Floors and ladders - Is social security the missing ingredient for ‘bottom up’ growth?

April 5th, 2023

Kenya’s governing administration has set a new vision for the country –  bottom-up growth.

Bottom-up growth implies economic inclusivity- a pathway to growth which creates opportunities and benefits for all. While this is a desirable ambition, the current reality for many Kenyan households and enterprises is survival rather than growth.

Despite promising GDP growth  numbers posted in 2022, inflation and a high cost of living are besetting the Kenyan economy, leading to rising poverty (World Bank 2020), rising food insecurity (KNBS 2022), declining financial health (Central Bank of Kenya 2021) and reduced quality of jobs (FSD Kenya 2022).

The type of growth to which the governing administration aspires to, the ‘bottom-up’ growth, requires us to think seriously about the floors as well as the ladders which will structure the Kenyan economy for the near future.

Marylyn, a trader who operated a grocery store in Kangemi before the Covid-19 pandemic, saw revenue from her business plummet by 70 percent during the early months of the pandemic. She also faced unexpected medical expenses for her son and her parent’s house burnt down. Marylyn has since closed her business and is now surviving on income from domestic work. Nasha, on the other hand, a trader in Laisamis in Marsabit, actually saw her business grow during the ‘Covid-19’  years.

The big difference between these two women was the presence of a widespread cash transfer in their areas.

Nasha’s revenue was sustained because her customers were able to continue buying from her shop since many of them were recipients of the Hunger Safety Net Programme (HSNP) implemented by the National Drought Management Authority (NDMA) in eight counties in Kenya. A significant percentage of households in these counties receive monthly cash transfers which help them to maintain consumption, while also enabling businesses and local economies to weather the impacts of large-scale shocks.

In contrast, with no access to social protection, Marylyn’s customer base fell sharply when the Covid-19 pandemic hit Kenya, and she herself had no safety net to help her through her son’s illness. Despite her vulnerability, if there had been a cash transfer available in her area, she would have been classified as too wealthy to be targeted. Yet, like many others in her position, she has now gone from being a trader doing relatively well for herself to joining the ranks of the urban poor.

According to this paper published by FSD Kenya in March 2023 titled Social Security: a pillar of inclusive growth for Kenya? the implementation of universal social security programs has the potential to generate considerable advantages for Kenya’s overall economic development.

The paper models the potential impacts of a universal child benefit of 800 shillings per month per child, finding that this could cumulatively boost GDP by an additional 5.33 percentage points above ‘business as usual’ growth in just 10 years.

The model is based on initially targeting all children aged 0-9 years in 2023, gradually expanding to cover all children up to 18 years of age by 2033 as the initial cohort ages. The cost of such an investment would be 0.92% of GDP in 2023 reducing to 0.76% of GDP by 2040 as the economy grows. At less than 1% of GDP, with such far reaching effects for growth and wellbeing, this proposition is compelling.

However, according to the paper, the design and scale of such social security programmes is critical if impacts on growth are to be realised.

Existing Kenyan cash transfer programmes spend vast amounts of money trying to target the poorest and most vulnerable populations (often with poor results). These significant investments may keep people alive, but do little to stimulate growth and may even slow growth.

For instance, if one needs to prove their vulnerability to receive a transfer, there is no incentive to find lucrative work or invest in business. Instead, the paper argues that progressive schemes need to be anchored in a rights-based framework where receipt of the benefit is universal, reliable and guaranteed for the long-term.

How can impacts on growth from well-designed social security programmes be achieved?

In the short term, cash transfers to citizens would act as an economic stimulus, supporting Kenya’s economic recovery in the wake of Covid-19, through boosting consumption and business growth.

In the medium term, cash transfers stabilising household income would incentivize household investment (e.g., in business, farming, education and assets) and improve nutrition. This would result in higher household incomes and better returns on education.

In the long-term, improved human capital (a new generation of better nourished and educated people) would attract investors, enabling Kenya to reap a ‘demographic dividend’. Reduced inequality would lessen insecurity and foster the conditions for growth and a strong social contract – the perception that government caters to the needs of everyone not just the privileged few- would improve the revenue base, as citizens appreciate the investment by government in their wellbeing and are motivated to reciprocate through taxation and formalisation.

The result is a win-win: reduced poverty and food insecurity, reduced crime and inequality, higher quality human capital, improved revenues and returns to growth over the coming decade of as much as 5.33%.

But if universal, long-term social security programmes can be so powerful in creating bottom-up growth, why aren’t all governments investing in them? Well, some governments are. For example, South Africa, Bolivia, Nepal to name but a few.

However, a major argument for not adequately investing in social security programmes is insufficient funding available. In a country like Kenya that is struggling with rising public debt repayment obligations and a highly constrained fiscal space, the fiscal implications of such an investment are a legitimate concern.

As Kenya debates the future of its social protection system at the 2023 Kenya National Social Protection Conference, it has the opportunity to make a strategic investment in its future prosperity.

To do so, the Government of Kenya could consider a range of options, including partnerships with development partners, off-setting public debt, tying social protection to green growth, leveraging exports, and reprioritising existing budgets or creating new fiscal space.

As Kenya debates the future of its social protection system at the 2023 Kenya National Social Protection Conference, it has the opportunity to make a strategic investment in its future prosperity. To do so, the government should consider a range of options, including partnerships with development partners, off-setting public debt, tying social protection to green growth, leveraging exports, and reprioritizing existing budgets or creating new fiscal space.

One viable option is to establish partnerships with development partners, as was done with Inua Jamii, with the government gradually assuming a larger share of spending over time. By using a similar model, an expanded social security programme could be funded, with the government gradually taking over as the multiplier effect takes hold and the programme becomes self-funding.

Alternatively, in partnership with development partners, the government could negotiate to use any funds invested in social security to offset debt or be matched through external funds in the initial years of the programme. Once the programme starts yielding additional tax revenue from its impact on economic growth, this revenue could be used to fund its further expansion.

Innovative solutions could also be explored, such as a green levy, as Kenya positions itself to become a hub for green investment, or by imposing conditionalities on green investors to contribute a small percentage of profits to social security. Other countries have financed expanded social protection programs through re-purposing revenues from the taxation of natural resource exports, and while Kenya does not have as significant a natural resource base, a similar model could be applied to the tourism industry.

Lastly, the government could reprioritise its current budget allocations to invest more in social security or use its revenue expansion in the short-term to expand its social security programmes. If the government were to anchor its mandate in delivering a flagship social security program such as a child benefit for Kenya’s children, this could boost its political appeal and create a new course for bottom-up growth.





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