Poverty reduction, Hunger, Poor and vulnerable, Cash transfers, Inequality, Pro-poor policies, Safety nets,

Alderman, Harold

Hoddinott, John

English

Research Papers in Economics

1 
2020 FOCUS BRIEF on the 
World’s Poor and Hungry People 
 
 
GROWTH-PROMOTING SOCIAL SAFETY NETS 
 
Harold Alderman and John Hoddinott 
 
 
Publicly funded, noncontributory transfer 
programs targeted to the poor and vulnerable 
have a long history. Free food distribution was 
a feature of Egypt in the time of the Pharaohs 
and of Rome during its Imperial age. England 
had a succession of “Poor Laws” dating from 
the 16th century that provided assistance to 
those unable to work, while Germany 
inaugurated components of the modern welfare 
state in the late 19th century. These programs, 
typically referred to as social safety nets or 
social protection programs, are now ubiquitous 
in developed countries and are becoming more 
common in developing countries. They are, 
however, controversial. While proponents of 
such programs see them as a means of 
ensuring that the benefits of economic growth 
are shared widely, critics see them as 
squandering scarce public resources and doing 
little to promote longer term development, 
while at the same time discouraging work and 
investment. Overlooked in this often polemical 
debate is the contribution that social safety 
nets can make in promoting economic growth. 
This instrumental dimension of social safety 
nets is the focus of this brief.  
Growth-Promoting Social Safety Nets 
Social safety nets can take many forms: 
transfers of cash through welfare payments, 
child allowances, or pensions; in-kind transfers, 
such as food aid or school feeding programs; 
subsidies on goods purchased by the poor; 
unemployment insurance; and public works or 
workfare schemes. Recent innovations in social 
safety nets include both the means to improve 
targeting, such as proxy means testing, and the 
means to increase the impact of transfers on 
capital creation—for example, through 
conditional cash transfer (CCT) schemes and 
interventions that link recipients of cash or food 
payments to other government services and 
public works programs. Social protection 
programs are targeted toward the poor or those 
individuals who may become poor as a result of 
adverse shocks. This, together with their 
noncontributory dimension, distinguishes them 
from programs such as occupational pension 
schemes, which—while sharing certain 
similarities with social protection programs—
base eligibility and benefit levels on 
employment and contribution history, rather 
than, say, current poverty status.  
The provision of safety nets is motivated by 
both equity and efficiency concerns. In part, 
safety net programs arise from a desire to 
assist the least well-off members of society. 
Additionally, such programs seek to offset 
credit and insurance market failures, which 
leave poor households unable to make 
investments that would raise their future 
incomes or protect them from adverse events. 
Thus, in addition to the intrinsic value of such 
transfers in creating a fairer society, social 
protection programs have an instrumental 
function in promoting economic growth. This 
works through five channels: 
1.  social safety nets help create individual, 
household, and community assets; 
2.  they help households protect assets when 
shocks occur; 
3.  by helping households cope with risk, they 
permit households to use their existing 
resources more effectively;  
4.  they facilitate structural reforms to the 
economy; and 
5.  by reducing inequality, they directly raise 
growth rates.  
Each of these channels is discussed in turn below.  
Social Safety Nets and Asset Creation 
Reducing poverty requires raising the asset 
levels of the poor and increasing the returns to 
those assets. Achieving these objectives 
requires making investments, but doing so is 
hard when households have few resources of 
their own. In theory, such households could 
borrow money to finance these investments, 
but—as is now well understood—despite the 
impressive spread of microfinance institutions, 
many poor households lack access to credit, 
which would allow them to acquire assets, 
invest in their children’s human capital, or enter 
profitable activities. Social protection provides 
liquidity to poor households, giving them 
October 2007 2 
additional resources that can be used to make 
such investments. In Nicaragua, the CCT 
program Red de Proteccion Social raised school 
enrollments by nearly 22 percentage points, 
while Mexico’s former Programa de Educación, 
Salud, y Alimentación (Progresa, now 
Oportunidades) significantly reduced stunting. A 
study of Oportunidades found that beneficiaries 
invest just over 10 percent of their transfers, and 
that this leads to sustained increases in per capita 
consumption in the following five years. 
In addition to directing resources to the poor, 
certain forms of social protection can create assets of 
value to the local economy. Many developing 
countries have public works programs that 
rehabilitate roads, refurbish canal and irrigation 
facilities, or build structures—such as schools and 
health clinics—that are of value to the community 
and local economy. Such investments stimulate 
growth in the local economy. So too do the transfers 
themselves and the investments households make 
using these transfers. In addition, local communities 
are increasingly involved in decisionmaking 
surrounding the choice of assets to be built, the 
management of their construction, and the oversight 
of the finances being used. This not only increases 
the likelihood that the assets constructed are of 
particular value to the community, but also that 
communities build up social capital and governance 
capacity. 
Social Safety Nets and Asset Protection 
Risk and shocks—such as floods, droughts, 
price shocks, market collapses, and civil strife—
are pervasive in developing countries. Such 
shocks can directly lead to a loss of livelihoods 
by destroying assets, as when a flood washes 
away a farmer’s topsoil, or by reducing current 
returns to existing assets, as when a drought 
causes harvests to fail. They may also affect 
livelihoods indirectly, as when the demand for 
service providers, such as barbers or 
hairdressers, falls because their customers have 
become impoverished. In the absence of 
insurance, shocks force households to lower 
consumption, deplete savings, or both. The 
consequences can be far reaching. Farmers in 
Ethiopia who suffered livestock and other losses 
in the droughts of the 1980s found it difficult to 
recover and experienced considerably slower 
income growth in the decades that followed. 
Studies undertaken in countries as different as 
Bulgaria and China found similar results. 
Shocks, even if temporary, can also reduce 
investment in human capital with long-lasting 
consequences. In Zimbabwe, children exposed 
to the civil war preceding independence and the 
droughts that occurred in the early 1980s were 
more likely to be stunted as preschoolers, had 
reduced stature by late adolescence, and 
completed less formal schooling. These shocks 
translate into a reduction in lifetime earnings 
on the order of 14 percent. Similarly, children 
in rural Mexico have higher dropout rates when 
a parent loses a job and, once out, a much 
lower chance of returning the next semester. 
Social Safety Nets and Resource Allocation 
Even if shocks do not reduce asset holdings, 
the threat of shocks discourages innovation and 
risk taking. It is true that many households 
have developed ways of insuring themselves 
against risk, but these come with high 
opportunity costs. Studies undertaken in south 
India and Tanzania show that, because poor 
households deploy their assets more 
conservatively than wealthy households, their 
return on assets is 25–50 percent lower. 
Further, the threat of shocks can make 
households reluctant to access credit markets 
because they fear the consequences of an 
inability to repay. Others are simply unable to 
obtain credit because they are perceived to be 
at risk of default. Social safety nets, therefore, 
play two complementary roles in attacking the 
problem of risk and shocks. First, timely 
responses to shocks allow households to 
recover more quickly from these adverse 
events, thus reducing the likelihood that they 
have permanent consequences. Second, social 
protection programs that are reliably delivered 
and transparently operated provide a form of 
insurance that can encourage households to 
adopt new innovations. 
Social Safety Nets and Structural  
Policy Changes 
There are times when governments need to 
make significant policy reforms that, while 
necessary in order to improve economic 
efficiency and create the conditions for 
sustained growth, impose significant short-term 
costs on some households. Social safety nets 
can compensate households hurt by policy 
shifts and make policy reforms more politically 
palatable. Mexico introduced El Programa de 
Apoyos Directos al Campo (PROCAMPO) to 
mitigate the costs of adjusting to the North 
American Free Trade Agreement (NAFTA). The 
program had the added advantage of increasing 
production because the transfers helped relax 
credit and insurance constraints. Turkey 
introduced a similar direct income support in 
2000 to facilitate reforms. So, programs that 
address the inherent stress of agricultural 
transformation and the reality that few policy 
changes are unambiguous sources of gains for 
all households may also improve efficiency in 
addition to equity. 
Social Safety Nets, Redistribution,  
and Growth 
Finally, by redistributing resources within an 
economy, social safety nets may make 3 
economic growth more likely. While 
longstanding controversy surrounds the 
relationship between inequality and growth, the 
most recent evidence suggests that high levels 
of inequality are growth-retarding for at least 
two reasons. First, marked income or wealth 
inequalities create circumstances where political 
or institutional power is more likely to be 
captured by elites, who then make policy 
choices that generate rents to themselves 
rather than policies that encourage broader 
based growth. Second, high levels of inequality 
are often accompanied by low levels of social 
cohesion, which can reduce growth either 
because levels of trust are lower or because 
lowered social cohesion is often accompanied 
by high rates of crime. 
Common Criticisms of Safety Nets 
There are two common criticisms of safety 
nets: first, that they create disincentive effects; 
and, second, that they are simply too costly, 
particularly for very poor countries. While these 
concerns need to be taken seriously, the 
preponderance of existing evidence casts 
serious doubt on both.  
Disincentive effects arise for several 
reasons. Sometimes, it is argued that the 
receipt of public funds discourages work effort 
because beneficiaries favor increased amounts 
of leisure. Additionally, in cases where strict 
means testing is used, individuals may worry 
that if they work too much, they will lose 
access to their benefits. In addition to the 
effect on labor incentives, public safety net 
programs may change incentives for private 
individuals to assist family and friends; thus, 
social safety nets might crowd out informal 
safety nets such as private transfers. 
Most studies, however, find that public 
transfers have modest effects on work effort. In 
some cases, this is not a bad thing; for 
example, some evidence suggests that CCT 
programs reduce child labor. The evidence on 
the crowding out of private transfers is more 
mixed. Some studies suggest that effects are 
substantial; for example, in South Africa, it is 
estimated that every rand transferred via a 
pension scheme reduces transfers from children 
living away from home by 0.25–0.3 rand. 
However, in other countries—such as China, 
Papua New Guinea, Vietnam, and Indonesia—no 
such crowding out is found. Evaluations of CCT 
programs in Mexico and countries in Central 
America also failed to find evidence of crowding 
out. While disincentive effects are worth 
keeping in mind—and program designers should 
ensure that social protection schemes do not 
inadvertently create disincentives—existing 
evidence does not suggest that they are 
pervasive or severe. 
Perhaps the most potent criticism of safety 
nets focuses on their affordability in highly 
resource-constrained environments. Such 
concerns are often couched in terms of trade-
offs between different forms of pro-poor 
expenditures. How can, it is asked, a country 
afford a safety net when residents in remote 
rural locations lack schools? This concern, 
however, exaggerates the costs of many well-
targeted programs; frequently, social protection 
programs are less than 1 percent of gross 
national product, an amount that can often be 
financed by re-allocating unproductive 
expenditures that offer little tangible benefit for 
the poor. For example, Brazil is expanding its 
well-targeted CCT program, Bolsa Familia, to 
cover the bottom quintile of the population at a 
cost of 0.4 percent of gross domestic product 
(GDP). While this is a considerable amount, it 
palls in comparison to the contribution made to 
federal pension programs, which receive nearly 
10 times this amount, at 3.7 percent of GDP, 
while transferring more than half the benefits 
to the richest quintile! This is not an isolated 
example. Other countries spend considerable 
amounts of money on regressive energy 
subsidies, which tend to take the form of 
industry subsidies, bank bailouts, and military 
expenditures. That said, in very low-income 
countries, there may be limited scope for re-
allocating existing expenditures or increasing 
domestic tax efforts. In such cases, 
international aid may need to play a larger role 
in financing social protection programs. Here, 
care is needed in terms of the form of this 
financing. A subset of transfer programs is 
financed by food aid, which under some 
circumstances may create local market 
distortions. 
Caveats and Conclusions 
Social safety nets are by no means sufficient to 
ensure pro-poor growth. Good governance, 
functional infrastructure, schools and health 
clinics, and so on are all important components 
of development strategies. Further, poorly 
designed or implemented social protection 
programs, or those with only token funding, are 
unlikely to meet the intrinsic or instrumental 
objectives described here. Much depends on 
correct design. All effective social safety nets 
have five key characteristics: (1) a clear 
objective; (2) a feasible means of identifying 
intended beneficiaries; (3) a means of 
transferring resources on a reliable basis; (4) 
ongoing monitoring of operations and rigorous 
evaluation of effectiveness; and (5) 
transparency in operation to encourage 
learning, minimize corruption, and ensure that 
beneficiaries and the wider population 
understand how the program functions. 4 
Much has been learned about how to design 
and implement equitable and efficient safety 
nets with these characteristics. An important 
remaining challenge is the design of safety nets 
that address the long-term consequences of 
transitory shocks. This requires improving the 
identification of those affected by a transitory 
shock, devising flexible means of financing 
responses to these events, and developing 
mechanisms for scaling up and down quickly.  
Safety net interventions can contribute to 
economic growth through their impact on asset 
creation, asset protection, resource allocation, 
structural policy change, and redistribution. 
Social safety net interventions, when well-
designed and implemented, can complement  
pro-poor investments and thus contribute to 
longer term poverty reduction in addition to 
their short-term direct impacts.  
For Further Reading: H. Alderman, J. Hoddinott, and B. 
Kinsey, “Long Term Consequences of Early Childhood 
Malnutrition,” Oxford Economic Papers (Vol. 58, 2006); D. 
Coady, M. Grosh, and J. Hoddinott, The Targeting of Transfers 
in Developing Countries: Review of Experience and Lessons 
(Washington, DC: World Bank and IFPRI); J. Das, Q. Do, and 
B. Özler, “Reassessing Conditional Cash Transfer Programs,” 
World Bank Research Observer (Vol. 20, No. 1, 2005); M. 
Grosh, C. del Ninno, E. Tesliuc and A. Ouerghi, From 
Protection to Promotion: The Design and Implementation of 
Effective Safety Nets (Washington, DC: World Bank); E. 
Skoufias, PROGRESA and its Impacts on the Welfare of Rural 
Households in Mexico, IFPRI Research Report No. 139 
(Washington, DC: IFPRI). 
 
 
 
Harold Alderman (halderman@worldbank.org) is social protection advisor for the Africa region at the World Bank; John Hoddinott 
(j.hoddinott@cgiar.org) is deputy division director of the Food Consumption and Nutrition Division at the International Food Policy Research 
Institute. 
 
Suggested citation: Harold Alderman and John Hoddinott. 2007. Growth-Promoting Social Safety Nets. 2020 Focus Brief on the World’s 
Poor and Hungry People. Washington, DC: IFPRI. 
 
The views expressed in this brief are those of the author(s) and are not necessarily endorsed by or representative of IFPRI, or of the 
cosponsoring or supporting organizations. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
This brief was prepared for a policy consultation process coordinated by IFPRI and focused on the World’s Poor and Hungry People. IFPRI 
gratefully acknowledges the contributions of: Asian Development Bank (ADB), Bill and Melinda Gates Foundation, Canadian International 
Development Agency (CIDA), Deutsche Welthungerhilfe (German Agro Action), European Commission, German Federal Ministry for 
Economic Co-operation and Development, with Deutsche Gesellschaft für Technische Zusammenarbeit (BMZ/GTZ), International 
Development Research Centre (IDRC) Canada, and Irish Aid. 
 
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE 
2033 K Street, NW, Washington, DC 20006-1002 USA 
T: +1 202 862 5600  •  F: +1 202 467 4439   
ifpri@cgiar.org  •  www.ifpri.org 
 
 
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Copyright © 2007 International Food Policy Research Institute. All rights reserved. Sections of this material may be reproduced for 
nonprofit use without written permission but with acknowledgment to IFPRI. For further information: ifpri-copyright@cgiar.org. 

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