Social Policies in ASEAN: Economic Impacts

SOCIAL POLICY REFORMS IN ASEAN:

SOME CONSIDERATIONS

ADBI Annual Conference

4 December 2009, Tokyo - Japan

Gloria O. Pasadilla

Research Fellow, ADB Institute

Prayoga Wiradisuria

Research Associate, ADB Institute

I. SAVINGS IN ASEAN

II. SOCIAL PROTECTION IN ASEAN

III. ECONOMIC EFFECTS OF SOCIAL PROTECTION SPENDING

IV. SUMMARY AND CONCLUSION

10

15

20

25

30

35

40

45

50

55

1990

1992

1994

1996

1998

2000

2002

2004

2006

GD

P (

%)

East Asia & Pacific

Europe & Central

AsiaEuro area

Latin America &

CaribbeanSouth Asia

Sub-Saharan

AfricaASEAN

5

10

15

20

25

30

35

1990

1992

1994

1996

1998

2000

2002

2004

2006

GD

P (

%)

High income

Middle income

Low income

ASEAN

HOW BIG IS ASEAN’S SAVINGS?

Compared to

other regions like

Latin America or

Europe, ASEAN

savings is fairly

high…

Sources: ASEAN-5 data is referring to Gross National Saving as percentage of GDP taken from ADB

Statistical System. Other data is using Gross saving as percentage of GDP download from

the World Bank’s World Development Indicator Database. Authors’ calculation.

…and around the

same level as the

average for middle

income countries

ASEAN-5 Saving rates in comparison

051015202530354045

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008GDP (%) IndonesiaMalaysiaThailandPhilippinesVietnamASEAN (avg)

SAVINGS MAGNITUDE WITHIN ASEAN HAD VARIED

Individual

countries in

ASEAN had

followed different

savings path

Source: ADBI Statistical Database System, downloaded 1 November 2009, authors’

calculation

ASEAN-5 countries saving rates

Philippines

8.3% 9.2% 8.7%

0.6%

7.7%

3.3% 2.9% 1.9% 1.9% 2.2%

-2%

0%2%

4%6%

8%

10%

12%14%

16%18%

20%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008S

avin

g t

o G

DP

ratio

Government

Corporations

Households

Thailand

10.1%8.5%

7.2%5.0%

3.6% 3.9% 4.5% 4.2% 5.0%7.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Savin

g t

o G

DP

ratio

Government

Corporations

Households

HOUSEHOLD SAVINGS, HOWEVER, IS NOT UNIFORMLY RESPONSIBLE FOR THE OVERALL HIGH NATIONAL SAVINGS

Corporations saving is composed of both private and government corporations.

Sources: CEIC Data Company Ltd, downloaded 2 November 2009, authors’ calculation

… meanwhile in Thailand,

corporate saving has

increased over the years

and is now responsible for

one third of total saving

In the Philippines saving

contribution has been

constantly and largely

dominated by corporations

since 2002…

Selected ASEAN-5 countries’ saving compositions

3%US

0%Australia

10%Korea, Rep

4%Philippines

17%Indonesia

9%Thailand

Average household saving as percentage of household disposable income

Country

HOUSEHOLD SAVING AS SHARE OF HOUSEHOLD DISPOSABLE INCOME SUGGESTS CONSIDERABLE DIFFERENCES WITHIN ASEAN

Note: Averages of yearly data of 2004-2008 period for Thailand, Philippines,

Republic of Korea, and US. Averages of 2003 and 2004 for Indonesia.

Australia experienced negative household saving rates in 2004 and 2005 and

positive from 2006 onwards.

Australia’s and Republic of Korea’s Yearly data are averages of quarterly data.

US yearly data is average of monthly data.

Source: CEIC Data Company Ltd, Downloaded 2 November 2009, Indonesia data is

obtained from Santoso and Sarie (2007), authors’ calculation.

While households in

Indonesia and Thailand

seem to have a relatively

larger space to increase

their consumption by saving

less, households in the

Philippines has less elbow

room

Household saving as percentage of household disposable income for

selected countries

Household Final Consumption Expenditure and General Government Expenditure

as percentage of GDP in 2007

HOUSEHOLD CONSUMPTION HAS LEFT LITTLE SPACE FOR EXPANSION

3345

56 54 62 61

57 5857

7670

60

0

10

20

30

40

50

60

70

80

90

100

Chi

naM

alay

sia

Indi

aTha

iland

Vie

tnam

Indo

nesia

Japa

nG

erm

any

Franc

eP

hilip

pine

sU

nite

d Sta

tes

ASE

AN

Household

Government

30

35

40

45

50

55

60

65

70

75

80

85

90

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

China

Indonesia

Thailand

Vietnam

Malaysia

Philippines

ASEAN

Source: World Bank’s World Development Indicator Database, downloaded 1 November 2009

Household Consumption as share of GDP (%)

The share of private

consumption to GDP in

this region is already

markedly higher than

other countries private

consumption share..

… and some ASEAN

members might actually

need to reduce their

consumption instead of

increasing it

I. SAVINGS IN ASEAN




●●●●●Vietnam

●●●●●●●●●Thailand

●●●●●●●●Philippines

●●●●Myanmar

●●●●Malaysia

●●Lao PDR

●●●●Indonesia

●●Cambodia

87654321

Micro and Area-Based SchemesSocial InsuranceSocial Assistance

Country

Note: 1) Old age, disability, death insurance; 2) sickness, maternity insurance; 3) medical care; 4) work injury; 5) micro insurance; 6) agriculture insurance; 7) disaster management; 8) social fund

Source: Soeharto (2007)

ASEAN COUNTRIES HAVE MANY DIFFERENT SOCIAL PROTECTION POLICY PROGRAMS

0.19

0.2

0.33

0.36

0.38

0.45

0.46

0.47

0.57

0.6

0.76

0.96

0 0.2 0.4 0.6 0.8 1 1.2

Cambodia

Philippines

Indonesia

Malaysia

Viet Nam

China

India

Sri Lanka

Uzbekistan

Mongolia

Korea

Japan

BUT IN TERMS OF OVERALL SOCIAL PROTECTION STAND, MOST ASEAN COUNTRIES ARE RELATIVELY BEHIND OTHER COUNTRIES

Social Protection Index (SPI) of Selected Asian Countries

Source: ADB, Wood 2009

1.4%

1.9%

2.2%

4.0%

4.0%

4.1%

4.6%

5.7%

7.5%

9.8%

11.1%

16.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

Cambodia

Indonesia

Philippines

India

Malaysia

Viet Nam

China

Sri Lanka

Korea

Mongolia

Uzbekistan

Japan

IN TERMS OF EXPENDITURE, SOCIAL PROTECTION IN ASEAN HAS RECEIVED RELATIVELY LESS ‘ATTENTION’

Overall social protection expenditure (Government, NGO, private sector)

as percentage % of GDP


71%

90%

79%

50%

84%

60% 60%

8%

7%

10%

26%

20%

4%

4%

27%

6%

20%

12%3% 17% 14%

1%7%

0%

20%

40%

60%

80%

100%

Indo

nesia

Mal

aysi

a

Phi

lippi

nes

Vie

tnam

Chin

a

Indi

a

Korea

Child Protection

Micro Area based

Social Assistance

Labor market

Social Insurance


Distribution of overall social protection expenditure by social

protection components

A CONSIDERABLE VARIATION IN SOCIAL PROTECTION EXPENDITURE DISTRIBUTION CAN BE OBSERVED AMONG ASEAN COUNTRIES

ASEAN SOCIAL SECURITY PROFILES (1/2)

Compulsory to all employers employing one or more workers; Compulsory for workers who earn no more than RM2000/month.

Defined BenefitsEmployment injury, occupational diseases, invalidity, death

Social Security Organization (SOCSO) (1971)

Compulsory: private employees and non-pensionable public sector employees;Voluntary: self-employed, domestic helpers, foreign employees, pensionable public sector

Defined Contribution

Retirement benefits, pre-retirement benefits, death, incapacity, members’ investment program

Employees Provident Fund (EPF) (1951)

Malaysia

Compulsory for enterprises with 10 or more employees or payroll of at least 1 million Rp a month

Provident fund/ Defined Contribution

Health care benefits, work accident and death insurance

JAMSOSTEK (1977)

Government civil servants

Provident fund/ DC Defined Benefits

Lump sum payment:

invalidity, death, retirement, separationPension (1981): retirement, survivorship, invalidity

TASPEN (1963)Indonesia

CoverageType of SchemeBenefitsOrganizationCountry

CoverageType of SchemeBenefitsOrganizationCountry

Mandatory for all enterprises (private and state-owned);Voluntary for small enterprises (less than 10 employees)

Defined BenefitsPension and death benefits, sickness, maternity, and occupational accidents/ diseases

Social Security Organization (1995)

Vietnam

Compulsory for large private enterprises (10 or more employees)

Defined BenefitsSocial security (medical, sickness, maternity, invalidity, death); survivorship, disability, survivorship, funeral; Pension – added in 1999

Social Security Office (SSO) (1990)

Thailand

All private and public employees and self-employed

Provident fund/ Defined Contributions

Retirement, health care, homeownership, family protection, asset enhancement

Central Provident Fund (CPF) (1953)

Singapore

All public employees;Voluntary for former public employees that have resigned or retired early from government service

Defined BenefitsPension and insurance: retirement, disability and death, unemployment, sickness, loan windows, optional life insurance

Government Service Insurance System (GSIS) (1937)

Compulsory for private employees and self-employed below 61 yrs old;Voluntary: Overseas workers, non-working spouses of members, employees under foreign government; separated members from employment

Defined BenefitsPension and insurance covering sickness, maternity, disability, retirement, death, medical care, accident; allows borrowing privilege

Social Security System (SSS) (1954)

Philippines

ASEAN SOCIAL SECURITY PROFILES (2/2)

ASEAN Social Security Profile

• Social security schemes in ASEAN contains not only retirement benefits but other insurance components: medical care, death benefits, unemployment, etc.

• Singapore, Malaysia, Brunei, and Indonesia have provident funds (defined contribution scheme); the rest have PAYG schemes (defined benefit)

• Coverage varies: social security is not mandatory for all firms of all sizes

26.016.212.925.642.1Viet Nam

32.030.424.443.857.3Thailand

63.027.118.750.463.0Philippines

48.015.511.132.856.0Indonesia

68.049.632.276.285.2Malaysia

100.076.245.286.099.6Singapore

27.07.25.710.420.3Lao PDR

15.035.622.258.259.6Sri Lanka

16.0-2.5-32.7Nepal

57.039.623.639.360.1Mongolia

81.0--66.491.9Korea

29.09.15.7-33.2India

40.020.517.2-53.1China

20.0--12.929.6Cambodia

Percentage of labor force

Percentage of population 15-64

Percentage of urban

population

Coverage ratePercentage of wage earners in

the total working

population

Percentage of non agricultural workers in the total working

population

Source: Yamabana (2009)

COVERAGE RATE OF SOCIAL SECURITY PENSIONS/SAVING

Source: ILO Social Security Expenditure Database, authors’ compilation

CONTRIBUTION

Social security reform is constrained by the increased burden on employers who normally take the larger share of contributions.

17%

19%

20%

4%

6%

5%

7%

5%

8%

12%

13%

Aged 15-64Aged 0-14

69%18%Canada

65%18%France

67%14%Germany

66%

Indonesia

Japan

67%21%United States

71%21%China

63%32%Malaysia

69%24%

65%30%Viet Nam

66%28%

14%

61%35%Philippines

Aged 65+

Thailand

51

52

75

70

47

77

69

61

68

64

74

Ø 64

63

50

51

42

54

40

49

53

50

54

44

Ø 50

7

9

9

10

7

11

19

32

30

25

19

Ø 16

1.00

0.70

-0.03

0.07

0.93

0.60

1.87

0.87

1.10

1.33

1.77

Ø 0.9

2.6

1.8

1.6

1.9

2.1

2.2

1.3

1.3

2.1

3.1

Ø 2.0

1.8

Population structure based on age

(% of total, 2005)

Labour force to

population ratio1

Old-age

Dependency

Ratio3

Population

Growth4

(Annual, %)

Total

fertility5

(children

per woman)

Dependency

ratio2

Population structure based on age

(% of total, 2005)

Labour force to

population ratio1

Old-age

Dependency

Ratio3

Population

Growth4

(Annual, %)

Total

fertility5

(children

per woman)

Dependency

ratio2

1Average of 2005, 2006, and 2007 data2Average of 2006, 2007, and 2008 data. Aged <15 and 65+ in proportion of 15-64 years old3Average of 2006, 2007, and 2008 data. Aged 65+ in proportion of 15-64 years old.4Average of 2003, 2004, and 2005 data.5Average of 2007, 2008, and 2009 data.Source: World Bank’s World Development Indicator, downloaded 9 October 2009, authors’ calculation

PRESSURES FOR REFORM IN SOCIAL SECURITY ARRANGEMENT (1/2)

For the moment, the old-age dependency ratio is low but the trend points to increased aging of the population due to low population growth and longer life span.

7.7

7.8

7.98.0

8.1

8.38.3

8.48.5

7.2

7.4

7.6

7.8

8

8.2

8.4

8.6

2000 2001 2002 2003 2004 2005 2006 2007 2008

ASEAN-5: Indonesia, Malaysia, Philippines, Thailand, and Vietnam.Source: ILO Social Expenditure Database, downloaded 1 November 2009

ASEAN-5’s Increasing Old-age Dependency Ratio

NEED FOR REFORM IN SOCIAL SECURITY ARRANGEMENT (2/2)

Source: UN World Population Prospect (2008 Revision), Population Database, authors’ computations

ASEAN-5 Old-age Dependency Ratio

0%5%10%15%20%25%30%35%

Indonesia Malaysia Philippines Thailand Viet Nam2000201020302050

PROJECTION OF OLD AGE DEPENDENCY RATIO UP TO 2050

I. SAVINGS IN ASEAN




• The policy to reform social protection spending has to be evaluated for its overall impact on the economy. There could be conflicting incentive forces at play on one side and competitions for limited resources on the other.

• Striking the optimum level is sometimes more normative than purely economics

• Studies on overall social protection spending impacts on various aspects of the economy are limited

• Much of the literature has been devoted to the effects of social insurance, pension systems in particular, and less on the other elements of social protection.

• The paper focused more on impacts of social insurance

What to consider

What the literatures provide

ON ECONOMIC EFFECT OF SOCIAL PROTECTION SPENDING

THE EFFECTS ON LABOR SUPPLY

• To the extent that social insurance is usually financed through contributions or ‘payroll tax’, labor supply distortion arises from the tax imposition.

• In OECD, significant evidence of adverse incentives where older workers stop working earlier than the mandatory retirement age, effectively reducing the potential productive capacity of the labor force

• By design, early retirement opportunity was to give room to new entrants in labor force, but no corresponding reduction in unemployment rates had resulted from old workers’ early exit

Labor supply distortion from tax

Early retirement

Social assistance • (Moffitt, JEL1992): beneficiaries of the social assistance do not ‘graduate’ to become self-sufficient but rather stay on as ‘permanent’ recipients of what ought to have been temporary assistance .

PRIVATE TRANSFERS AND PRIVATE INSURANCE

• In countries where state-based (social security system) or market-based (formal credit markets) economic support is limited, family transfers constitute a major source of householdincome. Private transfers, however, have been found to have been crowded out by public social welfare expenditure.

• Medicaid coverage expansion has resulted in workers reducing their own private insurance coverage (Cutler and Gruber, QJE 1996).

Private transfers

Private insurance

Government’s attempts to alter the distribution of economic well-being can be

thwarted by private behavioral responses (Cox, et. al., JPE 2004)

SAVINGS, CONSUMPTION, AND DEMAND (1/3)

• Increase contribution rate (to improve sustainability)

• Expansion to informal sector (to increase coverage)

Negative short-run impact on consumption due to reduction in disposable income

Positive impact particularly on the informal sector labor-headed household due to rising expected social security wealth

Reforms can

effect both

ways

Theoretical Social insurance impact depends on assumptions of individuals saving motivation, financial market development, labor supply assumption and other factors.

Type of reform will affect the direction of impact on savings and consumption.

• Consumption smoothing motive in basic life cycle model, fixed LS (Diamond, 1965)

• Labor supply is not fixed

• Bequest and precautionary motive

SS has no effect on aggregate saving

SS effect on private savings depends on income and substitution effect; aggregate savings may increase

SS has positive result in aggregate saving

Case Impact

Case Impact

• Education

• Income

• Vintage effect

• Age

• Household size

• Existence of occupational pensions; Urban vs rural

• Liquidity constraint

The better educated and relatively well off have stronger saving reduction in response to public pension

Low income HH saving is not affected by pension provision

Different generations have different saving propensity

Old people save less

Bigger size, smaller displacement of saving by SS

Higher displacement for state employees and self-employed as well as for urban dwellers.

Size of impact depends on constraint but sign is ambiguous

Empirical

Cross-sectional study results provide glimpse of possible cause country variations

Factors Impact

Mixed empirical result of effect of SS on aggregate savings but when the expected change in pension wealth is large, a negative relationship with savings is more perceptible. However the offset between private savings and pension is imperfect and magnitude of increase in aggregate savings varies across countries (Kohl and O’Brien, OECD 1998)


• Specific impact on private savings and aggregate savings will still

depend on the specific design of the reform

• Social insurance policy reforms in ASEAN will likely be undertaken

not in response to short-term macroeconomic policy concerns but in

response to demographic considerations.

• In contrast, social assistance has a different effect on the economy

and may be a useful countercyclical policy due to its more immediate

effect on savings and consumption.


• In pure lifecycle model where young have higher MPS, redistribution

via PAYG (from young to old), results in lower savings, capital stock,

and growth

•Other studies highlight insurance aspect of social security that

helps increase welfare

Investment, Growth, and Welfare

• Theoretical impact of SS coverage extension to informal sector labor: K Y but magnitude of effect on output depends on financing source (higher impact if government use capital vs. consumption tax)

• Effect on welfare differs whether it is a HH headed by informal labor (+) or HH headed by formal labor (-).

• Implication: net welfare change of SS extension

depends on inequality; more unequal (higher informal sector), the higher the net welfare effect (i.e. the

redistribution and insurance function dominate the savings and labor distortion

• Potential policy trade off in between welfare and growth

• However, social security or social safety nets are not the only way to

address high income inequality

•While inequality has a long-term negative relationship with growth,

inequality in assets rather than inequality in income has greater influence on

growth (Deininger and Squire, 1998)

•Accumulation of new assets is recommended than redistribution of existing

assets is recommended if redistribution will cause investments to go down

•education and human capital investments or microfinance are investment-

oriented policies that are beneficial to the poor while not being detrimental to

long-term growth

•Government should focus more on social sector expenditures

(education, health) instead of social protection exp?

Investment, Growth, and Welfare

I. SAVINGS IN ASEAN




SUMMARY & CONCLUSION

• Not all countries in ASEAN are in a position to boost private

consumption because: 1) their savings ratios are not really that high

compared to other countries in East Asia; and 2) private consumption

is already a big component in total domestic demand, that further

increase may render them vulnerable to macroeconomic volatility

• Reforms or changes in social protection schemes will seem to be

driven more by “natural” factors such as the aging population, low

population growth, urbanization, and the fraying of family ties /

informal support, than short-term countercyclical policy consideration

• There are important multi-faceted trade-offs that social protection

expenditures impinge on an economy which policy makers need to

consider in the design of any social protection reforms

Thank you

Social Policies in ASEAN: Economic Impacts

Education

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