Does Social Policy Have a Role in Global Growth Rebalancing?

ADBI Dean Kawai and other panelists discuss social protection spending at ADBI's 12th Annual Conference in Tokyo.

How does social policy impact domestic demand? This was the focus of the discussions during the ADBI's 12th Annual Conference held 4 December in Tokyo. The paper presentations generally showed a positive effect of improved social protection programs in boosting domestic demand through a reduction in households' precautionary savings as well as increases in income. Particularly when targeted to low-income households that have high spending propensities, the impact of social protection spending on consumption is higher.

However, several speakers cautioned against depending heavily on social protection spending to boost domestic demand. Certainly, particularly in countries that have a high budgetary surplus, social protection spending is one policy solution that can be used but it is not the only instrument for global growth rebalancing. Nor is social protection policy primarily for increasing demand or reduction of precautionary savings; rather it is for poverty relief and risk protection. Social protection policy's impact on consumption is only a favorable side effect in the context of the general need to rebalance growth in the region.

Other speakers highlighted other coping mechanisms, besides savings and social protection, such as households' ability to borrow. Charles Horioka of Osaka University suggested in his presentation that looser borrowing constraints may be an important factor in lowering saving ratios with the implication that the development of capital markets alleviates the need for high precautionary saving. The conference also discussed the impact of demographic trends in savings and how a rise in old-age dependency ratios tends to reduce savings rates. Interestingly, the sensitivity of savings to old-age dependency is posited to be stronger in countries with weaker social protection programs. Several presentations also centered on the People's Republic of China's social expenditure reform's role in beefing up consumption as well as the potential importance of state-owned enterprises' corporate surpluses in funding government social spending.

ADB President Kuroda and ADBI Dean Kawai with the speakers and discussants at ADBI's 2009 Annual Conference.

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