowing constraints are least severe in
Canada, Japan, UK, and US, which can explain why the household savings
rate is relatively low in these four countries despite their relatively low social
benefit ratios (except for Japan in 1996). Unfortunately, asset and liability
data are not readily available for the other OECD member countries, but the
evidence from the Group of Seven countries suggests that borrowing constraints
are an important determinant of differences among countries in household
savings rates. We include a proxy for borrowing constraints in the regression
analysis in the next section.
Looking at whether or not trends over time in the social benefit ratio can
explain trends over time in the household savings rate, there was virtually no
change in the mean of the OECD social benefit ratio during 1996–2007 but
the mean of the OECD household savings rate declined sharply during this
same period (from 8.9% to 5.2%, a decline of some 42%). Thus, it appears that
trends over time in the social benefit ratio cannot explain trends over time in
the household savings rate.
6. Regression Analysis
In this section, we conduct a regression analysis of the determinants of the
household savings rate using panel data on the OECD member countries for
the years 1995, 2000, and 2005.
The dependent variable is the household savings rate (HHSR). The
explanatory variables are AGE, the ratio of the population aged 65 or older
to the population aged 20 to 64; the ratio of social benefits receivable (SBR)
to household disposable income; and CREDIT, the ratio of private credit by
deposit money banks and other financial institutions to GDP. CREDIT is
included as a proxy for the degree of financial development or for the prevalence
of borrowing constraints.
The sources of the data on HHSR and SBR are OECD (2009a) and various
issues of the OECD Economic Outlook. The source of the data on CREDIT is
Beck, Demirguc-Kunt, and Ross (1999, 2009).
The results of the Hausman test indicated that the fixed effects model was
the correct model, so we present the results of the fixed effects model, with the
observations being weighted by the population of each country in 1995.
72 Effects of Social Policy on Domestic Demand
As the results in Table 4.3 demonstrate, the coefficient of AGE is negative (in
the –0.85 to –1.00 range) and statistically significant at a minimum significance
level of 5%, as expected, indicating that a one percentage point increase in
AGE reduces the household savings rate by 0.85 to 1.00 percentage points.
The coefficient of CREDIT is negative (in the –0.033 to –0.036 range) and
statistically significant at a minimum significance level of 10%, as expected,
indicating that a one percentage point increase in CREDIT lowers the household
savings rate by 0.033 to 0.036 percentage points. Finally, the coefficient of
SBR is positive and totally insignificant, indicating that it does not have a
No. of
Model Constant AGE SBR CREDIT SBR*CREDIT R-squared F-stat. obs.
1 27.573 –0.846 0.408 22.590 67
4.250 0.178 0.028 0.000
6.49 –4.75 0.000
0.000 0.000
2 22.789 –0.847 0.197 0.258 2.770 64
8.339 0.371 0.331 0.044 0.075
2.73 –2.28 0.59 0.007
0.009 0.028 0.556
3 35.721 –1.003 –0.036 0.523 7.660 67
7.189 0.263 0.016 0.021 0.002
4.97 –3.81 –2.16 0.000
0.000 0.000 0.036
4 31.079 –0.980 0.151 –0.033 0.388 2.230 64
11.376 0.449 0.266 0.018 0.025 0.099
2.73 –2.18 0.57 –1.81 0.002
0.010 0.035 0.575 0.079
5 39.772 –0.993 –0.232 –0.103 0.0033 0.437 3.020 64
12.225 0.444 0.371 0.039 0.0018 0.006 0.030
3.25 –2.24 –0.62 –2.66 1.89 0.001
0.002 0.031 0.537 0.012 0.067
Note: The first figure indicates the estimated coefficient, the second figure indicates the standard error, the third
figure indicates the z-value, and the fourth figure indicates the p-value. The first R-squared is within countries,
the second R-squared is between countries, and the third R-squared is for the sample as a whole. The figure
below the F-statistic is the p-value.
Household Saving Rates and Social Benefit Ratios: Country Comparisons 73
significant impact on the household savings rate. Thus, it appears that the age
structure of the population and borrowing constraints are more important
than the social benefit ratio as determinants of differences among countries
in the household savings rate.
Our results concerning CREDIT are consistent with the findings of
Loayza, Schmidt-Hebbel, and Servén (2000), who found that in a sample
of developed and developing countries, the ratio of domestic credit flow to
gross national disposable income had a negative and significant impact on
the private savings rate.
7. Conclusion
References
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Development and Structure. Policy Research Working Paper 2146. Washington,
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Economics 14(2, October): 225–244.
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Insurance. Journal of Political Economy 103(2, April): 360–399.
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the World? Review of Economics and Statistics 82(2, May): 165–181.
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————. 2009a. Economic Outlook No. 86. Paris: OECD.
————. 2009b. National Accounts of OECD Countries: Detailed Tables, Volumes IIA and IIB.
Paris: OECD.
76 Effects of Social Policy on Domestic Demand
Comments
Mukul Asher
1. Comments on Definitions
Let me start with the definition of the savings ratio. The authors define the
savings ratio as net household savings to household disposable income. It is
not clear whether it is the net of liabilities of the household, i.e., borrowing,
and the net of depreciation of the household sector. This suggests that the
data that is used for household savings from household surveys need to be
reconciled with the household savings data in the national income accounts.
In the national income accounts, the business savings only include corporate
savings, not private proprietorships and partnerships and so on; these are all
under household savings figures.
The second area is related to what exactly is savings in the household
context. In particular, how housing expenditure is to be treated in the
1
Editors’ note: Chapter 4 contains a regression equation that controls for other factors, taking into
account this discussant’s comment.
Household Saving Rates and Social Benefit Ratios: Country Comparisons 77
consumption-investment dichotomy. The national income account conventions
use new residential construction as an investment rather than consumption,
but there are many variations in the way the housing expenditures are reflected
in the household account. A clarification of this point would be useful. In the
Asian context, this issue is even more important. First, housing expenditure is
a major item for Asian households. Second, a significant proportion of Asian
household savings is not undertaken in the form of financial savings but in
the form of physical savings. Some countries, such as India, publish separate
data on financial and physical savings.2
Third, the social benefit ratio is defined in the chapter as the ratio of
social contributions and benefits receivable to household disposable income.
Including both contributions and benefits in this ratio is a bit puzzling. It
might be useful to clarify why both are included.3
The household savings data for the OECD countries presented in the chapter
exhibit a great deal of volatility. Italy’s savings rate decreases from 21.5% in
1985 to 7.9% in 2007, while there are no indications that the benefit ratio has
changed much. This tends to suggest that the simple technique employed in
the chapter may lead to over-generalized conclusions, especially with respect
to policy implications.
The chapter also discusses the borrowing constraints, but without elaborating
on their nature or policy implications. For example, can policymakers expect
an increase in household savings or a reduction in household savings if rules
for obtaining credit cards are changed?
2
Horioka replied that he used data from the national accounts of each country as compiled by the OECD,
which are based on the conceptually correct concept of saving: they are net of liabilities, and net of
depreciation; they include saving in the form of investment in housing and other physical assets; and
they include the saving of individual proprietors.
3
Horioka replied that he used social benefits receivable, excluding payable.
78 Effects of Social Policy on Domestic Demand
References
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Prasad, E. 2009. Rebalancing Growth in Asia. Finance and Development 46(4): 19–21.
80 Effects of Social Policy on Domestic Demand
Influence of Age Structure on Savings and Social Spending 81
V
The Influence of Age Structure on
Savings and Social Spending
1. Introduction
Changes in the age structure in the OECD countries and in some Asia-Pacific
emerging market economies are likely to affect economic developments in the
medium-term. In particular, saving patterns are expected to alter when the
elderly become a larger proportion of consumers and savers, with widespread
implications for capital and good markets. Social spending is also likely to
adapt to the evolving age structure of the population. This will have major
implications for public long-term sustainability.
This chapter seeks to quantify the impact of the age structure on private
saving and social spending, based on a review of the literature and on new
panel data analyses covering OECD countries and Asia-Pacific economies.
The main findings are as follows:
t "HFTUSVDUVSFJTBTJHOJmDBOUEFUFSNJOBOUPGQSJWBUFTBWJOHJOCPUI0&$%
and Asia-Pacific economies. In particular, the old-age dependency ratio
is estimated to be negatively correlated with household and private
saving and this effect is robust to a range of tests. By contrast, the young-
age dependency ratio generally does not have a significant impact on
household savings rates in OECD countries. At the same time, the young-
age dependency ratio is found to influence private saving, but the sign
and the magnitude of the impact depends on geographical coverage and
the model specification.
The authors would like to thank Charles Horioka, Mario Lamberte, Hyungpo Moon, Gloria Pasadilla, and
all the other participants at the ADBI Annual Conference 2009 for useful comments and suggestions.
82 Effects of Social Policy on Domestic Demand
t "HFTUSVDUVSFBQQFBSTUPJOnVFODFTPDJBMTQFOEJOHJO0&$%DPVOUSJFT
with an increase in the old-age dependency ratio boosting social spending,
and a rise in the young-age dependency ratio having the opposite effect.
Here again, the old-age dependency channel is estimated to dominate.
This finding reflects the marked influence of the old-age dependency ratio
on old-age pension expenditure and, to a lesser extent, on active labor
market programs, housing, and health-care spending. The results on
health-care spending should nonetheless be interpreted with caution, as
specific factors explaining this expenditure are only imperfectly captured
in analyses through country fixed effects.
The chapter starts with a discussion of demographic trends both in OECD
countries and in Asia-Pacific economies. It then turns to the impact of these
trends on private saving. The effect of the age structure on aggregate social
spending and its breakdown by components is then analyzed. The final section
concludes and identifies policies that would help temper the effects of aging
on saving and social spending, and ultimately on economic growth.
after 2050. OECD countries will also see a small decline in the ratio of youth
to the working-age population.
However, not all OECD countries will be affected by aging populations to
the same extent (Figure 5.2). Europe has already a much older population than
North America. Within Europe, the populations of Italy and Germany are
aging faster than France. Countries where the population is currently relatively
young, such as Mexico and Turkey, will experience a fast aging process.
Overall, while demographic developments will continue to sustain growth in
the US, aging is likely to slow the GDP per capita growth in Japan and Europe.
Previous evidence based on simulations suggests that aging could depress
GDP per capita by an average of 0.2–0.3 percentage point per year during
the next 50 years (Oliveira Martins et al. 2005). International flows of capital,
goods and services, and labor will be important mechanisms moderating the
effects of population aging in each individual country.
The populations of OECD Asian countries are predicted to age at an
extremely rapid pace. The aging process accelerated in the 1990s in Japan
and the proportion of elderly in that country is now higher than the average in
OECD countries. This trend is expected to continue at a similar pace until 2050.
Korea is predicted to be the country where population aging will occur at the
84 Effects of Social Policy on Domestic Demand
fastest pace in the OECD, with the old-age dependency ratio1 reaching 80% by
2050, close to the rate forecast for Japan. The populations of Australia and New
Zealand are also projected to increase in age in the coming decades, but the
old-age dependency ratio is expected to remain below the OECD average.
Significant aging is foreseen for many emerging market economies of East
and Southeast Asia, although on average the share of the elderly in the population
is projected to continue to be lower than in the OECD countries. The timing
and the extent of aging will differ within the regions (Figure 5.3). The East
Asian countries are further advanced in terms of population aging and their
old-age dependency ratio is expected to rise sharply from 2010 to 2050. The
aging pattern of the Chinese population is similar to that of East Asia. After
2010, the old-age dependency ratio in PRC is expected to increase gradually but
would stay below that of East Asia; it is anticipated to be above 40% by 2050.
The old-age dependency ratio is projected to start to rise in the Southeast Asian
countries from 2020, and to stay below or close to 30% by 2050.
According to the life-cycle hypothesis, older people tend to have a higher propensity
to be dissavers, consuming beyond their incomes (Ando and Modigliani 1963).
In this framework, a country with a higher old-age dependency ratio will have
a lower household savings rate because there will be more elderly dissavers and
fewer people belonging in the category of the working-age population, who are
generally net savers. Nonetheless, two factors may compensate for this trend.
First, the expectation of greater longevity may encourage younger people to
increase their savings. Secondly, the expectation of a higher lifetime income may
encourage a new generation to increase their saving levels. It is likely, however,
that these two effects would not fully offset the elderly dissaving, resulting in a
negative relationship between saving and the old-age dependency ratio.
The empirical evidence based on microeconomics studies points to the
existence of a partial consumption smoothing.2 Household survey data
suggest that total consumption displays a humped shape across age groups,
but the hump-shaped income profile is even more pronounced for the elderly
1
The old-age dependency ratio is defined as the ratio of the population over 65 years to the 15–65-year-
old population.
2
One important exception is Japan. Micro-evidence (Horioka 2009) shows that the life-cycle model is
highly applicable in this country.
Influence of Age Structure on Savings and Social Spending 87
Figure 5.3: Old-age Dependency Ratios in Pacific-Asian Countries—
Historical and Projected Values, 1980–2050
Coefficient on Elderly
Authors Scope Dependency Rate
Feldstein (1980) Industrial countries
Pool cross-section time series Private savings -1.21
Masson et al. (1995) High income and developing countries
Pool cross-section time series Private savings -0.25
Weil (1994) 9 OECD countries
Pool cross section time series Household savings -1.36
Disney (1996) 19 OECD countries
Pool cross-section time series Household savings -2.025
Horioka (1991) Japan
Time series Private savings -1.03
Schmidt-Hebbel et al. (1992) 10 developing countries
Cross-section Household savings -0.48
Modigliani and Sterling (1983) Industrial countries
Cross-section Private savings -0.51
Heller and Symansky (1997) Asian Tigers
Pool cross-section time series Private savings -1.54
Oliveira Martin et al. (2005) OECD countries
Pool cross-section time series Household savings -4.267
3
This evidence is not a direct test of the life-cycle hypothesis, as part of the results can be explained by
time and cohort effects.
4
Savings encompass either private or household savings.
Influence of Age Structure on Savings and Social Spending 89
data have yielded larger and more significant coefficients than those derived
from pooled time series data.
A simple scatter plot of household savings rates against old-age dependency
ratios in the OECD countries suggests a negative relationship between the two,
although there is a large variation across countries (Figure 5.4). In particular, Italy
displays stronger savings rates than suggested by its old-age dependency ratio,
whereas New Zealand and Luxembourg show a much lower rate of saving.
To get more insights into the effect of the age structure on saving, a saving
equation was estimated for two groups of countries/economies, the OECD
countries and Asia-Pacific economies,5 for an unbalanced panel of countries
in 1980–2008.
where savings rate is respectively the household savings ratio for the OECD
countries and private saving (gross national saving–gross public saving) for
OECD and Asia-Pacific economies; CONTROL is a set of macro-economic
controls including fiscal balance (as share of GDP), social spending (as share of
GDP), GDP per capita, GDP growth, and the unemployment rate. Fiscal balance
5
The Asia-Pacific group incorporates Bangladesh; PRC; Hong Kong, China; India; Indonesia; Malaysia;
Mongolia; Pakistan; Philippines; Singapore; Thailand; Viet Nam; Australia; and New Zealand.
90 Effects of Social Policy on Domestic Demand
6
In theory, foreign capital inflow could influence savings. However, it is unclear why this should be
incorporated in the analysis, as the saving ratio is an after-measure.
7
Barnett and Brooks (2010) report similar results in the case of the PRC, where government spending
on health is found to reduce household saving. Spending on education would not generate a similar
effect. Evidence is also more mixed for rural households.
Influence of Age Structure on Savings and Social Spending 91
Table 5.2: Saving Equation—Household Savings Rates
(64.57)***
GDP per capita 1.03 1.326 7.561 0.278 3.421 1.603 0.888
(-1.86)*
Social spending
squared - - - 0.017 - - -
(1.82)*
Old-age
dependency ratio -0.552 -0.541 -0.412 -0.386 -0.501 -0.223 0.07
-0.74
(2.20)**
Number of
observations 632 628 576 473 632 632 623
2
R 0.9 0.9 0.89 0.92 0.9 - -
GDP = gross domestic product, GLS = generalized least squares, GMM = generalized method of moments,
OECD = Organization for Economic Co-operation and Development.
t-statistics in parentheses. *,**,*** Significance at 10%, 5%, and 1%, respectively.
Source: Authors’ estimates.
92 Effects of Social Policy on Domestic Demand
The old-age dependency ratio was negatively correlated with private saving
both in OECD and in Asia-Pacific countries (Table 5.3). In absolute terms,
while an increase of 1 percentage point in the old-age dependency ratio would
decrease private saving in OECD countries by 0.8 percentage point (baseline
estimation), it would decrease private saving in Asia-Pacific economies by
2.6 percentage points. Several factors could explain the behavioral differences
between the two areas, including differences in bequest motives and in
social protection coverage. While it is difficult to test econometrically for
these assumptions given the paucity of data, there are some indications
that the low social protection coverage may be an important factor. Indeed,
social spending in the non-OECD Asian countries was about 10 percentage
point lower, in terms of GDP share, than in the average of OECD countries
(OECD 2009b).
The young-age dependency ratio was also estimated to influence savings,
but this effect varied depending on regional coverage and model specification.
While there is evidence of a negative relationship for OECD countries, the
impact of young-age dependency ratio on private saving was mostly statistically
non significant for Asia-Pacific countries.
GDP = gross domestic product, GLS = generalized least squares, GMM = generalized method of moments,
OECD = Organization for Economic Co-operation and Development.
t-statistics in parentheses. *,**,*** Significance at 10%, 5%, and 1%, respectively
Source: Authors’ estimates.
94 Effects of Social Policy on Domestic Demand
8
The study covered 21 OECD countries, including all the Group of Seven countries.
9
The role that technological advances play is complex. Some innovations have been cost-saving. Despite
this, much of the impact of technology appears to have increased health-care costs (Jones 2003).
Influence of Age Structure on Savings and Social Spending 95
Building on this line of research, this paper focuses on the impact of age
structure on social spending and its components. We first start with a descriptive
analysis detailing the main features of social spending and how they relate to
the age structure. Data for social spending are taken from the OECD Social
and Welfare Statistics database and are available from 1980 to 2005. Nine
social policy areas are identified: old age, survivors, incapacity-related, health,
family, active labor market, unemployment, housing, and others.10
Social spending represents a significant share of government expenditure
and GDP, on average about 43% and 19%, respectively (Table 5.4). There is,
however, a large variation across countries, with total spending ranging from
a bit more than 5% in Korea and Mexico over the sample to more than 25% in
the Nordic and some continental European countries (Table 5.5). In contrast,
country differences in terms of both level and composition of social spending
have not evolved much over time. Social spending as a share of GDP displays
an upward trend for most of the countries in the sample, the Netherlands
being a clear exception.
10
Public spending on Family includes financial support exclusively for family and children and encompasses
child-related cash transfers to family, public spending on services for families, with children and
financial support for families provided through the tax system. Spending for such items as health care
or housing are not exclusively for families and therefore are not included in this item.
96 Effects of Social Policy on Domestic Demand
T O S I HE F A U HO OP
Australia 14.7 3.7 0.3 1.9 4.9 2.1 0.4 1.1 0.2 0.2
Austria 25.5 11.6 0.5 2.6 6.1 2.8 0.4 1 0.1 0.3
Canada 17.7 3.9 0.5 1.1 6.4 0.9 0.5 1.5 0.6 2.5
Czech Rep. 18.7 6.6 0.4 2.4 6 2 0.2 0.5 0.1 0.6
France 26.4 9.6 1.7 2.3 6.8 2.8 1 1.5 0.8 0.2
Germany 25.1 10.3 0.6 1.9 7.4 1.9 1.1 1.4 0.2 0.5
Greece 17.2 8.7 0.9 1.2 4.5 0.8 0.3 0.4 0.4 0.1
Japan 14.2 5.5 1.2 0.7 5.4 0.6 0.3 0.5 - 0.2
Korea, Rep. of 5.3 1.6 0.3 0.4 2.3 0.2 0.1 0.1 - 0.3
Netherlands 23 5.6 0.6 4.9 5.4 1.7 1.2 2.4 0.4 0.8
New Zealand 19.2 6 0.2 2.4 5.6 2.4 0.7 1.1 0.5 0.2
Norway 22.4 6.8 0.4 4.6 4.1 3 0.8 0.7 0.2 0.7
Portugal 15.3 5.4 1.1 2.3 4.5 0.8 0.5 0.6 0 0.1
Spain 19.4 7 1.1 2.4 5.1 0.6 0.5 2.5 0.1 0.1
Sweden 29.8 9.1 0.7 5 7.1 3.7 1.9 1.4 0.8 0.7
Switzerland 17 6.2 0.4 2.6 4.7 1.2 0.5 0.6 0.1 0.7
United Kingdom 19.1 5.2 0.8 2.1 5.5 2.4 0.5 1 1.3 0.5
United States 14.6 5.4 0.9 1.2 5.3 0.7 0.2 0.5 1.4 0.5
AVERAGE 19.2 6.3 0.8 2.4 5.4 1.8 0.7 1.3 0.4 0.5
Source: OECD Social and Welfare Statistics Database and World Bank World Development Indicators.
Influence of Age Structure on Savings and Social Spending 99
between social spending and the age structure. The following specification
is estimated:
spending
GDPit = βi + β1CONTROL + β2 DEMOGRAPHYit + εit (2)
11
Results on health expenditure are in line with the expansion of the morbidity hypothesis (Gruenberg
1977). This result should nonetheless be treated with caution, as other demand-and-supply factors which
usually drive health-care spending are only imperfectly captured through country fixed effects.
100 Effects of Social Policy on Domestic Demand
Baseline +
Baseline+ Birth Rate Time Baseline +
Baseline + Mortality + Mortality Fixed Time Fixed
Baseline Birth Rate Rate Rate Effects Effects-GLS
(2.88)*** (3.47)***
(-4.00)*** (-5.02)***
The effect of the young-age dependency ratio varies widely across categories.
It is estimated to have a negative but significant effect on old age, health,
survivors, and housing spending. These results appear to drive the results found
at the aggregate level. By contrast, the young-age dependency ratio would be
positively correlated to family spending, which includes child subsidies.
Given the complexity of social policy and behaviors, this paper only presents
incomplete evidence and is subject to important caveats. As already mentioned
for savings, there may also be some endogenous issues associated with the
Influence of Age Structure on Savings and Social Spending 101
Table 5.7: Social Spending Equations by Category
Unemploy-
Old Incapacity- ment
Age Survivors related Health Family Active Benefits Housing Others
Revenue 0.018 0.03 0.046 0.048 0.028 0.02 0.042 -0.011 0.027
GDP growth -0.067 0.006 -0.013 -0.064 -0.027 0.001 -0.028 -0.005 -0.003
GDP per capita 0.262 -1.618 -0.007 0.011 1.469 -0.286 -0.334 0.115 -0.063
estimation of equation (2), as income level and growth may also be determined
by social spending. One alternative would be to estimate a system combining
social spending and growth equations (Lindert 1996), but this would also mean
disregarding the time dimension of the data. Finally, the relation between
social spending and age could be non-monotonic.12
12
Lindert (1996) found that the squared old-age dependency ratio has a negative and significant effect
on most spending categories, one main exception being health-care spending.
102 Effects of Social Policy on Domestic Demand
5. Conclusion
The empirical analysis undertaken in this paper points to a significant effect
of the age distribution of the population on savings in both OECD and Asia-
Pacific countries. Old-age dependency ratios were usually found to have a
negative correlation to private or household saving. The effect of the young-
age dependency ratio was less marked and was not always significant. The
age structure also appears to influence social spending in OECD countries
but, as expected, its effect varies across spending categories. In particular, an
increasing aging population is likely to translate into increasing spending on
old-age pensions.
There is no straightforward leap from these conclusions to results on
national savings. Indeed, one would need to assume that the current share
in GDP of other forms of government consumption, revenues, and social
contributions remains unchanged. Moreover, one would have to assume that
there are no offsetting increases in private savings arising from the decline in
public sector savings. This assumption would run counter to empirical studies
that suggest significant Ricardian effects (e.g., Schmidt-Hebbel, Webb, and
Corsetti 1992).
Nonetheless, the results have important policy implications. First,
population aging is likely to depress private saving and thus be detrimental
to private investment and consequently long-term output. Policy should be
put in place to temper the effect of an aging population. Promising avenues
include pension and labor market policies encouraging private saving and
employment of older workers. A prerequisite will be to ensure that financial
markets are consistent with the optimal allocation of investments. For example,
expanding the market for annuities could reduce any tendency to over-save
for precautionary motives, and developing a reverse, or lifetime, mortgage
scheme would make it easier to use non-liquid assets possibly more efficiently
(Oliveira Martins et al. 2005). Secondly, it is important to account for the
effect of age structure and its evolution over time when assessing the impact
of social measures. This could inform the choice of social-spending categories
that should be prioritized and could optimize the cost-efficiency of measures
taken.
Influence of Age Structure on Savings and Social Spending 103
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Barnett, S., and R. Brooks. 2010. China: Does Government Health and Education
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Dynan, K., J. Skinner, and S. P. Zeldes. 2004. Do the Rich Save More? Journal of Political
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California and NBER Working Paper 9325. Berkeley, CA: University of California.
Khoman, E., and M. Weale. 2007. Development of Scenario for Health Expenditure in the
European Member States. Final report of work package 8 of the Ageing, Health
Status, and Determinants of Health Expenditure (AHEAD) Project, undertaken
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Research Framework Programme.
Lindert, P. 1996. What Limits Social Spending? Explorations in Economic History 33: 1–34.
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of National Saving and Wealth, edited by F. Modigliani and R. Hemming. London:
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OECD. 2009a. Pension at a Glance. Paris: OECD.
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Okunade, A., and V. Murthy. 2002. Technology as a “Major Driver” of Health Care Costs:
A Cointegration Analysis of the Newhouse Conjecture. Journal of Health Economics
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Influence of Age Structure on Savings and Social Spending 105
Comments
Hyungpyo Moon
This chapter empirically examines the impact of the age structure on private
savings and social spending using the new cross-country panel data covering
OECD countries and Asia-Pacific economies. In particular, the authors find new
empirical evidence such that: (i) population aging decreases private savings in
both OECD and Asia-Pacific economies and increases social spending in OECD
countries; (ii) the fertility rate, by affecting the young-age dependency rate, is
also a significant determinant of private saving and social spending; and (iii)
population aging has no significant impact on public health spending in OECD
countries. This study will not only add new insight to academic research, but
also provide both developed and developing countries with important policy
implications for attempts to temper the impact of aging populations.
Source: Korea National Statistics Office, National Wurvey of Household Income and Expenditure, 2000. Available
at: http://kostat.go.kr/nso_main/nsoMainAction.do?method=sub&catgrp=eng2009&catid1=g02&catid2=g0
2d&catid3=g02da&catid=g02da. US Federal Reseve Board, Survey of Consumer Finances, 2001. Available at:
http://www.federalreserve.gov/pubs/oss/oss2/2001/scf2001home.html.
Influence of Age Structure on Savings and Social Spending 107
age cohorts. In contrast, elderly households in the US deplete their net worth
at a very slow rate.
Figure 5.8 also shows that Korean households possess a relatively higher
level of net worth in the early stage of working life. This would imply that the
bequest motive of the average Korean household is at least as strong as, or
even stronger, than that of US households. Also, according to OECD (2009),
the average retirement age of Korean workers was 71.2 years in 2007, which is
much higher than that of the US workers (64.6 years). Hence, the labor market
participation of the elderly cannot explain the faster dissaving of the elderly
in Korea. One possible explanation of the faster asset decumulation of this
population is the immaturity of the public pension plan. The National Pension
Plan in Korea was first introduced in 1988 and is still in its infancy—only
17.6% of those who are aged 65 and over received pension benefits in 2005.
This inadequate old-age income security system would make the elderly rely
heavily on self-insurance measures and to decumulate their net worth faster
than elderly households do in the US.
The above example can also be applied to the findings in this chapter; that
is, different levels of social protection, especially for the elderly, are the major
cause of different responses in private saving between OECD countries and
Asia-Pacific economies. Hence, it would be worthwhile to examine whether
this discrepancy of demographic impact on private saving still persists after
controlling for the differences in the amount and coverage of public pensions
and health insurance programs. The differences in the impact of the young-age
dependency ratio can also be explained in the same way, at least partially.
References
OECD. 2009. Society at a Glance 2009: OECD Social Indicators. Paris: OECD.
Household Savings and Social Protection Policies in the PRC 109
VI
Household Savings and Social Protection Policies in
the People’s Republic of China
1. Introduction
This chapter consists of three parts. First, it analyzes existing research on savings
in the PRC, as well as policy implications for social protection policies. Second,
it traces the historical development of social policies in the PRC from 1949 to
2002, focusing on the impact of marketization and the state’s retreat from
social provision. Third, it discusses the recent efforts made by the government
to improve the social protection policies in the PRC. The chapter concludes by
arguing that the PRC’s strategic prioritization of economic growth over the
past several decades has led to unprecedented economic prosperity, but that
the social protection system has been severely jeopardized. Reconstruction of
the social protection system, though challenging, would generate far-reaching
positive effects in achieving more balanced socio-economic development in
the PRC.
We shall first clarify a number of key terms and their delimitations in
this chapter. Social policy as discussed here is understood as government
intervention to provide social services, with complementary support to the
socially disadvantaged and needy through statutory regulation, including a
range of unemployment and social security benefits (Hall and Midgley 2004).
Social protection policies, or social policies, in the PRC context include social
insurance (or social security, shehui baozhang), social assistance, welfare services
The authors acknowledge Tian Feng for his input and technical support during the initial writing of
the chapter. The authors are also grateful for the comments and suggestions made by the reviewers at
ADBI.
110 Effects of Social Policy on Domestic Demand
and benefits, the special care and placement system, and social aid and charity
(Figure 6.1). In this chapter, we will mostly focus on social insurance and
social assistance.
“Social Welfare” refers to services and benefits administrated by Civil Affairs government branches to such
groups as children, the elderly, and people with disabilities. The “special care and placement system” consists of
monetary compensation and job placement policies intended for servicemen and their families, and the families
of martyrs. PRC= People’s Republic of China.
Table 6.2: PRC Household Savings Rate by Income Group, Urban and Rural
(% of GDP)
Income Level 1995 1998 2000 2001 2002 2003 2004 2005 2006 2007
Urban Households 17.4 20.2 20.4 22.6 21.7 23.1 23.8 24.3 26.0 27.5
Lowest 20% –3.3 7.0 7.4 7.7 6.8 6.9 6.8 7.7 10.2 9.8
Lower-middle 20% 3.5 14.7 14.6 15.1 14.7 15.2 15.4 16.9 19.1 20.0
Middle 20% 6.8 18.4 18.7 19.4 18.1 19.7 20.4 20.5 23.0 24.5
Upper-Middle 20% 10.3 21.8 21.3 23.6 21.8 22.7 24.5 25.3 27.3 29.4
Highest 20% 18.0 27.8 28.0 31.9 28.7 30.9 31.6 32.0 32.9 34.5
Rural Households 16.8 26.4 25.9 26.4 25.9 25.9 25.6 21.5 21.1 22.1
Lowest 20% –21.8 –21.3 –17.4 –23.0 –23.9 –45.1 –37.5 –37.4
Lower-middle 20% 14.4 14.6 15.4 14.3 14.2 5.2 8.2 8.7
Middle 20% 25.1 24.9 24.0 23.8 24.4 18.3 18.5 19.7
Upper-middle 20% 32.2 32.7 31.1 31.7 31.8 28.1 27.4 28.2
Highest 20% 40.5 40.2 40.7 40.8 40.4 40.7 37.7 38.8
The founding of the Communist government in 1949 set the keystone of the
PRC’s reconstruction: state socialism. It promised to cure social problems such
as severe poverty as well as their roots—private ownership; the Revolution
derived its legitimacy from this promise. Measures taken up included state-
ification or collectivization of productive and major consumption assets, a
high priority on industrialization, and the imposition of totalitarian social
control. In order to speed up industrial development, the PRC government
implemented policies to increase capital accumulation from agriculture via
control of grain production and distribution and a strict household registration
policy (known as hukou), which restricted mass migration from the rural areas
to the cities. This gave rise to a gradual urban–rural divide and, hence, a social
protection system divided along urban–rural lines (Hussain 1994).
In the urban areas, social provision was primarily employment-based. In
the early 1950s, priority was placed on war, disaster relief, and social assistance
as the unemployment rate rose to 50% and the unemployed numbered nearly
3.33 million. The unemployment relief fund was set up using contributions
of the state and enterprises, as well as mandatory wage deduction from the
working population (Liu 2004). Soon, attention began to shift toward production
and employment. In February 1951, the Regulation on Labor Insurance was
introduced. It required enterprises to set aside 3% of the total wages for the
insurance of old age, sickness, disability, maternity, and death for their workers
(State Council 1951). The pension was typically 35–70% of the standard wage
depending on the recipient’s number of years in employment. The absence of
unemployment insurance from the Regulation on Labor Insurance was not
due to mere neglect; instead, it implied the then-dominant belief in work as
a right or entitlement. True, open unemployment was practically nonexistent
in the PRC until the 1990s. It was also in the 1950s that state-sponsored
programs of health care and retirement benefits for government employees
were implemented (State Council 1952, 1955).
Although production, employment, and social provision were controlled by
the state, it was danwei in which the state provision was primarily embodied
in urban areas. Danwei, which literally means “unit” in Chinese, is close to
the English term “workplace.” Danwei as workplace refers to the institutional
arrangements through which the individual seeks employment and thus draws
the source of livelihood. However, during the period of the command economy in
the PRC, it was through the affiliation with danwei that the individual was ensured
118 Effects of Social Policy on Domestic Demand
2
See Item 26 in Central Committee of the Chinese Communist Party (1961).
Household Savings and Social Protection Policies in the PRC 119
high subsidy. Within such a system, the individual was not personally obliged
to contribute to social insurance, yet the social welfare benefits one received
encompassed hidden labor compensation as the wage level remained low for
many years (Zheng 2002). Some economic growth statistics from 1952 to 1980
bear this statement out: the total industrial and agricultural output increased
8.1 times and industrial fixed assets investment 26.0 times, while the gross
national product increased 3.2 times and per capita consumption only 1.0
time; yet, from 1957 to 1978, the average wage level increased a mere 0.34%
(Leung and Nann 1995). In other words, under the command economy, the
strategic accumulation of industrial investment far exceeded the improvement
of people’s lives, and consumption was kept at a subsistence level.
Social protection policy in the urban areas during this period underwent
even more dramatic changes, which can be categorized as shifting from
enterprise or state security to social security, or the state’s gradual retreat
from social protection. After the official launching of urban economic reform
in 1984, reform of the social protection policy was intended to “liberalize”
the SOEs, relieving them from the overly heavy social “burdens” in order to
allow them to enhance their market competitiveness. In 1986, social security,
or shehui baozhang, appeared for the first time in the Seventh Five-Year Plan.
Social security was defined to include social insurance, social assistance, social
welfare, and special care and placement policies. Later, in the 1990s, mutual
aid and individual accounts were added to the social protection scheme (Duoji
1998). From the early 1980s and throughout the 1990s, in order to facilitate the
transformation of SOEs, a series of reforms were undertaken, including labor
contract, tax, and wage reforms, and insurance for old age, unemployment,
maternity, occupational injury, and health care. In 1999, the Regulation on
Unemployment Insurance was promulgated. In addition, commercial insurance
programs were reinstated after a long period of ceased practice. Also initiated
were community-based social service, an urban minimum living standard
guarantee scheme (dibao), and pilot projects of housing privatization. Through
the implementation of these programs and reforms, social protection policy was
redefined as a mechanism to accommodate the market transition of enterprises.
Several key sectors in which reforms were made are discussed below.
Policy Features
1991 Decision on Old-Age Insurance Scheme Reform Imposed cost sharing between the government,
for Enterprise Workers the enterprise, and the individual;
Proposed a multi-level scheme including basic
social old-age insurance, enterprise pension, and
individual accounts
1995 Notice on Deepening the Reform of the Old-Age Specified combination of social pooling and
Insurance Scheme for Enterprise Workers individual accounts
1997 Decision on Establishing a Uniform Basic Old-Age Set a unified contribution rate for both employers
Insurance Scheme for Enterprise Workers and employees; requested social pooling from
city/county to provincial level
2000 Notice on a Pilot Scheme to Improve the Basic Reduced individual contribution rate from 11% to
Old-Age Insurance Scheme in Liaoning Province 8%; gradually substantiated individual accounts
and made them partly accumulative
*Social health expenditure mainly includes medical costs covered by health insurance companies and by danwei
of all types for their employees.
PRC = People’s Republic of China.
Source: Ministry of Health of the PRC (2009).
Household Savings and Social Protection Policies in the PRC 123
the enterprise contribution being deposited into the collective fund. Clinic
expenses would be paid out of the personal account while hospital bills and
treatment of serious illness would be partly covered by the collective fund (Hu
2009). Yet, the debate on the balance between social and economic roles of
medical care continued (Wang 2008). Most markedly, the shrinking role of
the government in medical care was reflected in its declining share in the total
national health expenditure, which dropped from a high of 38.7% in 1986 to
a record low of 15.5% in 2000; individual expenditure increased from a low of
20.4% in 1978 to a high of 60.0% in 2001 (Table 6.4 and Figure 6.6).
insurance for two years, and then dibao. These programs drew financial
resources from enterprises and the central and local governments. From
1998 to 2006, the central government transferred CNY100 billion from the
central government to the local authorities to provide for the basic living and
reemployment training of the laid-off workers. At the beginning of 1999, the
State Council stipulated in the new Regulation on Unemployment Insurance
that the “laid-off insurance” of the SOEs be extended to all the employees of
enterprises as well as public service organizations. It was also mandated that
an unemployment insurance fund be established, into which the enterprises
would contribute 2% of the total wage bills while the individual employees
would contribute 1%. Once unemployed, an individual could draw between 6
and 24 months of unemployment benefits depending on the number of years
that individual had been paying into the system (Hu 2009).
As to the dibao, its implementation was a gradual process. As early as
1993, pilot programs were carried out in a number of cities such as Shanghai
and Dalian. In 1997, the central authorities urged the establishment of dibao
nationwide by the end of 1999. The authorities’ goal was to provide monthly
cash assistance to laid-off workers and those categorized as the “three nos”: no
source of income, no ability to work, and no familial support. By September
1999, when the regulation on dibao for urban residents finally became effective,
not only was dibao adopted in all the 668 cities and 1,638 towns where county
governments were then seated, it was widely extended to all as long as they met
the income criterion. As of October 1999, the total number of dibao recipients
reached 2.82 million, of whom close to 80% were new (Tang 2003).
What was proposed, it seemed, was a very ambitious plan for a universal
expansion of the social protection scheme. To see what progress has been
made and what obstacles have been encountered, we shall first look at the
recent accomplishments reflected in numbers.
up 27.7% of the recipients, while women accounted for 26.9%, the young (18
years old and younger) 11.0%, and people with disabilities 8.6% (Zhang and
Tang 2008).
Measures for setting the standard for benefits varied locally and could
be based on any of the following considerations: (i) national poverty line; (ii)
minimum wage, e.g., 40% of the given local minimum wage in the urban
areas, and 60% of the urban dibao in the rural areas; (iii) financial capacity
of the local authorities; (iv) the basic living needs and consumer price; or (v) a
proportion (26–30%) of the average gross income in the given area (Center for
Policy Studies of the Ministry of Civil Affairs 2009).
While the number of recipients of dibao in the urban areas seems to be
stable, coverage has been rapidly expanding in the rural areas. As of May 2009,
there were 23.36 million recipients in the urban areas and 44.56 million in
the rural areas; the number of rural recipients had increased by 5.98 million
compared with the number in 2008. In addition, there were 5.52 million rural
people who continued to receive the aid related to the “five guarantees” (Jia
2009). Further expansion of dibao is expected to continue. Some proposed that,
by 2012, dibao recipients should be increased to 8% of the total population
from 4.7% in 2008 (Zheng 2008).
While it is not easy to assess the effectiveness of the programs based on a
descriptive presentation of these numbers, we shall now turn to the challenges
lying ahead.
6
Formerly the Ministry of Labor and Social Security.
Household Savings and Social Protection Policies in the PRC 129
throughout the 1990s, the poverty rate in urban areas was on the rise, mainly
due to massive unemployment and inadequate social assistance (Xue and Wei
2004; Li and Knight 2002). The dibao was meant to combat these issues, but
research findings indicate that while it has had a significant impact on poverty
alleviation, it has a very limited impact on narrowing income inequality in
the urban PRC. The policy implications are that the level of the dibao should
be raised and its coverage be expanded (Li and Luo 2009).
As many of the programs were established or modified in response to
massive unemployment in the urban PRC in the late 1990s, they surely played
the role of “shock absorber” for social stability at a time of potential turmoil.
Nevertheless, social protection policy has failed to serve as a redistributive
mechanism for lessening income disparity.
Social protection policy has contributed more to the urban–rural divide
for which the PRC has long been known. Until recently, more resources of
social provision have been devoted to urban than rural areas; even the quickly
expanding social assistance or insurance programs in the rural areas are based
on a much lower income maintenance standard. This “urban bias” is partly
due to the practice of regarding peasants as self-employed (Hussain 2005).
It also has to do with the assumed lower cost of living in rural areas. Yet,
while the urban–rural economic disparity reflected in the Gini coefficient is
dramatic and continues to grow, social policy has made the situation more
severe. According to a longitudinal household survey, in the beginning of the
twenty-first century, the social security benefits of urban residents in monetary
terms were equivalent to about 53% of the disposable income per capita, which
was 1.65 times the amount of gross income per capita of rural residents. Thus,
counting the differences in urban–rural social security benefits would enlarge
the urban–rural income gap from 3.1 times to 4.5 times and would increase the
Gini coefficient by about 10% (Li and Luo 2009). The urban–rural income gap
among low-income households is even wider partly due to the lower mobility
of the rural residents and partly due to the relatively better social protection
benefits for the urban residents (Luo 2006). A comparison of transfer income
of the urban and rural residents indicates similar results. Tables 6.5 and 6.6
show that urban households received far more transfer income than did rural
households in absolute terms as well as relative to total disposable income.
Further, even though between 1990 and 2007, transfer incomes received by
both urban and rural households were on the rise, the former increased much
more than the latter. Thus, transfer income contributes positively to urban–rural
income inequality (Yang and Chi 2008; Huang, Wang, and Wan 2003).
130 Effects of Social Policy on Domestic Demand
The priority accorded to urban areas with regard to medical care is even
more apparent, as reflected in the unequal distribution of health care resources.
Taking 2005 as an example, the gross health care expenditure per capita in
the PRC was CNY662.3, of which the urban residents used an average of
CNY1,123 per capita, while rural residents used an average of CNY319 (3.53
Per capita annual income (yuan) 1,516.21 4,279.02 6,295.91 11,320.77 12,719.19 14,908.61
Income from wages and salaries 1,149.70 3,390.21 4,480.50 7,797.54 8,766.96 10,234.76
Per capita annual net income (yuan) 686.31 1,577.74 2,253.42 3,254.93 3,587.04 4,140.36
Income from wages and salaries 138.8 353.7 702.3 1,174.53 1,374.80 1,596.22
Income from household operations 518.55 1,125.79 1,427.27 1,844.53 1,930.96 2,193.67
7
The phenomenon in sociology where the rich get richer and the poor get poorer.
132 Effects of Social Policy on Domestic Demand
average pensions are respectively 109.1% and 86.6% more than that of the
enterprise retirees (Zheng and Sun 2008).
The relatively low number of contributors as a percentage of the labor
force has meant that the contributions required to finance these benefits are
relatively high, compared to other world regions. Slightly over half of the
urban employees participate in the old-age insurance scheme.8 As a result,
the PRC has the highest level of social security contributions among the lower-
income Asian countries. There is also a relatively high level of reliance on
employer rather than employee contributions in the PRC (Whiteford 2003).
This has partly led to the particular barriers to the efforts of expanding social
insurance coverage among the so-called floating population, i.e., rural-to-
urban migrants.
Rural-to-urban migrants have so far been a vulnerable group who have yet
to benefit from the social protection programs. Prior to 2005, enterprises were
required to treat the migrants equally with urban employees, which meant
mandated participation in the five social insurance programs. This policy
apparently met significant resistance from enterprises employing high numbers
of migrants; their objections were based on concern about the consequent rising
labor costs. As a result, local authorities in the Pearl River Delta region, where
large number of migrants are concentrated, allowed enterprises to disentangle
the five social insurances bundle and prioritize insurance for occupational
injury and serious illness with lower required contribution rates. Still, social
insurance coverage rates among migrants remain low compared with urban
employees: 20% of them have old-age insurance, 42% have occupational injury
insurance, and 35% have insurance for serious illness (PRC Department of
Population and Employment Statistics, Department of Planning and Finance,
Ministry of Labor and Social Security 2008).
Resistance to the migrant old-age insurance comes not only from employers.
Migrants themselves are not keen on the old-age insurance because of a built-in
transferability problem. As the program only allows benefits within the given
city or province after 15 years of accumulation, rural–urban migrants cannot
receive the pension if they leave the city or province. In addition, the policy
permits cashing out of personal contributions if current employment is ended,
but employer contributions remain in the social pooling account. Two problems
thus arise: (i) a proportion of migrants is always joining and exiting the old-age
8
As of the end of 2007, about 52% of urban employees participated in old age insurance (PRC Department
of Population and Employment Statistics, Department of Planning and Finance, Ministry of Labor
and Social Security 2008).
Household Savings and Social Protection Policies in the PRC 133
insurance as they change jobs, leading to increased management costs and
loss of benefits; and (ii) enterprise contributions to the social pooling account
for migrants end up benefiting urban employees.
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136 Effects of Social Policy on Domestic Demand
Comments
Yasuyuki Sawada
Given that the PRC is becoming the world’s savings capital, I enjoyed reading
this chapter, which attempts first, to describe savings in the PRC second,
to trace the historical development of social policies from 1949 to 2002,
and finally, to discuss the recent social protection policies. The method
employed was largely descriptive with some aggregate statistics in figures and
tables. No econometric analyses were conducted. There are three concluding
remarks: first, on strategic economic growth policies, the PRC has achieved
unprecedented economic prosperity; second, the social protection system has
been severely jeopardized in the quest for growth; and third, reconstruction
of the social protection system is needed to generate more balanced socio-
economic development.
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Economics Letters 96(2): 196–201.
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Pakistan. Journal of Development Economics 91(1): 77–86.
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Affect Household Welfare Seriously? Journal of Money, Credit and Banking.
Consumption, Income Distribution, and State Ownership in the PRC 141
VII
Consumption, Income Distribution, and State
Ownership in the People’s Republic of China
Yuqing Xing
1. Introduction
income in 2007, almost the same level as in 1992. In other words, household
savings changed very little during the period.
In contrast, both government and corporate savings as a share of national
income grew rapidly. In 1992, corporate savings accounted for 11.3% of national
income and government savings for 4.4%. Corporate savings grew almost
steadily after 1997, rising to 22.9% in 2007, more than double the level of 1992.
Government savings fluctuated around 4.0% before 2002, then climbed rapidly
to 8.1% of national income in 2007. The structural change in national savings
from 1992 to 2007 indicates that the significant increase in corporate savings
contributed most to the rise in the gross national savings rate. Household
savings’ share in national income actually dropped 0.3 percentage points from
1992 to 2007, and thus could not make any positive contribution to increases
in the gross national savings rate. In other words, of the three components
of national savings, household savings made the smallest contribution to the
high national savings rate. Analysis of the composition of national savings
based on flow-of-funds data1 in the country’s national accounts also suggests
that corporate savings became more significant than household savings in
the last decade (Tyers and Lu 2009). Hence, in order to promote domestic
1
Financial in-flows and out-flows among all sectors of an economy.
Consumption, Income Distribution, and State Ownership in the PRC 145
consumption, policy prescriptions simply focused on household savings would
actually miss the real target and would not be effective.
Imperfections in the labor market—where excess supply remains—are among
the reasons PRC enterprises have continuously generated a rising share of
national savings in recent years. An almost unlimited supply of labor from
rural areas undermines the bargaining power of workers and constrains wage
increases. Empirical studies show that wages in the PRC grew much slower
than workers’ productivity. Workers were actually paid about 25% to 30% of
marginal labor revenue (Cai, Wang, and Qu 2009). The PRC economy has
grown about 10% annually in the last three decades. The declining share of
wage income in GDP implies that enterprises have gained relatively more
from economic growth compared to workers.
Another critical factor responsible for the rise in corporate savings was a
series of SOE reforms, and government policy to retain state control in strategic
industries such as mining, petroleum refining, steel, and telecommunication.
State control of these industries serves as a means of maintaining socialist
characteristics within a market economy—the so-called “socialist market
economy.” The enterprise reforms implemented since late 1990 have
significantly reduced the number of SOEs and eliminated millions of redundant
workers, thus converting surviving SOEs into leaner, more competitive, and
profitable firms. Moreover, supported by government policies, SOEs have
monopolized many industries which are very profitable in an economy that
is growing rapidly on the way toward industrialization.
The huge monopolistic rents and retained profits of these enterprises
comprise a major source of corporate savings (Lu et al. 2008; Tyers and Lu
2009). In 2007, state-owned-and-controlled companies earned net profits of
CNY1.62 trillion, equivalent to 6.5% of the PRC’s GDP and 31.8% of the
government’s fiscal revenue. A handful of central SOEs (about 140 large firms),
which are under the jurisdiction of the central government, accounted for
CNY1.1 trillion of net profits, or about 68% of the record profits of SOEs in
2007 (Ministry of Finance 2008).
Figure 7.2: Comparing Household Savings Rates between the PRC and
Japan
Source: Japanese Cabinet Office (2005), China Statistics Yearbook, and author’s calculations.
Consumption, Income Distribution, and State Ownership in the PRC 147
there saved about 15.1% of their disposable income. Their saving propensity
gradually increased to 24.3% in 2005, almost the same level that Japanese
households achieved within the same period of time (15 years). The savings
rate in the PRC continued to rise to 27.5% by 2007, however. The evolution
of household savings rates in the PRC basically followed the path of Japanese
households during that country’s period of rapid economic growth from 1960
to 1977. Compared with Japan, it is not evident that PRC households are an
outlier and save excessively.
An obvious difference is that Japan’s household savings rate peaked in 1975,
while that of the PRC continued to grow after 2005. However, in PRC household
surveys, consumers’ purchases of houses are classified as investments. The
welfare allocation for housing was abolished by the government in 1998. Faced
with rising housing prices, mortgage payments have comprised a large portion
of monthly expenditures of individual households in urban areas. Monthly
mortgage payments are usually considered savings, not consumption. In
addition, pitfalls in the survey methodology may underestimate household
propensity for consumption. An official of the Chinese Statistics Bureau
acknowledged that survey methodology was designed in the 1980s and failed
to reflect subsequent structural changes in the economy (Peng 2009). Many
consumption expenditures, such as school selection fees and under-the-table
payments for visits to doctors in hospitals, are not covered by the survey.
Rents for houses are based on house construction cost rather than on market
value, thus underestimating household consumption. Given these facts, the
4-percentage-point difference between the peaks of household savings rates
in the PRC and Japan may not support the view that Chinese consumers save
more than their counterparts in Japan.
but more importantly, would enhance social justice; in theory, all SOEs are
owned by citizens of the PRC.
2
For the definitions, please see Explanatory Notes on Main Statistical Indicators in Chapter 13 of
National Bureau of Statistics (2008).
Consumption, Income Distribution, and State Ownership in the PRC 151
competitive, and eventually developing them into multinational companies.
Letting the small go implied that the government would give up control of
SMEs. The government employed various methods to spin off SMEs, such as
bankruptcy, merger and acquisition, leasing, and sale. The ultimate purpose
of the strategy was to allow the state to retreat from competitive sectors by
privatizing SMEs, and dominate a few strategic industries. The latter were
industries that were suitable as natural monopolies, or companies with
economies of scales realized through control of a limited number of large,
central and local SOEs (Zheng and Chen 2007).
To achieve the objective of these reforms, the government recapitalized the
targeted large enterprises by converting state loans to equities, authorizing
state banks to write off bad loans, selectively listing firms in stock markets, and
allowing the firms to form joint ventures with foreign investors. In addition,
redundant workers were laid off, and all social welfare functions such as
provision of housing, schools, hospitals, and pensions were removed from
these enterprises.
The downsizing of SOEs was dramatic. It is estimated that about 30 million
workers have been laid off since 1998 (Garnaut et al. 2005). The number of state-
owned and state holding3 industrial enterprises dropped sharply from more
than 64,000 in 1998 to about 21,000 in 2007. The total number of employees
shrank 54% to 17.4 million—corresponding to about 22% of the total labor
force employed in all industrial enterprises, down from 60% in 1998 (Table
7.1). Industrial SOEs as a whole became leaner in terms of number and work
force, but stronger and more competitive. Measured by assets, the average
size of industrial SOEs rose to CNY765 million, more than five times larger
3
The former means wholly state-owned; the latter means that the state controls more than 50% of
enterprise shares.
152 Effects of Social Policy on Domestic Demand
Revenues Profits
Enterprises 2007 2008 2007 2008
Total 118 Central Enterprises 10,028.2 11,870.5 1,005.6 696.2
1 China Mobile Communication Corp. 397.2 451.9 127.4 145.8
2 China National Petroleum Corp. 1,000.7 1,273.0 192.0 134.8
3 China National Offshore Oil Corp. 162.0 194.8 56.5 67.8
4 Shenhua Group Corp. Limited 107.1 144.0 29.8 38.3
5 China Unicom 197.7 188.1 16.7 31.0
6 China PetroChemical Corp. 1,227.9 1,462.4 75.7 26.4
7 Baosteel Group 227.7 246.8 35.7 23.8
8 China Ocean Shipping 158.5 190.6 34.1 17.4
9 China Three Gorges Corp. 16.8 21.3 12.7 11.4
10 China Coal Energy Company 57.7 71.3 8.0 11.3
Source: SASAC.
with high entry barriers. It is likely that their strong financial performance
was attributable more to their monopoly position and preferential treatment
by the government than to the efforts and capabilities of their employees.
banks. Later, CNY1,400 billion in NPLs from the four banks were transferred
to four state-owned asset management companies, which were funded with
CNY40 billion from the Ministry of Finance and CNY192 billion from the
PBC for the purchase of NPLs.
In 2003, PBC provided US$45 billion to help CBC and BC write off their NPLs
and prepare for listing in stock markets. The public fund injections raised the
capital adequacy of both banks and reduced their NPL ratios significantly. ICBC
and ABC also received US$15 billion and CNY130 billion, respectively, from
PBC. With a series of public fund injections and internal restructuring—such
as laying off redundant workers, diversifying ownership, and strengthening
corporate governance—profits of all four of the large banks improved
dramatically. From 2004 to 2007, profits of ICBC grew to CNY82 billion from
CNY30 billion, and the profits of BC jumped to CNY46 billion, more than
double the level of 2004 (Figure 7.4). In 2008, ICBC emerged as the most
profitable bank in the world with profits of US$16 billion (Fortune 2009).
Although a publicly listed bank, the government owns 70% of ICBC shares.
ICBC, however, has yet to pay any dividends to the government.
Using tax money to bail out failed banks is not a unique practice. There
are many predecessor cases. In the late 1990s, the Government of Japan used
Figure 7.4: Profitability of the Four Large State Banks of the PRC,
2004–2007
( Billion Yuan)
ABC = Agriculture Bank of China, BC = Bank of China, CBC = Construction Bank of China, ICBC = Industrial and
Commercial Bank of China
Source: China Financial Statistics.
Consumption, Income Distribution, and State Ownership in the PRC 155
tax money to save private banks dragged down by NPLs accumulated after
asset bubbles burst in 1989. Recently, the Government of the US injected
more than US$800 billion to rescue the largest US banks hit by the subprime
loan crisis. In Japan and the US, however, injected public money is not free.
All banks receiving public funds in these countries have a legal obligation to
repay the money or face the risk of nationalization if they fail to survive. In the
case of the PRC, however, it is not clear to the general public what obligations
the four large banks have after receiving enormous amounts of tax money.
It appears that these banks have no obligation to repay public funds. The
ambiguity may be due to the assumption that these banks, despite being
listed in stock markets, remain state-owned banks. If so, the citizens of the
PRC, the real owners of these banks, are entitled to share their profits. No
mechanism exists by which the general public, who shouldered all costs of
bailing out these banks, could share in their profits.
expand beyond optimal scales and invest in projects with low rates of return.
Moreover, due to asymmetric information and weak supervision, it is highly
likely that managers use retained profits for their own benefit at the cost of
shareholders.
Current arrangements for allocation of SOE profits seriously undermine
social equity. Only a small portion of employees working at SOEs enjoys high
wages and handsome fringe benefits—notably workers in sectors with a state
monopoly. Excluding compensation from stocks and options, the average
income in 2007 of executive managers in state holding companies listed on
stock markets was CNY340,000 (about US$50,000)—more than 10 times
higher than the average salary of workers (Su 2009). The recently uncovered
“shadow stock” plan of China International Capital Corporation Limited
(CICC) revealed how managers and employees of SOEs utilized state assets
and guaranteed monopoly power to maximize their personal interests. CICC
is controlled by China Investment Corporation, the sovereign fund of the PRC,
with 43.4% of its shares. With the support of the government, CICC almost
monopolizes the initial public offering business of SOEs in overseas stock
markets. CICC granted 20% of its shares to its managers and employees in
the form of shadow stocks, substantially diluting the ownership of the state.
In 2007, total employee compensation by CICC amounted US$435 million,
about half of company revenue (Wall Street Journal 2009).
Providing incentives—such as high salaries and stock options—to executive
managers is argued to be an effective means of solving the principal agent
problem in corporate governance and improving share values. In the PRC,
however, SOE executive managers differ from private sector professional
managers in a typical market economy. First, most SOE executive managers are
appointed by the government, rather than selected through open competition
in the labor market. Secondly, they are government officials. Their status and
benefits as government officials remain even after they become SOE managers.
Regardless of the performance of firms under their management, their status
as government officials rarely changes. In other words, they are under no risk
of pay cuts or being dismissed, as are professional managers working in private
firms. Finally, the government has been using various measures to create a
favorable environment for SOE growth, such as easy credit and deliberate
accommodation of the monopoly power of SOEs. It is difficult to determine
whether rising SOE profits are due to the contribution of managers or to
monopoly power and government support (Su 2009). A few studies suggested
that high manager compensation played a significant role in affecting the
Consumption, Income Distribution, and State Ownership in the PRC 157
value of company shares and correlated with the performance of listed firms
(e.g, Firth, Fung, and Rui 2007; Kato and Long 2005). These studies not only
ignored the reverse causality—i.e., high profits leading high compensation—but
also incorrectly assumed that SOE managers face the same risks as professional
managers in a typical market economy.
A recent survey conducted by the Shanghai Human Resources and Social
Security Bureau (2009) of aggregate labor compensation (including basic
salary and all benefits) indicated that state ownership is highly correlated
with the level of compensation. The bureau surveyed 6,210 companies in
10 sectors in Shanghai. Within each sector, firms were classified according
to ownership structure: state; collective; foreign; private; and Hong Kong,
China; Taipei,China; and Macau, China considered as one group. The
results showed that banking and finance companies provided the highest
compensation—on average CNY221,000 (US$32,500) per employee or about
five times higher than compensation in the hotel and restaurant sector, the
sector with lowest compensation. Within the financial sector, state-owned
financial enterprises paid CNY240,000, the highest compared with non-state
financial companies. Yet, both return on assets and return on equity of state-
owned banks were lower than such returns of foreign banks in the PRC. Using
marginal labor productivity as a rule for determining labor compensation,
the higher compensation offered by state-owned banks was not justifiable
economically.
Higher compensation by state-owned financial firms compared to non-state
financial firms is not a practice unique to the financial sector. In eight out of the
ten sectors covered by the survey, average compensation by state-owned firms
was highest. In the utility industry, annual compensation of SOEs averaged
CNY138,000, about 4.5 times higher than in collectively owned firms, which
offered the lowest worker compensation in the sector. In the financial sector,
compensation by state-owned banks was CNY156,000 higher than the lowest
compensation offered by collectively owned banks (Figure 7.5). It is well known
that both the utility and banking sectors are largely monopolized by SOEs.
It is not difficult to understand differences in compensation by sector.
Industry-specific factors such as relative market competition, specific labor
skills, average firm size, and technology affect worker compensation across
sectors. Within a sector, on the other hand, labor mobility tends to equalize
compensation across firms. The survey, however, suggested that compensation
within the same sector varies substantially. In particular, SOEs paid more
than other types of firms in most sectors. The significant correlations between
158 Effects of Social Policy on Domestic Demand
state ownership and compensation imply that SOEs either enjoy monopolistic
profits, or their employees benefit at the cost of shareholders and the general
public due to weakened supervision of compensation decisions. No similar
survey is available for the whole of the PRC. In that the development of the
market economy in Shanghai is the most advanced compared with other
parts of the country, the survey provides insightful information about
the relationship between state ownership and workers’ compensation in
contemporary PRC.
(1)
where qi= Qi /Li is the unit labor output and ki= Ki /Li is capital stock per
worker. The unit labor output i is a standard measure for labor productivity,
which determines labor wages. Equation 2 indicates that physical capital and
human capital are two major variables determining labor productivity and
wage. Following equation 2, a testable wage equation can be derived as
Equation 3 could be used to estimate wage level in each sector. However, the
hypothesis concerns interindustry wage differences, not wage level. In other
words, the fundamental purpose of the empirical test is to examine whether
state ownership plays a significant role in interindustry wage differences. Using
equation 3, wage difference can be defined as
ln = α + β1 ln + β2 ln + ei (4)
ln = α + β1 ln + β2 ln + β3 ln + eit (5)
Equation 5 is the final model estimated for testing the hypothesis that
state ownership contributes to rising interindustry wage disparity. The model
is estimated with panel data covering 12 industries in 2003–2007. A random
effects model is selected for the estimation. The original data were collected
from various issues of China Statistical Yearbook (National Bureau of Statistics
various years). Human capital i is computed as the ratio of professionals to
all employees in an industry; physical capital i is calculated as fixed capital
investment per employee.
The estimates are reported in Table 7.3. The estimated coefficient of
is 0.103 and significant at 1%, indicating that an industry with relatively more
concentration of SOEs tends to pay higher salary. The estimated coefficient
of is 0.041 and significant at 10%, and the estimated coefficient of is
0.333 and significant at 1%. The positive and significant coefficients of both
physical capital and human capital differences are consistent with the theory
that relatively higher physical capital and human capital lead to relatively
higher salary.
Since both physical capital and human capital differences are included in
the model as independent variables, the significance of , the relative SOE
***: significant at 1%; * significant at 10%; the numbers in parentheses are standard errors.
Source: Author’s estimates.
Consumption, Income Distribution, and State Ownership in the PRC 163
concentration, suggests that state ownership explains partly the residual wage
difference, which cannot be attributed to either physical or human capital. The
empirical result supports the hypothesis that SOEs pay higher salaries than
non-SOEs, in general. It is difficult to find economic rationales to explain why
state ownership could increase salary levels given that both physical capital
and human capital are constant. Institutional reasons—e.g., state monopoly;
weak corporate governance in SOEs, particularly of employee compensation
decisions; and enormous amounts of retained profits—may contribute to the
relative high compensation in SOEs.
5. Concluding Remarks
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168 Effects of Social Policy on Domestic Demand
Comments
Yvonne Sin
The chapter shows how an in-depth analysis of the relationship between income,
savings, and consumption can contribute to our understanding of what drives
domestic demand. This is a challenging task, as key indicators such as savings
rate and income disparity can take on different operational definitions and
be subject to varying interpretations. The implications are even greater in
the case of the PRC because of the country’s size and diversity in terms of
geography, climate, and demographics, as well as its rapid and far-reaching
socio-political-economic transformation in recent history. A commendable
effort has been made to close the loop on consumption, income distribution,
and state ownership. However, this may have led to oversimplification of
mechanisms of influence as well as the legacy of SOEs in the context of the
PRC’s reform and opening up policy. Furthermore, while the choice of a rather
narrow scope allows closer examination of one particular dimension, it also
runs the risk of impoverishing the discussion on a very complex topic.
apartment. Financing the purchase with a mortgage would still require a 30%
down payment or a one-time payment of US$30,000—the equivalent of about
15 years of income (without counting interest payments). Merely raising wages
or handing out more dividends—assuming the funds are legitimately classified
as true surplus earnings for distribution—will likely not solve the problem.
Too many unknown and uncontrolled variables would remain.
Many experts believe that fundamental problems in the financial system
must be addressed first before distortions in the savings rate, consumption
pattern, income distribution structure, and other areas (including the labor
market, wage growth, enterprise profitability, employment rate, and employee
compensation) can be effectively adjusted. Judging by media releases and
reported speeches, the government is aware of the complexity and implications
of these issues and is working to mitigate the savings imbalance, reduce income
inequalities, and boost domestic consumption. Many economists would also
agree that only a strong domestic financial sector can support the necessary
policies to truly sustain a dynamic domestic economy.
References
China Daily. 2009. Blowing up a property bubble. 4 November.
Public Expenditures on Social Programs and Household Consumption in the PRC 171
VIII
Public Expenditures on Social Programs and
Household Consumption in the
People’s Republic of China
Emanuele Baldacci, Giovanni Callegari, David Coady, Ding Ding,
Manmohan Kumar, Pietro Tommasino, and Jaejoon Woo
1. Introduction
The authors have benefitted greatly from comments received at the 2009 ADBI’s 2009 Annual Conference,
at a 2010 IMF Workshop in Beijing, and from Benedict Clements, Carlo Cottarelli, Sanjeev Gupta, and
other IMF staff members.
172 Effects of Social Policy on Domestic Demand
European Union countries was about 11%, while in the US it was below
2% (Eurostat 2009).
t )PVTFIPMEEJTQPTBCMFJODPNFBTBTIBSFPG(%1JOUIF13$JTMPX
BU
about 54%, and declined by about 8 percentage points between 1990
and 2007.
Overall, the increase in the household savings rate accounts for about
9 percentage points of the approximately 13 percentage points of GDP decline
in the household consumption ratio between 1990 and 2007. The rest can
be explained by the fall in the share of household disposable income in GDP
over the same period.
The decline in household income as a share of GDP can be explained by
weak wage growth and the limited redistribution of firms’ profits. Weak wage
growth may be attributed to a variety of factors. The high level of internal
migration from rural to urban areas has maintained a large supply of labor
which outstrips increases in demand, resulting in a sizeable share of labor
that is underemployed or unemployed. This is combined with the absence
of effective union organizations and some degree of monoposonistic power
in the hands of employers. Investment income has languished because of the
virtual absence of profit redistribution to the public. This is due to the limited
number of publicly listed firms and the tendency of SOEs to not pay dividends
to the government, which could be redistributed to the public.
The increase in the household savings rate reflects a number of factors.
According to the life-cycle hypothesis, consumption and saving depend mainly
on the lifetime resources (net present value of income plus net current wealth)
and the demographic structure of the population. These two factors impact
the savings rate differently. Expected future growth of income reduces current
savings. Conversely, an increase in the ratio of the working to the nonworking
population can increase the savings rate, given the higher average income
resulting from a greater proportion of population being employed. In contrast
to the life-cycle hypothesis, the precautionary savings explanation postulates
that higher income and expenditure risks may increase savings as households
save to deal with adverse shocks. This would be consistent with a savings rate
increasing with age.
Each of the above factors appears to have characterized the PRC economy
at various times during the last two decades. Rapid economic growth has taken
place throughout the entire period together with an increase in the share of
the working population. At the same time, reform of SOEs at the beginning
of the 1990s substantially reduced the coverage of the PRC’s welfare services.
Public Expenditures on Social Programs and Household Consumption in the PRC 175
Prior to the reform, SOEs were responsible for the social and economic welfare
of workers and their families. After their reform, the burden of health and
education expenditures essentially shifted to the private sector, effectively
reducing households’ lifetime incomes (as income in-kind was lowered by
the reforms), and leading to a perception of higher income and expenditure
risk. The increased risk faced by households of incurring significant health
or education expenditures is thus likely to have played a role in the rise in
the savings rate.
Recent analysis confirms that savings for health and education costs play
an important role in explaining the increase in the household savings rate.
Earlier studies of the relationship between saving and lifetime income lent
some support to the role of demographic factors in explaining the dynamics
of the savings rate (Kraay 2000; Modigliani and Cao 2004; Horioka and Wan
2006) (Box 8.1). These conclusions, however, have been questioned by more
recent estimates on the age profile of the savings rate by Chamon and Prasad
(2008), which showed a U-shaped age profile of savings in which younger
and older households saved relatively more. The same study showed that
households featuring high expenditure risk regarding health (typically older
households) tended to have a savings rate 20 percentage points higher than
households not facing these risks. Similarly, households with small children
tended to have a savings rate up to 5 percentage points higher than households
without children—the additional savings to finance future education spending.
These effects may have been amplified by financial underdevelopment, as
reflected in constraints on borrowing against future income and low returns
on financial assets.1
Other country-specific evidence also supports the premise that extending
social services is likely to increase the household consumption rate. A number
of studies have been undertaken on the impact of extending social services
(including health, education, and pension insurance) on consumption in the
US. These studies suggested a positive relationship between the extension of
social services and household consumption rates. For instance, Gruber and
Yelowitz (1999) found that among the population eligible for Medicaid in
1993, each US$1,000 of added coverage increased household consumption by
US$538. Chou, Liu, and Hammitt (2006) examined the extension of health
1
In line with the age profile estimated by Chamon and Prasad (2008), Wei and Zhang (2009) found that
half of the increase in household savings rates could be explained by the rising share of males in the
population, experienced after the adoption of the one-child policy.
176 Effects of Social Policy on Domestic Demand
Kraay Rural and urban 1978– Expectations of future income growth and the role of
(2000) household survey of 1995 subsistence consumption played an important role
National Bureau of in determining the level of rural household savings.
Statistics of the PRC No significant relationship explaining levels of urban
household savings.
Modigliani Aggregate data from 1953– Savings rate increased with the share of working-
and Cao National Bureau of 2000 age population, in line with the life-cycle hypothesis.
(2004) Statistics’ China
Statistical Yearbook
Horioka Provincial level data 1996– Demographic factors affected savings in line with
and Wan from National Bureau 2005 the life-cycle hypothesis. Savings rate across time
(2006) of Statistics’ China and provinces determined mainly by the lagged
Statistical Yearbook savings rate, income growth, interest rate and, in
some cases, inflation.
Chamon National Bureau of 1990– Virtual absence of consumption smoothing over
and Prasad Statistics’ Urban 2005 time. Savings rates of younger and older households
(2008) household surveys grew relatively more. The factor that best explained
these patterns was the rising private expenditure on
health, education, and housing.
Wei and PRC population 2002 Half of the increase in the household savings rate
Zhang census, county Social- could be explained by the increasing share of males
(2009) economic Statistical in the population, experienced after the adoption of
Yearbook 2000, and the one-child policy. The premise was that males
China Household saved to accumulate assets that would put them at a
Income Project competitive advantage when searching for a spouse.
Barnett PRC provincial data 1994– Spending on health, but not education, had an
and Brooks from CEIC Data Co. 2007 impact on household behavior. A 1-yuan increase in
(2010) government health spending was associated with a
2-yuan increase in urban household consumption.
Other Countries: Impact of Extending Social Safety Nets on Savings
Kotlikoff US 1950– Savings rate was negatively correlated with the
(1989) 1987 availability of public health insurance.
Kantor and US 1917– The introduction of workers’ compensation following
Fishback 1919 injuries at work (gradually introduced from 1917
(1996) to 1919) reduced private savings by approximately
25% of their baseline value.
Gruber and US 1984– Among the population eligible for Medicaid in 1993,
Yelowitz 1993 each US$1,000 of added coverage would increase
(1999) household consumption by US$538.
Chou, Taipei,China 1992– The extension of health insurance coverage
Liu, and 1997 decreased the household savings rate by 3%–10%;
Hammitt this meant that an increase in health expenditures
(2006) of 1 percentage point of GDP increased current
household consumption by 0.4%–0.6% of GDP.
Public Expenditures on Social Programs and Household Consumption in the PRC 177
insurance coverage in Taipei,China from 57% of the population in 1994 to
96% in 2000. They concluded that the reform decreased savings by 3%–10%,
and that a US$1 increase in medical care transfer payments reduced savings
by US$0.4–US$0.6. This result is interpreted as indicating specifically the
impact of health insurance on savings, as changes in household income or in
the age of the households were explicitly controlled for in the analysis.
secondary, and higher), and social security (pensions and social assistance)
on the savings rate is explored.
where i and t denote the country and time period; νi is the country-
specific fixed effect; εit is an error term; Xit is a vector of economic, financial,
and demographic variables; and Zit is the social spending variable (in percent
of GDP).
Real per capita GDP and its growth. Richer countries tend to save more
than poorer countries and fast-growing countries tend to save more than
slow-growing countries.
Demographic structure. This is captured by two dependency ratios: old-
age dependency (ratio of the population aged 65 years and above to that aged
15–64 years), and young-age dependency rates (ratio of the population under
15 years to that aged 15–64 years). Existing empirical evidence suggests that
a high old-age dependency ratio is associated with lower aggregate saving,
as the number of dissavers is greater than the number of savers based on the
life-cycle theory. On the other hand, high dependency rates can have adverse
implications for public savings under a pay-as-you-go system.
Financial development. This is measured by credit extended to the private
sector from banks and other financial institutions (as a percent of GDP). An
underdeveloped financial system can lead to higher savings (Prasad 2009).5
In a growing economy where the desired consumption bundle shifts toward
4
The two main estimation methods reported are fixed-effects panel and dynamic panel generalized
method of moments regression. The results from different estimation methods, including pooled
ordinary least squares (OLS) (not reported), are broadly similar. Focusing on different time periods
or including the time trend or time fixed effects does not alter the results.
5
Caballero, Farhi, and Gourinchas (2008) identified financial underdevelopment as an important
determinant of rising savings rates, and hence a driver of global imbalances. However, Edwards
(1996) argued that financial deepening induces higher savings rates by creating more sophisticated
financial systems.
Public Expenditures on Social Programs and Household Consumption in the PRC 179
durable goods, the inability to borrow against future income streams could
lead households to save more in order to self-finance their purchases.
6
Table 8.1, column 1: ΔSaving/ΔZ = 0.06Z –1.95 because Saving = 0.03Z2 – 1.95Z + other terms, where
Z is total social spending.
180 Effects of Social Policy on Domestic Demand
FE = fixed effects estimation, GDP = gross domestic product, GMM = generalized method of moments.
a
Public social spending total is the sum of the public expenditures on health, education, and social protection.
Notes:
1. Dependent variable: household saving (% of household disposable income).
2. The panel consists of four 5-year periods for 24 countries. Heteroskedasticity and country-specific
autocorrelation consistent t-statistics are reported in parentheses. Levels of significance are indicated by
asterisks: *** = 1%, ** = 5%, and * = 10%. An intercept term is included in each regression.
Source: Authors’ estimates.
Public Expenditures on Social Programs and Household Consumption in the PRC 181
Application of these results to the PRC can provide some illustrative estimates.
Given the PRC’s current level of social spending (around 6.00% of GDP), the
marginal reduction in household savings for a 1.00% of GDP increase in social
spending could be in the range of 0.56%–1.03% of GDP.7
Depending on the composition of social spending, however, increases of
such spending will have different impacts. In the sample, for a country with
public health expenditure at the sample mean of 6.30% of GDP, household
savings will fall by 0.70%–0.78% of GDP in response to an increase in health
expenditure of 1.00% of GDP (column 3 of Table 8.1, and column A of
Appendix Table A8.1).8 Using PRC spending levels and ratio of disposable
income to GDP yields an impact of about 2.00% of GDP on household savings
for each 1.00% increase in government spending on health. Similarly, a
1.00% of GDP increase in social security spending reduces household
savings by 0.22%–0.29% of GDP in the sample (evaluated at the sample
mean), and 0.68%–0.72% of GDP in the PRC (column 3 of Table 8.1 and
column C of Appendix Table A8.1). However, public spending on education
is only significant when other social spending components are excluded
(column B, Appendix Table A8.1).9 With this caveat, it appears that a 1.00%
of GDP increase in public education spending leads to a decline in household
savings by 0.79% of GDP in OECD countries and by 1.26% of GDP in the
7
Needless to say, some caution is needed when extrapolating results based on the OECD country sample
to the PRC. The level of economic and institutional development in the sample countries is higher than
in the PRC. The coefficient on health expenditures (about 2.1) is nearly identical to that obtained by
Barnett and Brooks (2010) for the effect of public health spending on the saving of urban households
in the PRC.
8
Since column A in Appendix Table A8.1 includes public health spending only in the regression, the
coefficient of health spending may pick up the residual effects of other categories of spending as well.
Given the positive correlation among public expenditure categories and the negative correlation between
the error term (unobservable determinants of saving) and public social spending, the omitted variable
bias will tend to be negative. The results from Table 8.1, column 3 and Appendix Table A8.1, column
A, however, are very similar. Including government savings as an additional explanatory variable in
column A does not have a significant effect on the results (not reported).
9
Multicollinearity may affect these results. Public expenditures on health and education are correlated
with a coefficient of 0.65. Nevertheless, we obtain very similar results for public health and social
security spending, regardless of whether all three items are simultaneously included (column 3 of
Table 8.1), or each spending category is estimated separately (columns A and C in Appendix Table A8.1).
As column B in Appendix Table A8.1 shows, therefore, it seems reasonable to view public education
spending as having a significant, independent, negative effect on saving. Nonetheless, the result of
public spending on education should be interpreted with caution. One reason for these poor results
on the education variable could be that as most countries in the sample provide full access to basic
education, the spending variable picks up the effect of the latter while precautionary saving increases
mostly as a result of the insufficient availability of affordable higher education.
182 Effects of Social Policy on Domestic Demand
GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Development,
PRC = People’s Republic of China.
Source: Table 8.1 and Appendix Table 8.1.
10
This approach is based on the analysis in Gokhale, Kotlikoff, and Sabelhaus (1996). See also Kirsanova
and Sefton (2007) for a very similar approach.
Public Expenditures on Social Programs and Household Consumption in the PRC 183
Age
Average Propensity to Consume
Age
Average Propensity to Consume
Age
Note: Q1 represents the quintile with the lowest income, and Q5 the quintile with the highest income.
Source: Authors’ estimates based on 2002 Chinese Household Income Survey data.
188 Effects of Social Policy on Domestic Demand
Aggregated survey data for income and consumption for socioeconomic groups
are merged with macroeconomic national data and demographic data. CHIP data
are used to calculate the distribution of average propensities to consume across
different age and income groups in both the urban and rural sectors. Individuals
between 18 and 73 years old (the life expectancy in the PRC) are allocated to age
groups, and the net present value of individual income is calculated by assuming
future wages follow that of age-specific wages augmented by a growth rate of
7.7% and discounted based on an interest rate of 11.7%. Survival rates applied
are taken from the latest 2006 World Health Organization Life Table for the PRC.
The resulting discount rate is 0.96. The calculation of lifetime resources also
includes the present value of net transfers, net pension benefits, in-kind benefits
for education and health, and financial assets. The average propensity to consume
is calculated as the current consumption level, including education and health
spending, divided by lifetime resources. These propensities are then applied to
2007 national accounts and population data (the latest available) to calculate
group consumption levels.
Public Expenditures on Social Programs and Household Consumption in the PRC 189
Although the use of 2002 household survey data reflects primarily the constraints
of data availability, these data are likely to provide a good approximation of the
consumption impact of expanded social expenditure programs. According to the
summary of household survey data presented in Chamon and Prasad (2008), the
household savings rate increased from 16.7% in 1992 to 24.7% in 2006, with most
of this increase occurring by 2002 when the savings rate reached 23.1%. Similarly,
most of the increase in household expenditures on health and education had occurred
before 2002. The share of health expenditures in total consumption increased from
2.5% in 1992 to 7.4% in 2004, compared to 7.1% in 2002. Education expenditures as
a share of total consumption increased from 8.8% to 14.4% over the same period,
compared to 15% in 2002. The study of Chamon and Prasad (2008) was restricted
to urban households, while CHIP data also covers rural households.
Source: National Bureau of Statistics. 2002. Chinese Household Income Survey. Beijing: National
Bureau of Statistics; and Chamon, M., and E. Prasad. 2008. Why are Saving Rates of Urban
Households in China Rising? IMF Working Paper No. WP/08/145. Washington, DC: IMF.
13
McKinsey Global Institute (2009) estimated the impact of a fully-funded scheme.
14
McKinsey Global Institute (2009) evaluated the impact of an expansion of student loans for tertiary
education but not the consumption impact of higher public education expenditures.
190 Effects of Social Policy on Domestic Demand
The variation in income effects reflect the age profile of expenditures. The
income effect for the three types of government social expenditures under
Simulation 1, disaggregated by urban and rural population, are presented
in Table 8.3. Since the lifetime budget for the rural population is smaller, so,
too, will be the consumption impacts. The results suggest that the impact on
current consumption is highest for pension expenditures (at 1.4% of GDP),
followed by health (0.8% of GDP), and education (0.5% of GDP).15
The impact of a unit of government social spending on consumption is
substantially higher in rural areas. This reflects the higher propensities to
consume in rural areas, which in turn partly reflects lower income levels. For
example, under Simulation 1 the impact of pension expenditures in urban areas
is 0.92 compared to 0.50 in rural areas. However, only 25% of expenditures
go to rural households. Adjusting for the difference in pension expenditures,
the income effect of pension expenditures in rural areas is about 67% higher
than in urban areas—i.e., (0.50/0.25) divided by (0.92/0.75). The equivalent
differences for health and education are 56% and 55%, respectively. Targeting
expenditures to rural areas will clearly result in a higher impact on household
consumption. Similarly, targeting transfers to low-income households is likely
to be a more cost-effective approach to increasing household consumption.
15
Under the smaller lifetime budget in Simulation 2, the income effects are lower, at 0.8% for pensions,
0.5% for health, and 0.4% for education. Improved targeting could increase these further—for example, if
pensions were given only to those without pensions (e.g., by increasing coverage). Since the beneficiaries
under this scenario would more likely be rural, poorer than existing pension beneficiaries, and therefore
have higher average propensities to consume, the impact on current consumption would be larger.
192 Effects of Social Policy on Domestic Demand
and health services as well as old-age pensions. The paper then undertook an
analysis of the determinants of the household savings rate using a panel of
advanced and emerging market countries. The results support the premise
that government social expenditures (on education, health, and pensions) can
be an important determinant of the household savings rate.
Based on analyses in the preceding section, simulation analyses were used
to explore how and through what channels an increase in government social
expenditures in the PRC could lead to an increase in the consumption ratio.
Three channels were identified: (i) a direct income channel, (ii) a distributional
channel, and (iii) an insurance channel. Simulations using household survey
data showed that the effect of an increase in public spending on the three
categories could be significant. In particular, a sustained 1 percentage point
of GDP increase in government spending would likely lead to an increase in
the household consumption ratio of up to 1.25 percentage points of GDP.
These results also underline the likelihood of broader benefits of expenditure
reforms in connection with the PRC’s large external current account surplus
and global imbalances. The adjustment required to reduce the current account
balance to a more sustainable level is large. Estimates suggest that household
consumption would have to increase by some 3 to 4 percentage points of
GDP—assuming the savings rates of the corporate sector and the government
remain unchanged—to help rebalance world demand. This suggests that other
structural reforms would also be important, such as measures to increase the
availability of credit, retail distribution, and the share of wages in national
income by greater emphasis on domestic consumption in domestic growth.
Nonetheless, the findings of this paper suggest that greater public expenditure
on health, education, and pensions could make an important contribution.
Public Expenditures on Social Programs and Household Consumption in the PRC 195
Appendix Table A8.1: Individual Component of Public Expenditures
Household Saving Panel Regression, 1990–2008 for
OECD Sample
No. of observations 78 78 78
No. of countries 24 24 24
FE = fixed effects estimation, GDP = gross domestic product, OECD = Organisation for Economic Co-operation
and Development.
Note: The panel consists of four 5-year periods for 24 countries. Heteroskedasticity and country-specific
autocorrelation consistent t-statistics are reported in parentheses. Levels of significance are indicated by
asterisks: *** 1 percent, ** 5 percent, * 10 percent. An intercept term is included in each regression.
Source: Authors’ estimates.
196 Effects of Social Policy on Domestic Demand
Income
Quintiles Urban Rural
Food Non-food Housing Education Health Food Non-food Housing Education Health
Q1 0.405 0.274 0.175 0.071 0.075 0.465 0.242 0.145 0.091 0.057
Q2 0.387 0.309 0.153 0.078 0.073 0.468 0.266 0.125 0.088 0.053
Q3 0.371 0.334 0.150 0.077 0.068 0.443 0.285 0.160 0.069 0.043
Q4 0.346 0.343 0.180 0.071 0.059 0.417 0.292 0.165 0.080 0.046
Q5 0.311 0.371 0.186 0.075 0.057 0.348 0.323 0.205 0.088 0.036
Average 0.364 0.326 0.169 0.074 0.066 0.428 0.282 0.160 0.083 0.047
Urban
Rural
Q1 3668 13 47 58
Q2 3991 32 48 62
Q3 4543 52 44 55
Q4 5370 84 55 75
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202 Effects of Social Policy on Domestic Demand
Comments
Akiko Terada-Hagiwara
1. Panel Analysis
My comments are divided into two parts—first on the panel analysis, and then
on the generational accounting framework analysis. In the panel analysis
section, the analysis suggests a negative nonlinear relationship between
government social expenditure and the household saving rate. This is an
interesting exercise and result, given the fact that public spending in the
PRC is currently small as a proportion of GDP. However, no explanation is
offered as to why we should expect this nonlinear relationship. This result of a
nonlinear relationship clearly warrants more discussion. Further, in order to
better link this panel analysis to the analysis that follows, I would suggest that
the estimation include interactive terms with household disposable income
(or assets held), along with the public spending variables. We would naturally
expect that lower-income households would be more sensitive to a change in
public expenditures, and hence the nonlinearity in the relationship.
Additionally, a number of variables that are included in the analysis turned
out to be insignificant. Before concluding that this is the case, more analyses
could be done. As for per capita GDP growth, the results suggest it is generally
negative (although insignificant). The sign is puzzling given that economic
relationship, such as habit formation, predicts a positive sign. The authors
could instead try to include growth of household disposable income, which they
already have. Likewise, replacing the initial GDP variables with the household
income is a natural avenue to take as we are testing for the household saving
rate and not national saving. For financial sector development, I believe that a
variable such as consumer credit, rather than credit to the private sector (which
is probably mainly to the corporate sector), would be more appropriate.
2. Generational Accounting
In the section on generational accounting framework analysis, the chapter
computes average propensity to consume using household income survey data
in order to carry out policy simulations. (The survey year needs clarification—is
it 2002 or 2006?) In the model construction, household consumption and
income are divided by family size, except for urban and rural nonagricultural
income. If households include children, however, bias is introduced. This is
because individuals with income would be adults, while consumption per capita
includes children who do not consume as much as adults. This would result in
204 Effects of Social Policy on Domestic Demand
Reference
Chamon, M., and E. Prasad. 2008. Why are Saving Rates of Urban Households in China
Rising? NBER Working Paper 14546. Cambridge, MA: NBER.
Social Policy Reforms and Growth Rebalancing in ASEAN 205
IX
Social Policy Reforms and Growth
Rebalancing in ASEAN
1. Introduction
Outward-oriented growth strategies have served East Asia well for many
years. But the global financial crisis, having highlighted the persistent global
imbalance—high trade and fiscal deficits in one part of the world and high
trade surpluses and domestic savings in another—is forcing a reexamination
of such growth strategies.
No one is convinced that abandoning external orientation is the solution
to the global imbalance. But might there be scope for increased domestic
demand in the region to lessen dependence on external demand? Some
scholars suggest that, in view of East Asia’s very high savings, the region should
increase consumption and reduce saving to perk up global demand. One
suggested option to improve domestic demand is to increase social protection
expenditures to entice consumers to forgo excessive precautionary savings
and increase current consumption.
This chapter will analyze the appropriateness of this policy prescription
in the context of ASEAN members. The chapter first assesses whether
ASEAN countries have excess savings. Second, it looks at the region’s
social protection policies to see potential scope for improvement. Finally,
it considers the potential economic effects of social protection spending,
drawing from results of studies that have linked elements of social
protection with labor supply, economic growth, private transfers, savings,
and investments.
206 Effects of Social Policy on Domestic Demand
2. Savings in ASEAN
How big are ASEAN’s savings? How much room is there for savings reduction
to boost demand? Relative to other regions such as Latin America or Europe,
ASEAN-5’s1 savings as a percentage of GDP are fairly high at 31% in 2008. The
savings rate for East Asia and the Pacific, of which ASEAN is a part, is much higher
at 50% because of very high savers in the group, notably the PRC. Compared to
other countries by income group, ASEAN-5’s savings rate is around the same
level as the average for middle-income countries (see Figures 9.1a and 9.1b).
Individual countries in ASEAN-5 have followed different savings paths
(Figure 9.2). Thailand was the highest saver until its savings started dropping
in the mid-1990s. Since then, Thailand had not yet recovered its savings/GDP
rate in the early 1990s. The Philippines, the historically lowest saver, had a
remarkably slow but steady rise in its savings rate starting in 1992, such that as
of 2008, its savings rate exceeded that of Thailand. Viet Nam’s savings rate has
increased rapidly since the late 1990s, making it second to the highest saving
country, Malaysia. Like Thailand, Malaysia’s savings rate dropped during the
Asian crisis but has since recovered and, as of 2008, Malaysia’s savings rate is
36.6%. Indonesia, in contrast, is still slightly below its pre-crisis savings ratio.
Are these savings rates excessively high? Conversely, are ASEAN-5 households
consuming enough? Since the figures above are ratios of national savings to
GDP, they do not show how much households save. A breakdown of savings into
government, corporations, and households indicates that household savings is
not responsible for the overall high savings in the Philippines and Thailand (the
only two ASEAN-5 countries for which such data was available). Figure 9.3 shows
that household savings as a percentage of GDP in the Philippines amounted
to only 2.2% of GDP in 2008 compared to Thailand’s 7.3%. In the Philippines,
corporations (private and state-owned) have dominated savings, averaging
more than 12% from 2002 to 2008, while household savings have consistently
declined since 2003. In contrast, government savings have markedly improved
since 2003. In Thailand, corporate saving has increased over the years and
was responsible for one third of total savings in 2008.2 Though household
savings declined after the Asian crisis, they have been creeping back toward
the precrisis savings rate.
1
ASEAN-5 comprises Indonesia, Malaysia, Philippines, Thailand, and Viet Nam.
2
The disaggregated data on savings is slightly different from the gross savings reported in the World Bank’s
World Development Indicators Database. In this database, savings are derived from the national income
accounts, while household savings from CEIC have come from national household survey data.
Social Policy Reforms and Growth Rebalancing in ASEAN 207
Figure 9.1a: ASEAN-5 Savings Rates in Comparison with Other Regions
% of GDP
ADB = Asian Development Bank, ASEAN = Association of Southeast Asian Nations, GDP = gross domestic
product.
Notes: ASEAN-5 comprises Indonesia, Malaysia, Philippines, Thailand, and Viet Nam.
ASEAN-5 savings refer to gross national saving as a percentage of GDP downloaded from ADB’s Statistical
Database System on 7 November 2009. Data were missing for Viet Nam for 1990–1995 and Malaysia for
1992–1998.
Other countries’ savings refer to gross saving as a percentage of GDP downloaded from the World Bank’s World
Development Indicators Database on 1 November 2009.
Gross national savings is computed as gross national product minus total consumption, thus this value includes
the net factor income from abroad (ADB). Gross savings are calculated as gross national income less total
consumption, plus net transfers (World Bank’s World Development Indicators definition).
Sources: Authors’ calculations based on World Bank’s World Development Indicators Database and ADB’s
Statistical Database System.
208 Effects of Social Policy on Domestic Demand
With the low household savings rates shown in Figure 9.3, households appear
unlikely to be able to contribute significantly to increasing consumption and
boosting domestic demand during the global financial crisis. This is particularly
so for the Philippines, where households savings is a meager 2% of GDP. The
simple graph casts doubt on the argument that, in view of the region’s high
savings, social protection should be improved so that households can reduce
savings and increase consumption.
To compare household savings conditions in ASEAN with those in other
countries, we obtained households savings rates (ratio of household savings
to disposable income) for selected countries (Table 9.1). Among the three
selected ASEAN countries, Indonesian households save the most from their
disposable income, while households in the Philippines save the least, roughly
on par with the US. This suggests that households in Indonesia and Thailand
have relatively more space than those in the Philippines to increase their
consumption by saving less.
Concerning private consumption, its ratio to GDP in ASEAN-5 is already
comparatively high. Breaking down ASEAN-5’s consumption between
households and government reveals that household consumption expenditure
Social Policy Reforms and Growth Rebalancing in ASEAN 209
Figure 9.3: Saving Composition of Selected ASEAN Countries
Philippines
% of GDP
Thailand
4.3
5.0 2.7
5.5
2.8
2.8
% of GDP
4.6
2.0 3.7 4.8 4.7
6.1 6.4
2.7
5.8 5.4
4.8 4.3
5.7 4.7
10.1
8.5
7.2 7.3
5.0 4.5 4.2 5.0
3.6 3.9
Indonesia 17
Philippines 4
Korea, Rep. of 10
Australia 0
United States 3
Notes: Averages of yearly data for 2004–2008 for Korea, Philippines, Thailand, and United States. Averages of
2003 and 2004 for Indonesia. Australia experienced negative household savings rates in 2004 and 2005 and
positive from 2006 onwards, hence the zero average for the period.
Australia’s and Korea’s yearly data are averages of quarterly data. United States yearly data is average of monthly
data.
Sources: Authors’ calculations based on CEIC Data Company Ltd, downloaded 2 November 2009. Indonesian
data was obtained from Santoso and Sarie (2007).
is responsible for the majority of total consumption (Figures 9.4a and 9.4b).
Unlike the PRC, which shows relatively low household consumption compared
to other countries, ASEAN-5’s household consumption is on par with the high
rates of developed countries. Malaysia is the only ASEAN country that has
private consumption of less than 50% of GDP. The Philippines has the highest
consumption rate of 76%, even higher than that of the US, while Thailand,
Viet Nam, and Indonesia are somewhere in between the levels of Malaysia
and the Philippines.
Given the large share of household consumption in ASEAN-5 GDP, it is
unclear whether further growth of consumption is desirable. Excessively high
consumption may be dangerous, and sufficient savings are important for
long-term economic development. Increasing aggregate consumption in some
ASEAN-5 countries might amount to a cure that is worse than the disease,
bringing high vulnerability to external shocks such as currency exchange
fluctuation.
It is noteworthy that, even among supposedly “homogeneous” economies
like the ASEAN-5 countries, differences in consumption ratio, and hence
in savings behavior, prevail. Culture may play a role, but social protection
Social Policy Reforms and Growth Rebalancing in ASEAN 211
Figure 9.4a: Household Final Consumption Expenditure and General
Government Expenditure in 2007
% of GDP
ASEAN = Association of Southeast Asian Nations, GDP = gross domestic product, PRC = People’s Republic of
China.
Note: ASEAN-5 comprises Indonesia, Malaysia, Philippines, Thailand, and Viet Nam.
Source: World Bank’s World Development Indicators Database, downloaded 1 November 2009.
212 Effects of Social Policy on Domestic Demand
mechanisms may also be a factor (Box 9.1). Table 9.7 (in the next section),
for example, shows that the two countries relying on defined contribution
schemes, Singapore and Malaysia, have higher savings rates than countries
operating under defined benefit systems.
If aggregate consumption in most ASEAN-5 countries has little room for
growth, can investments help as an alternative source of growth? Figure 9.5
shows how aggregate investments in ASEAN dwindled to an average of slightly
One possible factor for Malaysia’s low consumption rate is the high mandatory savings
imposed on the employed labor force through the EPF. The substantial coverage and
contribution rate of the EPF distinguishes Malaysia from other ASEAN-5 countries.
In 2006, the EPF covered 11.36 million members (of which 5.39 million are active
members constituting 52% of the labor force) with a high contribution rate of 23%
of wages (11% from employees and 12% from employers). This contribution rate is
high compared, for instance, to the 3% employee contribution in the Philippines. EPF
assets have grown more than tenfold from RM24.55 million in 1985 to RM290.3 million
in 2006. Such growth in accumulated assets has not only reflected high mandated
household saving but has also enabled the EPF to be a significant funding source,
especially for Malaysia’s public sector.
This extensive mandatory saving scheme seems to have crowded out private voluntary
savings. An empirical study by Ang and Sen (2009) found that in Malaysia, private
saving (voluntary saving in the private sector, which is the sum of household and
corporate savings excluding EPF contributions) appears to be discouraged by
compulsory saving in the form of provident and pension funds. The Central Bank
of Malaysia stated that household savings through the EPF consistently accounted
for about 4–5% of gross national product from 1981 to 1990. On the other hand, the
residual “voluntary” part of private sector savings was on a declining trend. This could
be an indication that Malaysian households will be hard put to increase consumption
significantly unless the mandatory savings through the EPF is reduced.
can be categorized into labor market programs, micro- and area-based schemes,
and child protection programs. Table 9.2 provides some examples of social
protection programs that various countries have adopted.
ASEAN countries have many different social protection policy programs.
What are widely common are disaster management schemes, old age, disability,
and death insurance, as well as work injury, but different social assistance
programs exist in the region as well. Some countries like Thailand, Philippines,
and Myanmar have comprehensive medical coverage, while others address
health care in other ways. For example, Singapore allows borrowing from the
EPF for medical purposes. Appendix 2 provides more examples of projects
or initiatives related to social protection in selected ASEAN countries. The
projects serve as either independent ad hoc initiatives or part of more structured
long-term social protection provision. The list of programs shows how social
protection provisions in ASEAN-5 are varied based on individual country
situations. Table 9.3 summarizes available social protection provisions in
ASEAN countries in different categories using the framework of the ADB
(excluding labor market and child protection).
Form of Social
Protection Intended Beneficiaries Examples of Policy Instrument
Active labor force, including new Pre-employment training, employment
entrants, laid-off workers of state- skill upgrading, public works, job
Labor market programs owned enterprises brokerage
Workers and their dependents facing First, second, and third pillar pensions;
loss of income, low-income laborers, unemployment benefits; health
laborers with no access to proper health insurance; sickness and disability
Social insurance care benefits
Most vulnerable groups (disabled
elderly), poorest persons, those unable Cash allowances, food subsidies,
to participate in labor markets, those domestic shelters, health subsidies,
who have multiple disadvantages, upgrading , public housing, community-
are affected by crises, or are socially based social services, institutionalized
Social assistance excluded care
Micro- and area-based Those employed in the formal sector, Micro insurance, small-farmer
schemes rural and urban communities agricultural insurance, social funds
Immunization, school fee waiving,
Infants and children, pregnant women, health fee waiving, programs to combat
children involved in work, soon-to-be child labor, programs for children with
Child protection new entrants into labor market disabilities
Social
Country Assistance Social Insurance Micro- and Area-Based Schemes
1 2 3 4 5 6 7 8
Cambodia s s
Indonesia s s s s
Lao PDR s s
Malaysia s s s s
Myanmar s s s s
Philippines s s s s s s s s
Thailand s s s s s s s s s
Viet Nam s s s s s
ASEAN = Association of Southeast Asian Nations, Lao PDR = Lao People’s Democratic Republic.
Note: 1) Old age, disability, death insurance; 2) sickness, maternity insurance; 3) medical care; 4) work injury;
5) micro insurance; 6) agriculture insurance; 7) disaster management; 8) social fund.
Source: Soeharto (2007).
3
The SPI covers the five areas of ADB’s Social Protection Strategy: labor market, social insurance, social
assistance, micro- and area-based schemes, and child protection. However, it focuses more on policies
and programs that enable vulnerable groups to prevent, reduce, and/or cope with risks, and that (i)
are targeted at the vulnerable groups; (ii) involve cash or in-kind transfers; and (iii) are not activities
usually associated with other sectors such as rural development, basic infrastructure, health, and
education (see Baulch, Wood, and Weber 2006). Subsequent discussions of SPI in this section draw
heavily from ADB (2008).
4
ADB (2008) provides further illustrations of when misinterpretation of SPI values can occur.
216 Effects of Social Policy on Domestic Demand
also indicates that ASEAN countries lag behind other developing countries in
South and Central Asia (e.g., Mongolia, Uzbekistan, and Sri Lanka).
Factors that cause ASEAN countries to sit at the bottom of the selected
countries include the following. Indonesia and the Philippines have low coverage
and poor targeting of beneficiaries (the extent to which social protection
programs reach the poor). In the Philippines, only 30% of the poor receive some
form of social protection. Viet Nam and Malaysia perform better compared
to the rest of the ASEAN countries. Viet Nam is the highest-ranking country
in ASEAN in terms of SPI; 38% of its target population receives some social
protection, and 56% of its poor receive some social protection or other social
protection benefits. But Viet Nam’s performance is far below Korea, where
77% of the target population receives some social protection and 100% of the
poor receive some social protection or other benefits.
Focusing on social protection expenditure (from both public and private
sources) as a percentage of GDP, Figure 9.7 shows that ASEAN countries
provide comparably fewer resources for social protection. Japan, with social
protection expenditure of 16% of GDP, sits at the top of the ranking. Countries
like Sri Lanka, Mongolia, and PRC have also considerably higher figures for
social protection expenditure compared to ASEAN countries.5
5
These countries have previously had (and the PRC still has) centralized and totalitarian governments.
This largely explains the relatively high share of social spending as a percentage of GDP.
Social Policy Reforms and Growth Rebalancing in ASEAN 217
Figure 9.7: Overall Social Protection Expenditure
6
This refers to the scaled value of social protection expenditures relative to Japan’s.
218 Effects of Social Policy on Domestic Demand
SPCOV = social protection coverage, SPDIST = social protection distribution (poverty targeting), SPEXP = social
protection expenditure, SPIMP = social protection impact.
Note: East Asia includes Cambodia, People’s Republic of China, Indonesia, Japan, Korea, Lao People’s
Democratic Republic, Malaysia, Philippines, and Viet Nam.
Source: Authors’ compilation from ADB (2008).
Of the different social protection programs, social insurance or the social security
system is perhaps the most complex, but is also the one that receives the most
resources. Because of the importance of social insurance, this subsection focuses
on social insurance systems in ASEAN.
220 Effects of Social Policy on Domestic Demand
6
Defined benefit is a scheme where the promised benefits are delivered regardless of the accumulated
social tax in their account, but also under certain minimum conditions (e.g., number of years of
contribution). Under defined contribution, on the other hand, benefits are based on the individual’s
social security contributions.
Social Policy Reforms and Growth Rebalancing in ASEAN 221
Table 9.4: ASEAN Social Security Profiles
Philippines Social Security Pension and insurance Defined Compulsory for private employees and
System (1954) covering sickness, maternity, benefits self-employed below 61 yrs old
disability, retirement, death,
medical care, accident; allows Voluntary for overseas workers,
borrowing privilege non-working spouses of members,
employees under foreign government;
separated members from employment
Government Pension and insurance: Defined All public employees
Service Insurance retirement, disability and benefits
System (1937) death, unemployment, Voluntary for former public employees
sickness, loan windows, that have resigned or retired early from
optional life insurance government service
Singapore Central Provident Retirement, health care, Provident All private and public employees and
Fund (1953) homeownership, family fund/ defined self-employed
protection, asset enhancement contributions
Thailand Social Security Social security (medical, Defined Compulsory for large private enterprises
Office (1990) sickness, maternity, disability, benefits (10 or more employees)
death); survivorship, disability,
funeral
Viet Nam Social Security Pension and death benefits, Defined Mandatory for all enterprises (private
Organization sickness, maternity, and benefits and state-owned) Voluntary for small
(1995) occupational accidents/ enterprises (less than 10 employees)
diseases
ASEAN = Association of Southeast Asian Nations, PT Taspen = PT Tabungan Asuransi Pensiun, Jamsostek = PT
Jaminan Sosial Tenaga Kerja.
Source: Authors’ compilation. See Appendix 1 for more details.
222 Effects of Social Policy on Domestic Demand
Security Organization. In Thailand, where 44% of the workers are in the formal
sector, about one third of the labor force is covered by the Social Security Office.
In the Philippines, 27% of the labor force is covered by the Social Security
System or Government Service Insurance System. In short, existing social
insurance coverage in ASEAN is limited to a fraction of wage earners. While
social security organizations have implemented programs to extend coverage
to informal sector workers, overseas employees, and unemployed spouses,
overall coverage remains small compared to that in developed countries.
Another policy concern is the quality of coverage, for example, whether
the social security benefits allow retired persons to live with relative security
and afford good quality medical care. In the case of Indonesia, a background
study on social security systems in the region commissioned by ADB (2007)
reported that the social health insurance programs provide poor quality
services that force workers to pay out of pocket outside the scheme and
Social Policy Reforms and Growth Rebalancing in ASEAN 223
encourage private sector workers to purchase private health insurance on
top of the social health insurance.
Family
Coverage Sickness Maternity Old Age Disability Work Injury Unemployment
Allowances
Government
Government
Government
Government
Government
Government
Government
Employee
Employee
Employee
Employee
Employee
Employee
Employee
Employer
Employer
Employer
Employer
Employer
Employer
Employer
Financing
Source
Indonesia * 3* — — s — 2 3.7 o o — — — — — —
Viet Nam 5 s 5 10 o o — — — s — — —
Singapore 20 16 o o — — — — — —
Notes:
* 2003 data.
** 1999 data.
— Does not apply
No contribution
Whole cost
ASEAN = Association of Southeast Asian Nations.
Source: Authors’ compilation based on International Labour Organization’s Social Security Expenditure Database.
224 Effects of Social Policy on Domestic Demand
Pension
Savings*/GDP Pension scheme Contribution Coverage
Country (average 2000–2009) (DB or DC) (% of wages)*** (% of labor force)
and population growth, the financial sustainability and funding of the social
security system have increasingly become a concern. The concern is that there
would be fewer workers to contribute and support an increasingly large old
population because of longer life expectancies. Today, the old-age dependency
ratio is still relatively low, but with longer life expectancies, it is not inconceivable
that the ASEAN old-age dependency ratio might reach the same rate as in
Germany (30%) or Japan (32%). In just a decade, the growth of the dependency
ratio in ASEAN has increased by about one percentage point (Figure 9.11).
Other trends such as urbanization and industrialization have also caused
profound cultural changes that affect family finances. Before, people’s social
security depended on strong family and neighborhood support systems, but
this traditional support mechanism has frayed over the years. If decreasing
informal social security is not answered by increasing coverage and quality
of the formal social security system, old-age poverty is likely going to be a
looming challenge.
Meanwhile, existing poverty, income inequality, lack of access to basic
needs, and other pressing social problems of ASEAN-5 countries remain.
Short-term solutions for these would include redistribution through social
assistance programs and other social policies (e.g., access to health care and
education).
3.3 Summary
security and the vitality of the economy. Of course, the choice need not always
be “either-or” because some evidence indicates that social policies have
assisted economic growth (see, for example, Department for International
Development [DFID] 2006). But in the short term, the resource constraint
needs to be factored in.
In studying the effects of social protection spending on various aspects
of the economy, it is important to note that much of the literature has been
devoted to the effects of social insurance, pension systems in particular, and
less attention has been given to the other elements of social protection. There
are likewise some studies on the effects of social assistance programs like food
stamps and other welfare programs, but there are not many for other elements
of social protection such as micro- and area-based schemes, child protection,
or labor market policies (e.g., retraining). Thus, this section focuses more on
the effects of social insurance; where we have found some impacts of social
assistance, we will mention so explicitly.
7
The evidence also points to the impact of the social safety net on the family structure. In the case of
Aid to Families with Dependent Children, where part of the condition for aid eligibility is that the
household is headed by a single female, many beneficiary households remain single-female headed.
The decision to marry, therefore, is affected by the conditionality attached to the social assistance.
230 Effects of Social Policy on Domestic Demand
have supported the poor households, are pulled back as the government is
perceived to be “taking over” the care for their needs.
On private insurance, a similar crowding out effect has been observed
from the coverage expansion of Medicaid to include pregnant women and
children with higher incomes as well as households with two parents.8 The
reduction in private insurance coverage came from workers that dropped
their own insurance coverage, particularly the coverage of their dependents
(Cutler and Gruber 1996).
8
Previously, Medicaid covered only very low-income women and children in single-parent families.
9
This may refer to existence of a pension system in a country, increase in benefit ratios, etc., depending
on the empirical study.
Social Policy Reforms and Growth Rebalancing in ASEAN 231
where the motivation is only consumption smoothing over one’s lifetime,
pension will not cause any increase in aggregate savings because of the 100%
displacement effect of private savings by pensions. But if the labor supply
decision is not fixed and workers can take early retirement, in response to
the relative importance of income and substitution effects, the increase in
private savings (to prepare for longer longevity risk) increases aggregate savings.
Similarly, when bequest or precautionary motives10 are added to the simple
consumption-smoothing purpose of savings, then pension can further result
in an increase in aggregate savings.11
The empirical literature on the relationship between pension and savings
is just as nebulous, describing a wide variety of positive and negative effects
of pension on savings. However, when the expected change in pension wealth
is large, a negative relationship with savings is more perceptible (Kohl and
O’Brien 1998). There is a clear private sector savings offset of pension, but
because private savings is an imperfect substitute for public pension, the offset
is likewise imperfect. The result is a net increase in national savings of varying
magnitudes for different countries.
Cross-sectional empirical work on the pension–savings relationship
provides interesting insights on this degree of variation.12 For example,
from the literature review by Kohl and O’Brien (1998), we find the following
interesting relationships:
t 5IFSFMBUJWFMZXFMMPíBOECFUUFSFEVDBUFEIBWFTUSPOHFSTBWJOHSFEVDUJPOT
in response to public pension.
t -PXJODPNF IPVTFIPME TBWJOHT BSF OPU JNQBDUFE IJHIMZ CZ QFOTJPO
provision (because these households save little to start with), so the degree
of income inequality in the population has an effect on how much offset
there is in aggregate saving.
t %JíFSFOUHFOFSBUJPOTIBWFEJíFSFOUTBWJOHQSPQFOTJUJFTBUUIFTBNFQPJOU
in their life cycle (vintage effect). For instance, households that have
experienced major income shocks, e.g., World War II generation retirees,
tend to save more.
10
The bequest motive increases savings because, besides the consumption-smoothing objective, the
individual wants to have something left over to give to his children. The precautionary motive—i.e.,
saving in the face of uncertainties like death, income disruption, and health expenditures—likewise
contributes to the increase of savings.
11
For an accessible discussion of pension theory, see Blake (2006).
12
The downside of cross-sectional empirical results is that the differences across individuals at a given
time may change when an entire life cycle is considered. Hence, the results may not necessarily apply
to changes in wealth of the overall system across time (Kohl and O’Brien 1998).
232 Effects of Social Policy on Domestic Demand
t 0UIFSGBDUPSTUIBUNBUUFSJODMVEFBHF IJHIFSEJTQMBDFNFOUPGQSJWBUF
saving with age), size of household and number of children (bigger
households have smaller displacement), existence of occupational pensions
(displacement is higher for state employees and self-employed and lower
for managers), and urban residence (higher displacement).
t -JRVJEJUZDPOTUSBJOUTBíFDUUIFTJ[FPGUIFJNQBDUPGQFOTJPO
FWFOUIPVHI
its sign is sometimes positive and other times negative.
A shift from a pay-as-you-go system to a fully-funded scheme, usually in
the form of tax-favored retirement accounts, may have a positive impact on
private savings depending on the design of the scheme. In particular, where
defined contribution schemes provide ease of access (e.g., payroll deduction
schemes) or the public is sufficiently aware of its benefits, these schemes have
met considerable success in increasing savings. For example, the success of the
US 401(k) in raising savings is attributed to these factors, rather than to the tax
incentive per se. Still, other results show that the specific effects of tax-favored
retirement accounts on savings are sensitive to aspects of the scheme design,
such as the ceiling on contributions, eligibility limitations, marginal tax rates,
and whether it is mandatory or voluntary (Kohl and O’Brien 1998). Mandatory
schemes stimulate saving by forcing even poor households to save.
The implication of these results for social insurance reform in ASEAN is
that its specific impact on private and aggregate savings will depend on the
specific design of the reform. For example, if any of these countries shift from
a pay-as-you-go system to defined contribution schemes that have significant
tax costs, national savings may remain unchanged despite many countries’
experience of a rise in private savings. Another implication is that any marginal
tweaking of the existing social security scheme may not result in a perceptible
change in savings. Empirical results using periods in which changes in pension
schemes were sufficiently gradual and in which public awareness was low
showed little effect on savings.
We conclude, then, that social insurance, especially through social security
schemes, is not an effective countercyclical policy because of its ambiguous
effects on savings and, thus, on consumption. Reforms in pension schemes
should be undertaken not in response to short-term macroeconomic policy
concerns but rather to fulfill other objectives of social security provision
like income redistribution, poverty relief, insurance, and consumption
smoothing.
Other types of social insurance, particularly unemployment insurance,
have an important function of maintaining consumption levels during
Social Policy Reforms and Growth Rebalancing in ASEAN 233
economic downturns. Along with active labor market policies, unemployment
insurance has a more direct and effective countercyclical effect than do pension
schemes.
Similarly, social assistance or safety net expenditure is different from
social insurance. Studies relating savings with other public transfers (not
old-age benefits) show a clear displacement of savings. This result suggests
the importance of the precautionary aspect of savings, which, in turn, implies
that increased public sector provision of some social services will likely lead
to a reduction in savings and an increase in consumption. Social assistance,
therefore, may be a useful countercyclical policy instrument, provided that its
fiscal costs do not significantly offset its positive impact on consumption.
the insurance role played by social security or its redistributive benefit may
dominate to result in a net positive welfare change (Imrohoroglu, Imrohoroglu
and Jones 1995; Tran and Jung 2007).
Is redistribution through social security or social assistance the only way
to address inequality? Are there other redistribution schemes that do not have
as much distortionary effect on the economy? Deininger and Squire (1998)
found that, while inequality has a long-term negative relationship with growth,
it is inequality in assets rather than inequality in income that has the greater
influence on growth.13 Hence, asset redistribution would be more effective
than income redistribution. But if asset redistribution would cause investments
to drop, the authors recommend accumulation of new assets rather than
redistribution of existing assets. For example, education and human capital
investments or microfinance are investment-oriented policies that are beneficial
to the poor while not being detrimental to long-term growth. In general, policies
that increase aggregate investment and facilitate acquisition of assets by the
poor are beneficial for both growth and poverty. Thus, redistribution through
social sector expenditures (such as education) seems to be more attractive, in
a growth and welfare sense, than other means of redistribution.
13
One cause of the asset inequality link with growth is that the asset poor have difficulty making
economically profitable investments (e.g., in schooling) that affect long-term growth.
Social Policy Reforms and Growth Rebalancing in ASEAN 235
low population growth, urbanization, and the fraying of family ties that had
been the source of informal social security support in years past will motivate
changes in social protection schemes.
Finally, the chapter considered the multifaceted trade-offs that social
protection expenditures impose on an economy. These trade-offs include the
possible labor supply distortion, the crowding out of private (family) transfers
and private insurance, the uncertain impact on savings, and the impact on
capital stock, growth, and welfare. The design of any social protection reforms
must pay attention to these factors.
Social protection programs have grown in importance in the eyes of
policymakers. But considering limited resources and the possible adverse
incentive effects on labor supply decisions and on the economy as a whole,
the need for good program designs cannot be emphasized enough.
236 Effects of Social Policy on Domestic Demand
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240 Effects of Social Policy on Domestic Demand
Development of poor urban Crop insurance scheme for Sustainable livelihood and
communities (2003) farmers rural infrastructure in Central
A project was launched to reduce The Bank for Agriculture and Region (2004)
income poverty in urban areas Agricultural Cooperatives of Thailand A project was launched to reduce
through asset reform (land distribution conducted feasibility studies and rural poverty through (i) intensification
and microfinance). The Philippines drew up the operating guidelines and and diversification of agricultural
government, assisted by ADB, is procedures for a new crop insurance production and non-farm employment
establishing a conducive policy, scheme. The Thai parliament has and income-generating activities;
institutional, and regulatory environment passed the enabling law for this. and (ii) strengthening the capacity of
to meet the housing need of urban poor local communities, NGOs, and local
communities governments to implement broad-
based and participatory development
activities.
Philippines Against Child Child Protection Act and Early childhood development
Trafficking Campaign (2003) Committee (2003) for the poor (2003)
In 2003, the Anti-trafficking in Persons The Child Protection Act was passed The Viet Nam government, assisted
Act was introduced to reduce human in 2003 and the Child Protection by ADB, developed a safe and
trafficking including children. The Committee was introduced healthy environment for children
Philippines Against Child Trafficking subsequently. The Thai government, from poor and vulnerable households
Campaign is a nationwide drive to assisted by UNICEF, organized by (i) reviewing the current early
raise awareness on child trafficking multidisciplinary teams made up of child development, (ii) developing
in the country. The campaign aims to police, prosecution officials, social appropriate survey instruments,
encourage protection of children against and health workers, and other and (iii) increasing stakeholders’
trafficking. professionals to investigate and deal awareness.
with cases of abuse.
244 Effects of Social Policy on Domestic Demand
Comments
Hiroshi Yamabana
This chapter presents a good overview of the rates of macro savings and private
consumption and the social protection and social security schemes of ASEAN
members, especially of ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand,
and Viet Nam). It also summarizes theories on the economic effects of social
protection spending.
I agree with the concluding remark that attention should be paid to potential
impacts social protection can have on a country’s economy (e.g., growth).
However, I would like to stress that the emphasis should be put on the primary
objective and the role of social protection. Too much emphasis should not be
put on economic impacts when these impacts are uncertain and cannot be
considered as substantial (in solid quantitative terms).
As for the need to reform social security arrangements, too much emphasis
is put on the aging issue and the financial sustainability of social security in
the long run. The important and urgent issue of poverty reduction and the
medium- and long-term goal of achieving an equitable society with proper
redistribution should be also emphasized, not only for achieving social justice
and social cohesions, but also for achieving better and more stable economic
growth through building a healthier and more productive labor force.
As for the aging “crisis” for financing pensions, it is obvious that the
financing method (e.g., defined benefit and defined contribution) will not
solve the problem (whether through transfer or investment, the productive
segment of the population should pay). The ultimate solution is to gradually
establish longer years of work in the society or increase the retirement age.
This chapter is a summary of existing research, much of which was carried out
based on developed country experiences, except for Tran and Jung (2007). It is
important to learn from experience, especially “failures” of other countries,
so as not to repeat mistakes. But contexts may differ and there may be ways
to rectify existing problems rather than giving up the fundamental idea
of protecting people (e.g., the conversion from defined benefit to defined
contribution).
Even when trade-offs exist, without quantifying their scale and judging
whether they are substantial, it would be misguided to prioritize one policy
over another (e.g., defined contribution to defined benefit).
growth is not shown in the chapter. Investing in the poor, in terms of health,
education, or providing business capital, is very important. In addition, we
should recognize that:
(i) the urgent issue of poverty alleviation cannot wait for long-term
investment to materialize; and
(ii) a portion of the population may not be helped through lending such
as microfinance, where there is an associated risk of business failure
and bankruptcy.
Therefore, it may be questionable to support social sector expenditures
solely for macro growth and welfare without paying equal attention to
redistribution.
References
Tran, C., and J. Jung. 2007. The Extension of Social Security Coverage in Developing
Countries. Center for Applied Economics and Research Working Paper 2007-026.
Available at: http://ssrn.com/abstract=1029611.
Panel Discussion 249
X
Panel Discussion
Davide Furceri:
“Impact of Social Protection Is Higher in Developing
Economies”
Most of the analysis so far on social protection has focused on OECD countries.
But thus far, we know that the effect of public funding (including social
protection) depends on: (i) the economic development of the country, and
(ii) the size of government expenditure. First, social protection could be more
effective in boosting demand in countries where social protection share is
relatively lower. Put differently, there is a higher effect or higher consumption
multiplier in some Asian economies such as Korea or the PRC where the level
of social protection is quite low. Secondly, this increase in social protection
can have a permanent effect on demand through an “accumulation” process.
250 Effects of Social Policy on Domestic Demand
For example, in Nordic countries, some social safety nets for people exiting
the labor market allow them to go back to school to study. This is particularly
important during the current crisis where we see a mass exit from the labor
force. It is clear that if you have a safety net, this can help people increase their
human capital, even though they temporarily leave the labor market, which
enhances medium-term growth.
In terms of financing, there are several ways to finance social protection
programs. Here we are mostly focused on increasing tax. But I want to stress
that it is preferable to cut expenditures in other components (of government
expenditures) rather than to simply increase tax.
The problem of excessive saving in the PRC in the context of global
imbalance will not, in large part, be solved by social protection. Of course,
the PRC needs to improve social protection policies, but the reduction of the
global imbalance is not the ultimate goal of social protection. If you want to
reduce global imbalance, issues such as increasing competition or liberalization
of some key markets in the PRC should be addressed.
David Coady:
“Emphasis Should Be on Program Design”
Do social expenditures increase consumption? If you take money from people
who are not spending it, or spend less of it, and give it to people who do spend
it, consumption will go up. We are talking about the elderly who consume
more out of additional income. We are talking about low-income people, who
also consume more out of additional income. The best way to make sure that
such expenditure increases consumption is to focus on program design. In
the context of the PRC where the starting point (of social protection) is very
low, it is clear there is room both for more assistance and for more insurance.
The PRC can run better and more programs. In other countries, perhaps, it
would be a case of “do what you are already doing, but better.” In summary,
the consumption impact is biggest when social protection is well designed.
However, we should be very careful about discussing social expenditure only
in the context of its effect on consumption. We have to keep track of why we
have social expenditure. In fact, the increase in consumption is just a useful
side effect in the short term.
Panel Discussion 251
For finance, over time, social insurance will have to be run on a contributory
basis in one way or another, because of demographic considerations. In the short
run in the PRC, social protection may be financed by running down surpluses,
but this cannot last forever. In the end you will have to move to a well-designed
social insurance system that has a more sustainable financing.
The motivation should be greater efficiency and equity. When we are
developing a social assistance program, maybe we should start promoting
such programs not in terms of just social equity impact but in terms of their
efficiency impact. The policy disruption caused by not having access to cost-
effective social assistance programs has a great effect on growth. Most of
the time, governments have a “stop–go” policy: when there is a shock to the
economy, the government needs to spend money to overcome the shock,
and then, often, it is back to square one. I think we should start promoting
good social assistance programs from the perspective of efficiency as much
as equity.
Charles Horioka:
“Increased Demand Is Not the Primary Goal of Social
Policies”
I think there should be basically two broad objectives of social policies. One
is to guarantee a minimum standard of living and get people out of poverty.
And the second is to protect people from unforeseen contingencies regardless
of their income—whether they are poor or wealthy.
I think both objectives of social policy will lead to an increase in demand,
perhaps as an unintended consequence. If you redistribute resources to poor
people who have a higher propensity to consume, of course aggregate spending
will increase. And if you protect people from risks, they will feel less need for
precautionary saving, and again they will consume more.
Policies of both types will lead to greater demand, but I do not think that
this should be the primary goal of social policies. The primary goals should
be to eliminate poverty and also to protect people from risk.
252 Effects of Social Policy on Domestic Demand
Ming Yan:
“Social Protection Is Not Only for the Poor”
I would like to advocate social protection policies because they do not just help
the poor. I am specifically speaking in the context of the PRC. Health-care
insurance, education, housing—all of these are needed even by the middle
class. I think the reason that the Chinese government in many ways failed to
provide social protection for the Chinese people during the economic reform
was because it had a one-dimensional goal of economic growth. It did not
concern itself with human and social well-being because its objective was
different.
The quality of policy design and implementation are very important.
Otherwise, even with good intentions, such as that of the PRC government
to begin developing social protection, it could become as problematic as
before. For example, without a good program design, the provision of social
insurance to migrant workers could cause more problems for both the migrant
workers and local authorities. Another example is that, recently, the PRC
has implemented a program called “sending electronics to rural areas,” with
the goal of boosting domestic demand. But many rural areas in the PRC
do not even have electricity. Once the people buy a television, refrigerator,
or washing machine with government subsidies, what are they going to do
with these electronic items besides using them to store things? Even in areas
where there is electricity, few can afford to pay for it. Thus, the program of
boosting demand through social protection with government subsidies can
sometimes be wrong-headed.
The other problem with boosting domestic demand is its unintended
consequences such as change of values (consumerism), as well as for the
environment. People are competing to buy large houses and spending millions
of dollars on cars; already, we are competing with the US on car ownership.
This year, the PRC produced 12 million cars. But what about the environment?
What about the air pollution that these cars have been causing? I think the PRC
has a rich cultural tradition that should be valued more, rather than simply
learning from the American lifestyle, which often harms the environment.
On the incentive issue, the concern is, once the government provides
social protection beyond a basic livelihood, how can you prevent people from
becoming passive or dependent on government provision?
Panel Discussion 253
Hiroshi Yamabana:
“More Room for Consumption Growth in Asia”
In many parts of Asia, there is still huge unmet global demand. It is not true that
there is no more room for consumption growth. Substantial parts of the population
in these countries have no money or cannot afford basic consumption demands.
Transferring resources in the forms of social assistance, basic health care, and basic
education from richer segments of the population with a lower consumption rate,
to poorer segments of the population with a higher consumption rate, is a short-
term solution and an immediate way to boost consumption demand. Long-term
social insurance systems with good governance could flourish once the economies
grow and more people join the labor force as wage earners. So the challenge is
how to manage strategically the climb up from lower to higher levels of economic
development and, in parallel, gradually replace tax-based social assistance with
social insurance like that available in many developed countries.
Masahiro Kawai:
Summary
The discussion of social protection and domestic demand growth was motivated
by the fact that the global payments imbalance needs to be corrected. It is in
the best interests of Asia to correct this imbalance through higher domestic
demand, because the external demand coming from the US and Europe is
expected to be weak over the medium-term. Asian countries which have been
heavily dependent on external demand from the US and Europe have to create
their own demand in Asia.
The PRC, in particular, can use this opportunity to boost domestic demand
by improving social sector protection, which it has to do anyway. So there
is a good synergy between the need to create demand in Asia, in particular
in the PRC, and the imperative to strengthen social sector protection. Of
course in rebalancing demand, other, complementary, measures will need to
be pursued, such as various types of structural reforms to further marketize
the Chinese economy and strengthen competition. Although the growth in
the PRC has been the fastest in the world, and is expected to continue for some
time, maintaining productivity growth and coping with the aging population
will be a challenge.
254 Effects of Social Policy on Domestic Demand