Safe and Sound Social Policy: Reconciling Protection with Productivity

Societies need to protect their citizens against certain risks, especially current and future health problems, poverty, and labor shocks. In designing such social protection, most Latin American countries have followed the Bismarkian tradition of collecting in the labor markets the revenues needed for coverage. Unfortunately, this approach has not achieved universal coverage and important segments, especially the poor, remain vulnerable. Governments have tackled this problem by designing social protection policies to cover uncovered workers and their households through substitute public goods and services, such as free or low-cost health insurance, food vouchers, training vouchers, cash transfers, subsidized credit, and subsidized housing. While these policies may improve citizens’ well-being, they may also encourage informality and have certain harmful effects on productivity (Levy 2008). This chapter argues that rather than eliminating social policies because of the collateral damage they may cause, they must be redesigned with productivity issues in mind.