Unravelling the myth that is social welfare

Social welfare is a touchy subject. If the concept of social welfare payouts is expected to adhere strictly to economics textbooks, then the outcomes are considerably undesirable. Yet, time and time again, the human element has proved this stark outlook false.

First of all, it is important to understand just how broad the term ‘social welfare’ truly is. Social welfare payouts consist of, but are not limited to, old-age allowance, maternity allowance, single-parent allowance, and then going on to job security allowance (that which was distributed following the invasion of the Covid-19 pandemic that forced thousands out of work in the Maldives), as well as ‘food stamps’ for the impoverished. 

These payouts are meant to support those who need an extra push, those who are unable to work (due to health, disabilities, maternity responsibilities) or those who are unable to find work due to the job market unavailability. In short, this compartment of national or state economic policy is to assist in ensuring everyone gets the support they need to live a decent life without being forced into poverty.

Another facet of social issue that this helps fix is narrowing the income disparity between people, by lifting those unfortunate individuals from abject poverty, and also to ensure the retirees are not forced to live squalid lives due to being unable to work in order to support their basic necessities. While on paper this may sound wholesome, the money that is needed for social welfare is drawn from taxes paid for by the rest of society, which generate the national revenue. 

Some schools of thought believe this is unfair, where those who work are ending up supporting those who don’t, or maybe are not incentivised, to work. These ‘freeloaders’ are the stuff of nightmares for the supporters of capitalism, who believe that when presented with what is known as the ‘welfare trap’ (which essentially means one can get more in terms of finance from welfare payouts as compared to working at minimum wage), the productivity of the population is surely going to go down. This fear seems misplaced, as it is obvious that the welfare trap can most surely be offset by adjusting the minimum wage to a more liveable one, but that is another story.

In the western nations, this argument has been thrown back and forth, with the American administrations having strong, opposing views, from one term to the other, adjusting the criteria for social welfare, to making the bureaucracy so stringent that actually obtaining the social aid is more troublesome than trying to get by with poverty. However, in Indonesia, the powers that be decided instead to take the risk with their communities, and to truly test the textbook ‘fact’ in reality. 

The experiment that shook the presumptions to their roots was Indonesia’s cash-transfer scheme, Program Keluarga Harapan (“Hopeful Family Program”). With the help of the World Bank, the government of Indonesia launched PKH as a large-scale policy experiment in 2008. The program was implemented in 180 randomly selected sub-districts, which were compared to a control group of 180 sub-districts that did not have the program. All in all, 14,000 households were surveyed to assess the program’s outcomes.

According to the article on the World Economic Forum website, the program was developed as such:

“PKH provides quarterly cash transfers to the country’s poorest households, roughly meaning those within the bottom 7% of the income distribution. Payments constitute 7-14% of a recipient’s income, so they are not meant to cover all of a household’s needs. Moreover, the program was directed at families, which were encouraged to use the benefits to invest in their children. Only households with children or a pregnant woman could enroll, and a portion of the stipend was made conditional on fulfilling various health- and education-related obligations, such as basic immunization and the completion of at least nine years of school. As in many countries, these conditions are hard to enforce in practice, so many households received full payments despite non-compliance.

“One important feature of PKH is that it did not merely provide a few weeks or months of assistance between jobs or in the case of a financial shock. Rather, it focused on the very poor, and was administered for at least six years, with the understanding that climbing out of poverty takes time and requires consistent support and stability.”

Off the bat, it is obvious that these well-meaning policies took into account that effects would take years, if not decades, to manifest. Within two years, there was a marginal improvement to the health of these poorer families, with more visits to post-natal clinics, and a general improvement in the health of the children born in the test districts. Further on, within six years, school enrolment increased in the younger age groups, although there was little or no change in the older batches. However, within the next six years (twelve years after the consistent distribution of welfare support) there was over 17% increase in the amount of children who stayed in school.

The argument mentioned above reared its ugly head once more, claiming that there was a culture of dependancy that was surely developing in these certain sub-districts. Yet facts proved otherwise, as productivity did not decrease, and the amount of high-school educated youngsters in the workforce increased as well. 

Additionally, the article outlines another hopeful finding: 

“(We) re-analyzed data from seven different experimental trials of government cash-transfer programs throughout the developing world, from the Philippines to Morocco to Mexico. We found that in most cases, men who received benefits tended to be working already, and that there was no evidence that systematic income support reduced work. In an even more recent study, Sarah Jane Baird, David J. McKenzie, and Berk Özler of the World Bank undertook a systematic review of the economics literature on this topic and came to a similar conclusion.

“As for PKH, we did not find that program recipients stopped working, even after six years of receiving cash transfers.”

The importance of this topic is becoming more apparent with the new budget allocation of the administration for 2022. What has been seen so far I that while Economics 101 may not have it all wrong, what is crucial is the application of such policy changes, their timing, and also a lot more factors that can affect the desired outcome. These factors include more job availability, increased minimum wages, and also vocational training for skill-specific employment.

Policy makers need to be mindful, and also patient, as human capacity is a fickle yet wondrous thing. The drive to work and contribute to society does exist, and it is up to the leaders of the time to inspire that, while ensuring no one is left behind.