Social security scheme for a low-income country

Government has already reformed industrial relations law which facilitates trade union formation and compensation in the event of accident or death connected with work. Government has also revised minimum wage raising it manifold. Safety standards at workplace also are to be enforced with greater rigour. All of these will raise cost which may affect external competitiveness. (In progressively open global trade regime, the distinction between external competitiveness and domestic viability is likely to disappear gradually.)
However, the simple law of demand and supply determining wage is open to question, and has undergone change more recently. The critical or contrary view holds that a high minimum wage (not exceeding productivity) is counter-cyclical, raises demand in times of economic downturn, and secures better match between skill and job. Efficiency wage has earned respectability, though not fully replacing the classical view. (George Akerlof and Janet Yellen researched efficiency wage hypothesis to show that the employers pay more than market wage and the workers contribute more than marginal output equalling wage, which is explained by the problem of fully specifying contract, monitoring actual contribution, job-specific skill acquired by existing workers, cost of search for new workers by employer, and cost of search for new jobs by worker.)    
The labour market comprises three distinct segments: the rural and agricultural labour market; the rural and urban/industrial informal labour market; and the formal industrial labour market. The agricultural labour market and the informal labour market (rural and urban) hold the reserve army of workers. The informal labour market serves also as the mechanism for transition to the formal urban/industrial market.
Compensation and reforms of the labour market must not constrain mobility of labour progressively from the agricultural and informal market to the expanding formal industrial employment. Training of the workers in the informal market enhances their capacity to transfer to the formal market. Labour aristocracy tends to obstruct structural reforms even when most needed.
WAGE BARGAIN AND FLEXIBLE LABOUR MARKET: Flexible labour market is tied up with wage bargaining procedure. Europe is known for rigidity of labour market; USA is known to have the most flexible labour market, and goes around the world preaching flexible labour market.
Germany addresses the rigidity of the labour market by tripartite management structure (industrial democracy) and by industry-wide wage negotiation, which together moderate demand for wage hike. Wage increase makes very moderate contribution - if at all - to inflation in Germany.
 In Britain, wage negotiation takes place at factory- or plant-level, which strengthens demand for wage hike and does not consider the economy-wide impact. Industrial relations in Bangladesh is designed largely on the British model. Large wage hike is considered to make strong contribution to inflation in UK. Prime Minister Thatcher adopted a swath of legislation which weakened trade union in Britain; the successor Labour Government did not change that.
In the USA, the typical wage bargain is conducted between the lead industrial group or plant and the lead trade union for the sector. The settlement is taken as the model and adapted to other units suited to the conditions of the specific industrial plant, location, etc. The vast size of the country and the juridical competence of states to legislate on trade union and minimum wage facilitate labour market flexibility. Above everything else and most importantly, secular growth of the economy and structural transformation towards knowledge-based service industry have significantly reduced trade union participation.  
SOCIAL INSURANCE PILOT PARALLEL OR ALTERNATIVE TO CORPORATE SOCIAL RESPONSIBILITY: Social insurance has been emphasised as a method for private financing of social security - insurance in particular over and above the public provision. Given the scale of poverty and inadequacy of the basic provisions, it is likely that the basic provisions will be made by Government on a large scale.
However, social insurance may be tried on a pilot basis with participation of selected enterprises. For a start, for these enterprises social insurance may be parallel or alternative to corporate social responsibility with slightly more generous allowance for contribution and better tax break. (Treated as part of wage, the contribution is an expense and may get full benefit as tax expense or tax credit.) An expanded or full-blown social insurance is deferred until further examination by a Commission, however.
NEGATIVE SOCIAL EXTERNALITIES OF INVESTMENT BY INSURANCE INDUSTRY IN URBAN LAND AND REAL ESTATE: The opportunities for investment should be examined. Currently, the funds available after compulsory investment in government approved securities (about one-third) are put in term deposit, urban land and real estate, and perhaps stocks. The dearth of good stocks and volatility of the market makes investment in urban land and real estate highly attractive, the value of which appreciates faster than any other financial or tangible asset. Investment in land and real estate is likely to exacerbate the bubble further, which will make housing unaffordable for most people. Here is a dilemma that should be carefully examined: profit to the insurance industry from investment in urban real estate causes negative social externality.
TAX REVENUE TO RISE IN TANDEM WITH ACTUARIAL CLAIM IF SOCIAL SECURITY IS PAID FROM CURRENT RECEIPTS: In many countries social insurance receipts are merged with revenues and the claims are met from current revenues. The problem of social security payment connected with ageing population arises from the fact that the receipts were not maintained separately. As the working age population shrinks, the burden of social security payment on current income and government revenues rises. If social insurance claims are to be met from current tax revenues, the latter has to increase in tandem with payments into social security scheme and rise of actuarial claims.  
MINISTRY OF SOCIAL DEVELOPMENT NOT NECESSARY, FINANCE DIVISION OR PREFERABLY PLANNING COMMISSION, WITH RE-TOOLING, MAY ALLOCATE, COORDINATE, ETC.: Creation of a Ministry of Social Development (MSD) and the National Social Security Agency (NSSA) seems unnecessary. It may be even counterproductive, particularly as the focus on women and children is likely to be buried under the load of other responsibilities. MSD will be responsible for planning, programming - more likely for programme certification - allocation, coordination, etc. Finance Division or preferably the Planning Commission may continue to do these functions; in either case substantial "re-tooling" will be necessary.
SEPARATE UNIT IN PLANNING COMMISSION FOR NSPS: Establishing a separate unit for NSPS in Planning Commission may be considered, given its importance and the magnitude of expenditure. The unit may start with as a Division. GED (General Economic Division of the Planning Commission) may not get involved in the programmatic or operational details of NSPS but deal with the sectoral / structural issues impinging on macroeconomic performance and stability. That will allow GED to allocate more time and energy to the macroeconomy, take a more dispassionate view, and enhance Planning Commission's role in policymaking.
SEPARATE M&E FOR NSPS, OUTSOURCING OF MAJOR EVALUATION AT INTERVALS: A separate unit for monitoring and evaluation of NSPS along with provision for periodic out-sourcing for major evaluation may be considered. IMED's monitoring is of proprietary audit type plus occasional review of technical/engineering failures. The monitoring of NSPS need to focus on economy, efficiency and, most importantly, impact that should feed into improvement of design and implementation of NSPS.
The type of monitoring suggested for NSPS requires specialized skills that will be needed at intervals of a few years - say every third or fourth year for preparing the next round. While a relatively small unit may conduct the routine monitoring - namely annual expenditure, propriety - and accumulate data, the more comprehensive evaluation may be out-sourced. A variety of high professional skills is necessary for the comprehensive evaluation and programme redesign. It will be wasteful for the government to hire these persons on a permanent basis and keep their skills under-utilised.
SOCIAL SECURITY FOR A LOW-INCOME COUNTRY: Any social security scheme must not ignore the fact that it is designed for a low-income country where poverty is widely spread though shrinking rapidly; basic social services such as health and public health in particular, education and skill training are insufficient; physical infrastructure are inadequate and constrain growth as well as quality employment. The focus on removing the insufficiencies may not be missed. Expansion of the basic services and provision of the infrastructure will enhance growth and enable expansion of social security. Social security financed by budget transfer and by raising cost to the employer may generate a ratchet of backlash both economic and political.
PRODUCTIONIST SOCIAL INVESTMENT STATE MODEL: If I were granted indulgence to suggest a framework, I would possibly name it 'productionist social investment state model', focused on basic services and infrastructures, and consistent with fiscal responsibility and macroeconomic stability.
The following would be the main components and contexts of the model:
i. Financing of social security from budget should keep pace with robust and secular growth of revenue from the major taxes - namely IT, CD, VAT and SD - to at least 15 - 18 per cent - accompanying high growth at 6-7 per cent. Government may adopt a rule that a larger proportion of incremental revenue shall be allocated to poverty alleviation or social security. That will keep the overall budget expenditure within specified limit while allowing growth at higher rate for social expenditures.
ii. Government may set limit on deficit financing by domestic borrowing and aid as well as foreign borrowing. Current level of deficit financing at 5.0-6.0 per cent of GDP, split almost equally between domestic and foreign aid and borrowing, is within safe limit. There is perhaps some headroom for domestic deficit financing, given the extent of unemployment (4.5- 5.0 per cent of GDP ) and more importantly disguised unemployment (some 30 per cent), subject to containment of monetary expansion and quality of expenditure.  
iii. The core poverty alleviation and social security programmes may avoid excessive dependence on foreign aid. The development partners often are led by their experiences and judgments which may not reflect adequately our realities and needs - worse still they may not provide assistance or discontinue in the event of disagreement. The development partners may contribute to common programmes as to Health and Nutrition Programme on a long term basis, not discrete projects over medium term.  They may bind themselves not to withdraw in mid-course. Dependence of social security expenditures on foreign aid gives the development partners undesirable political leverage.
iv. Public expenditure should focus on investment in physical infrastructure and utilities which remove constraints on growth, human capital, social development, and employment generation. A balance needs to be maintained between reducing inequality now by stressing current transfer, on one hand, and equality to be attained progressively through employment, income generation, and extension of basic services. The second strategy takes a while to produce result, but has greater sustainability and durability. Earnings from employment satisfy better the sense of human dignity than dole.
v. Private financing of social security may be phased in, keeping in view the capacity of the entrepreneurs to bear the additional cost. However, the Commission as suggested by the Report and consultation with the entrepreneurs and the insurance industry may commence early. Investment opportunities which avoid asset bubbles, urban land and real estate in particular, should be carefully investigated.
Dr. Mashiur Rahman is Economic Adviser to the Prime Minister. The article is based on his observations on NSPS at the Planning Commission on February 16, 2014.  
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