Policy Implications

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Government provision of social insurance and social assistance and the labor market regulations that support them affect all dimensions of the modern economy. Social protection systems should therefore be understood as integral components of the general policy framework of countries’ economic development.

Social protection both mitigates the shorter-term impacts of shocks and promotes longer-term economic recovery and economic growth. To achieve these objectives, social protection systems need to become adaptive and inclusive. This kind of transformation is particularly important given the changes in employment that technological changes and globalization have driven, and the significant job reallocation that the green transition will require.

Faced with the systemic shock of the COVID-19 pandemic, countries took unprecedented steps to shield individuals and households from catastrophic welfare losses. All regions and countries expanded income support programs, although the expansion of their coverage was heterogeneous. In ECA, a large share of the economic stimulus budget was also channeled through firms in the form of job protection programs. The empirical evidence suggests that job protection programs may have been effective in achieving these objectives in the short term. These programs may also have created labor market frictions that reduced labor reallocation from less productive to more productive firms, however. They may have also left some groups of the population uncovered, particularly those in informal or nonstandard jobs. The social protection systems of ECA proved resilient in their ability to quickly expand their reach in the face of unexpected shocks, such as the displacement of millions of Ukrainians and the soaring food and energy prices that accompanied the conflict. Their role in promoting economic recovery is less clear.

Beyond the immediate challenges brought about by the pandemic and the consequences of the war in Ukraine, long-term labor market transformations may make social protection systems less inclusive. Social policies structured around job protection may leave a growing share of the labor force unprotected, as nonstandard forms of employment become more prevalent and job tenure declines. Nonstandard forms of employment are more common among women, people with little education, and youth; traditional social protection systems risk leaving these vulnerable groups unprotected.

Combining job protection policies with programs that protect the incomes of broad groups of the population might be optimal in shielding them from adverse shocks and promoting long-term economic recovery and sustainable growth. This blended approach could be based on publicly financed policies such as a guaranteed minimum income (Deeming 2019), a negative income tax scheme (Friedman 1962), or a universal basic income program (Ravallion 2019), all of which are designed to protect people from catastrophic losses regardless of their employment status or type of job contract. At the minimum, these programs should be means-tested to ensure they reach the poorest and those who face an adverse shock. This kind of approach may represent a significant departure from the way social protection systems are organized in many countries in the region,

Chapter 2: Social Protection for Recovery

where categorical, non-targeted benefits (disability benefits, birth grants, social pensions, war-veteran benefits, and to utility subsidies) represent the bulk of social assistance spending. Among these countries are Azerbaijan, Bosnia and Herzegovina, Kazakhstan, Kosovo, the Kyrgyz Republic, Moldova, Serbia, and Ukraine. Pro-natal categorical programs, which have yet to show evidence of their effectiveness in increasing fertility, take up a substantial part of the social assistance budget in Serbia and were also substantial in North Macedonia before they were phased out in 2019, as explained later.

Category-based systems are not able to provide a minimum coverage against adverse economic shocks because, by definition, they are rigid, and, moreover, the categories which organize the system may not correlate with the factors that drive income loss in a given shock. The COVID-19 shock is particularly relevant in this regard: the characteristics of the people falling into poverty as a result of the pandemic differed from the characteristics of those who were already poor (World Bank forthcoming). In Moldova, for instance, those who became poor were more likely to be employed and in the industry and services sectors, while those that were already poor were mostly self-employed and in the agriculture sector (World Bank 2021c).

Means-tested benefit systems, while a priori more capable of reaching the poor than categorical ones, also need to incorporate flexibility into the targeting scheme by design. Social protection systems can also be made more adaptive by setting out in advance the rules that would guide any changes, such as modifications to eligibility criteria, system procedures, and benefit amounts that a sudden shock would necessitate. Otherwise, targeted, means-tested programs may end up suffering from similar rigidities than those of categorical, non-means-tested ones. In both entities of Bosnia and Herzegovina, for instance, legislation didn’t allow the expansion of social assistance programs in a timely manner when the pandemic shock hit, and therefore the government of Republika Srpska implemented a one-off solution to address the immediate needs of income support. Updating the legislation to allow for flexibility on eligibility rules in extraordinary circumstances would give social protection systems the possibility to quickly expand when needed.

A successful example of moving away from a category-based social assistance system towards one where actual household income determines the receipt of benefits is the reform package implemented by North Macedonia in 2019. This reform package’s main initiative was the creation of the Guaranteed Minimum Allowance (GMA), which consolidated the fragmented, often overlapping benefit schemes that were in place before the reform. In terms of payments, GMA is a targeted program that provides the difference between household income and an established minimum income threshold. The implementation of the 2019 reform package is leading the country to improve the coverage and adequacy of social assistance spending (World Bank 2022a).

Some countries in the region have gradually started moving in a similar direction. Partly with the support of the World Bank, Tajikistan has implemented the Targeted Social Assistance (TSA) scheme, which was signed into law in 2018 and achieved national scale in mid-2020. The TSA program covers close to 15 percent ● 99

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of the households in the country, which is close to the extreme poverty line. The benefit level remains relatively small, but it was recently redefined in a way that allows its regular annual indexation. The country could look into introducing differentiation in the benefit level, so it can be linked to family composition, specifically the number of children, to make the assistance more meaningful. Romania’s guaranteed minimum income program (VMI, for its acronym in Romanian) faces similar challenges, given its low coverage and low adequacy. Türkiye has been able to respond strongly to the pandemic shock thanks to both its emergency measures and its social assistance system relying on targeted benefits managed effectively through an integrated registry of beneficiaries, though, at the same time, the country still has a large number of categorical benefits and would benefit from moving to a more comprehensive and unified targeting system. Uzbekistan is still in the process of consolidating its social assistance programs, helped by the creation of two new administration systems: the Single Social Registry (SSR) and the Labor Market Information System (LMIS), which should be fundamental for the implementation of a single evidence-based framework of targeted support. Other countries in ECA that have made important progress in moving to a means-tested benefited system are Albania, Armenia, and Montenegro.

Job losses and transitional unemployment should be insured by national unemployment income support programs instead of employer-provided arrangements such as severance pay, which is suboptimal from a risk-pooling perspective (Packard and others 2019). Generous severance payments may distort firms’ labor choices, by deterring formal hiring. Broad unemployment income support programs, financed from mandatory individual savings and complemented by public funding, are less distortionary and more protective. Countries that currently do not have an unemployment insurance program should consider setting one up. Armenia, Georgia, and Kosovo, which do not have unemployment insurance schemes, implemented programs to compensate job losses during the pandemic with generally low and of short duration benefits (World Bank forthcoming a). Other countries, like Albania, Kazakhstan, and Serbia, have unemployment insurance schemes but with demanding eligibility criteria and, in some cases, low benefit levels, which result in extremely low take-up rates for the allowance. The unemployment insurance schemes have, therefore to be meaningful to be effective.

When such measures are in place, governments can adapt their social protection policies to rapidly changing labor market conditions by implementing regulatory reforms that gradually remove restrictions on firms’ hiring and dismissal practices. Uniformly enforced regulations protecting workers, irrespective of their work arrangements, against abuses by employers and hazardous working conditions will guarantee that more flexible labor markets will enhance workers’ welfare. Modernizing labor regulations and institutions may also enhance the creation of formal jobs in the private sector and reduce informality.

Social protection systems need to be able to address the challenges of the green transition. When entire sectors or types of jobs disappear, employment-based insurance schemes cannot provide adequate protection to the affected groups of

Chapter 2: Social Protection for Recovery

the population. Social protection programs will play a key role in identifying and assisting individuals who are harmed by the green transition (World Bank forthcoming b). Employment assistance programs and other active labor market policies—such as skills training, entrepreneurial support, and intermediation—can be helpful when well-designed. Doing so is no easy feat, however; many active labor market programs in developing countries are not effective (McKenzie 2017). Evidence from high-income countries suggests that some programs, particularly those aimed at improving workers’ human capital, may increase employment rates in the long run (Card, Kluve, and Weber 2018). New evidence also shows that sectoral employment programs can be particularly effective when they provide training for transferrable skills and help place individuals in highwage sectors (Katz and others 2022). The private sector could play a role in subsidizing training in sector-specific skills. Active labor market policies like these can also help integrate those displaced by other shocks—like, for instance, Ukrainian refugees in Poland, Syrian refugees in Türkiye, or return migrants in the Kyrgyz Republic, who are currently not being adequately profiled in terms of their skills and qualifications by the public employment services.

Successful implementation of inclusive and adaptive social protection systems requires digital tools to manage the massive amounts of administrative data involved and monitor people’s welfare. Countries in ECA need to harness digitalization to improve their capacity to deliver services effectively (World Bank 2021a). Even where administrative data allowing for better targeting of social protection programs exist, governments may not have an integrated system that allows different agencies to share the information under their control. This is the case, for instance, of Croatia, where the social protection system is composed of different programs without an integrated administrative system. Bulgaria and Romania could also benefit from the creation of a proper case management system to enable social care services to reach those in need.

The effectiveness of new systems will depend on the alignment of the incentives bureaucrats face to minimize errors of inclusion and exclusion. Bureaucrats often try to minimize errors of inclusion because public opinion is usually more sensitive to including ineligible individuals than excluding people who should have received benefits (Rose-Ackerman 1986). From a welfare point of view, however, errors of exclusion may be more costly than errors of inclusion. A scheme in which the agency distributes the benefits differs from the one that identifies beneficiaries could split the reputational risks of bureaucrats, reducing the bias toward minimizing errors of inclusion. It could be complemented by actively monitoring the program’s performance in welfare outcomes through regular household surveys carried out by a third agency. In this sense, a common challenge throughout the region is the lack of activities aimed at monitoring and evaluating the effectiveness of social protection programs.

Lastly, for social protection systems to be inclusive, addressing the demandside challenges many of these systems face is essential. Marginalized communities in ECA struggle to access both social assistance and social services. Challenges include the lack of information and the low coverage or unavailability of social services in marginalized communities and lagging regions. Evidence ● 101

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moreover shows that some marginalized, poor and vulnerable citizens, who need support the most, end up not applying at all due to discouragement, suspicion, poor information about entitlements, difficulties with administrative procedures, or discriminatory treatment by administrative counterparts and service providers. Therefore, enabling inclusive social protection systems requires a thorough review of the systemic and institutional practices that may improve the ability to reach vulnerable groups. Social accountability and feedback mechanisms need to be established to improve access, quality, quantity, and relevance of the services the most vulnerable population groups need and entitled to.