Undoubtedly, if any national system of social security is to be effective it must carry out, either directly or indirectly, the allocation of a significant proportion of the national GDP.

The question is raised, therefore, as to whether the gain derived by the country from the existence of the system justifies what is perceived to be a substantial economic cost. In times gone by, the assessment may well have been – at least in the more economically developed countries – that the gain in welfare terms self-evidently justified the financial costs.

In more recent times, not only do such assumptions rarely escape challenge, but the measurable financial costs are increasing, not least in the light of the health and pension needs of ageing populations. Some have argued that extensive welfare state regimes have led to labour market rigidities, losses of economic welfare (due to microeconomic behavioural responses) and excessive administrative costs, while others have argued that too great a role for the “welfare state” may reduce the economic advantage of individual risk-taking enterprise, or hamper economic restructuring. 

The framework in which social security policy is developed is therefore one in which policymakers are challenged to assess social objectives simultaneously with economic ones. This may be addressed in a variety of ways. However, with the increasing availability of statistics in the past decade and a half, we are able with increasing confidence to make a judgment based on real evidence. Research – relating specifically to the EU countries to date – indicates that many countries, if not most, have succeeded in maintaining high-quality social security schemes and at the same time performing well in terms of economic growth. 

It is therefore warranted to conclude that in reality, there need be no trade-off and that at least some countries can and do achieve sound economic performances while maintaining an effective social “model”. The analysis, however, takes us further: not only can countries reconcile sound macroeconomic performance with sustainable social models, but they must, indeed, implement adequate social arrangements, without which open market policies would be unable to absorb the adverse consequences of these same open market policies and in the long term could not be successful (Canoy and Smith, 2006).

In the absence of suitable statistical data, the picture in developing countries is less clear, but there is no reason to expect less favourable experience in the long term than that of the industrialised countries. Recent research in India, for example, has found evidence that overall expenditure on social protection – measured over a long period, 1973 to 1999 – had a significant and positive impact on economic growth (Justino, 2007).

Trust and social capital. Provided that they are well designed, social protection programmes have a direct “static” impact in terms of poverty reduction. However, in a more indirect “dynamic” sense, social protection programmes also benefit productivity in a variety of ways – for example, through reducing or preventing social exclusion, through relieving constraints that often prevent the development of small or individual enterprises and, most importantly, through helping to enhance human capital in the form of a healthy and educated workforce. Conversely, a range of studies in the past 15 or so years have looked into the “black box” of channels through which a lack of social protection impacts on economic performance.

An important mechanism relates to capital market imperfections – specifically, credit or other constraints may prevent the poor from undertaking an efficient amount of investment. Such constraints may be financial in nature, but equally include issues of non-access to certain resources or provisions. Examples include restrictions on the exploitation of arable land, limited access to health facilities, and lack of access (for children, particularly in poor families) to education, which has been shown to have an adverse impact on future potential labour productivity and hence economic growth (Perotti, 1996).