1. Rates of Return of Social Protection The case for non-contributory social transfers in Cambodia Franziska Gassmann Arusha, Tanzania – 17 December 2014

2. Maastricht Graduate School of Governance The usual arguments for extending social protection rely on… Human rights Empirical evidence on impacts Pilot projects Affordability studies

3. Maastricht Graduate School of Governance Rationale for investment case Additional arguments are needed to move SP up the national development agendas –Demonstrate value for money –Analyze fiscal sustainability –Prove cost-effectiveness, capture multidimensional effects –Compare with alternative investments Develop economic argument for social protection –Costs AND benefits –Short term AND long term –Direct AND indirect

4. Maastricht Graduate School of Governance Non-contributory social protection as economic investment Paradigm shift: SP not just as a cost for the economy –Source of resilience in tough times –Support for growth and productivity in good times –Mechanism for social inclusion SP and economic growth – transmission channels –Building and protecting human capital, child wellbeing –Fostering productive investments, protect assets –Reducing liquidity constrains –Enhancing community assets, infrastructure –Stabilizer of aggregate demand, improving social cohesion, making reforms feasible

5. Maastricht Graduate School of Governance Background Cambodia has achieved rapid economic development and poverty reduction. Annual GDP growth of 7.7% on average (1995-2011). GNI per capita US$): $830 (2011) (low income country) Human Development Index: 0.523 in 2011 (#139) NSPS launched at the end of 2011. Double objective: economic stability and human development Objective of our study: Contribute to the evidence on the links between social protection investments and socio-economic development in Cambodia “What are the economic returns of social protection in the mid-and long term?” Supported by UNICEF and Royal Government of Cambodia

6. Maastricht Graduate School of Governance Data and methodology Rates of Return: relation between net benefits and costs Data: CSES (2004 and 2009) Microsimulation (steps): Static (cost-effectiveness): changes on poverty and inequality (direct distributional effect) Returns of human capital (education) at the household level Behavioural (income) effects School attendance (education) Nutrition (health) Labour (participation and supply) Dynamic: 20 periods

7. Maastricht Graduate School of Governance RoR study Cambodia – Model Household consumption Poverty and inequality Education (school attendance) Health (underweight) Labour participation Human capital Labour productivity Social protection Economic performance Return Direct (distributional) effects Behavioural (income) effects

8. Maastricht Graduate School of Governance Returns to human capital An additional year of education is related with a 4.1% higher wage. Low in international comparison  mainly low- skilled employment with limited productivity An additional year of education is related with a 1.8% higher household consumption for a poor rural household.

9. Maastricht Graduate School of Governance Behavioral (income) effects A 10% increase in the level of consumption is related with a 5.6 percentage points higher probability to attend lower secondary school for a poor rural person 10% increase in consumption is related with 0.4 percentage points lower probability of being underweighted. A 10% increase in household consumption is related with a 7.8 percentage points higher probability of formal work for poor persons between 18 and 64 years old in rural areas.

10. Maastricht Graduate School of Governance Behavioral (income) effects Model: 2SLS for all households Dependent variable (independent variable) Urban (non-poor) Urban (poor) Rural (non-poor) Rural (poor) log of household consumption per capita (maximum level of education within the household) 0.042***0.016**0.026***0.018*** (0.005) (0.007) (0.003) (0.002) Model: Probit model for individuals 6-25 years old Dependent variable (independent variable) Education level (rural-poor) Primary Lower secondary Upper secondary School attendance (log of household consumption per capita) 0.226**0.560**0.373 (0.089) (0.262) (0.516) Model: Probit model for children under 5 years old Dependent variable (independent variable)National National (poor) Rural (poor) Underweight (log of household consumption per capita) -0.043***-0.048-0.038 (0.015)(0.038)(0.041) Underweight (no toilet facility in the house = 1) 0.0260.062**0.081*** (0.016) (0.029)

11. Maastricht Graduate School of Governance RoR study Cambodia – Policy Social Protection Instrument Target PopulationBenefit TransferTotal Cost KHR billion % of GDP KHR billion % of GDP Cash transfer Poor children 0-6 years old in rural areas, up to two per household USD 12 per month (60% rural food poverty line) 3910.94301.0 Social pension Poor persons 65+ in rural areas USD 20 per month (100% rural food poverty line) 1390.31530.4 Scholarship Poor children at lower secondary in rural areas USD 50 per year (20% rural food poverty line) 250.1280.1 Public works Poor persons 18-64 years old in rural areas, up to 1 per household (80 days per year) USD 2.3 per day500.1750.2 Total costs is around 1.6% of GDP (USD 166 million, 2009).

12. Maastricht Graduate School of Governance RoR study Cambodia – Results BenefitScenarioPeriod 1Period 5Period 10Period 15Period 20 Average years of education (18-64 years old) With social protection6.527.679.0010.4011.62 Without social protection6.527.658.8910.2211.41 Benefit (difference)0.000.020.110.190.21 Total household consumption average annual growth rate (%) With social protection1.552.542.772.822.71 Without social protection0.002.292.652.742.67 Benefit (difference)1.550.260.120.070.04 Poverty headcount (%) With social protection23.7420.715.610.97.8 Without social protection29.7126.719.814.710.4 Benefit (difference)-6.0 -4.2-3.8-2.6 Inequality (Gini of consumption) With social protection0.3130.314 0.3080.302 Without social protection0.3290.3280.3270.3200.312 Benefit (difference)-0.016-0.014-0.013-0.012-0.010 CostPolicyPeriod 1Period 5Period 10Period 15Period 20 Cost (% of GDP)Social protection package1.61.41.20.90.8 RoRDiscount ratePeriod 1Period 5Period 10Period 15Period 20 Rate of Return (Absolute benefit on total household consumption / absolute cost) (%) 2%-11.6-10.0-4.15.814.7 3%-11.6-10.1-4.35.013.3 4%-11.6-10.1-4.64.311.9

13. Maastricht Graduate School of Governance Results: benefit (human capital) Labour force’s median education level increases faster due to social transfers. Labour force median education level (schooling)

14. Maastricht Graduate School of Governance Results: Benefit (hh consumption) Total household consumption grows faster if SPI are implemented. Total household consumption average growth rate

15. Maastricht Graduate School of Governance Results: Benefit (poverty reduction) Poverty headcount decreases faster because of SPI Head count

16. Maastricht Graduate School of Governance Results Total cost of SPI decreases over time.

17. Maastricht Graduate School of Governance Rates of Return – Results A basic package of SPI for poor rural individuals in Cambodia has a RoR of between 12% and 15%, after 20 periods (years). It becomes positive after 12 periods (years).

18. Maastricht Graduate School of Governance RoR study Cambodia – Final remarks Dynamic microsimulation provides a novel approach to analyse economic returns of social protection. Modelling options depends on data constraints. Costs and specific impacts have been estimated. The model can be used to analyze potential economic returns in the mid- and long- term. Any model is always a simplification of real life. Effects, benefits and returns may be higher if complementary policies are also implemented. Improving health and education coverage and quality. Enhancing sanitation conditions. Fostering economic productivity, formal labour market, industrialization, innovation and technical change.

19. Maastricht Graduate School of Governance RoR study Cambodia – Final remarks Additional effects may increase benefits and RoR. Behavioral (non-economic) effects due to SPI design. Spillover effects and regional multiplier. Institutional change and social cohesion. Health status improvements (e.g. nutrition). Financing aspects (taxation), administrative issues (inefficiency) and targeting errors may reduce RoR. Specific SPI design (e.g. targeting, conditionality, payment mechanism) may affect RoR.