This article first appeared in The Edge Malaysia Weekly on December 11, 2023 - December 17, 2023

AMONG the stark realities of life that the Covid-19 pandemic drove home, two of the most impactful were that all of us are vulnerable and unfortunate circumstances can strike anyone at any time, with unexpected severity and consequences. The recognition of that vulnerability — that anyone may fall sick, lose a job or have a child and need support, and that everyone inevitably gets old — is at the core of what universal social protection is about.

That is why universal social security or protection systems strive to ensure the provision of basic income security and support — a social protection floor — to everyone to shield them throughout their lives against poverty and risks to their livelihoods and well-being. This can be done via adequate cash transfers to all who need it, including children; the provision of benefits or support for people of working age in case of maternity, disability, work injury or retrenchment; and pensions for all older people. The universality of the system means it is accessible to all.

And it is something that Malaysia — at a crossroads now as it works to dismantle its hugely expensive subsidy system and thinks of focusing on poverty targeting — ought to consider, according to social protection experts.

Reforms of fuel subsidies are usually unpopular among those in the middle- and high-income brackets since they are the main beneficiaries, and governments often make the mistake of introducing poverty-targeted compensation programmes that exclude these groups, which tend to foment anger and protests, says Dr Stephen Kidd, principal social protection specialist at Development Pathways, a global consultancy specialising in designing and developing social protection systems.

Citing Syria as an example, Kidd says there is strong evidence that the crisis that erupted in 2011 there was precipitated by the introduction of a poverty-targeted compensation scheme during a fuel subsidy reform. Neighbouring Iran, on the other hand, he notes, managed to avoid that by introducing a nationwide universal cash transfer programme to compensate the population, including its children, for price rises that resulted from its massive cuts in fuel subsidies in 2010.

On top of that, accurate poverty targeting has been shown to be impossible in low- and middle-income countries as it has high exclusion errors — which refer to the proportion of intended recipients who are excluded from a scheme. In a paper published in June 2020 that examined 29 programmes targeting the poorest 25% of the population across low- and middle-income countries, Kidd and his colleagues found that 12 have exclusion errors above 70%, eight have errors above 80% and five have errors above 90%. The best performing poverty-targeted programme is Brazil’s Bolsa Familia, with an exclusion error of almost 44%. Indonesia’s Program Keluarga Harapan (see Chart 3) has an exclusion error of 82%.

And some of these programmes have resulted in unfortunate, unintended consequences, Kidd notes, citing as an example the Philippines’ Pantawid programme, a form of child benefit that targets the poorest 23% of households with children in the country, which has an estimated exclusion error of 47.9%. While the positive is that stunting rates have gone down among the children of recipient households, a World Bank study in 2018 found that those who are non-beneficiaries of the programme saw stunting rate rise among their children by a significant 11%, according to Kidd.

“It shows the kind of damage the programme caused. If they had just given it to all children, the problem wouldn’t occur,” Kidd reckons.

That also highlights one of the reasons for the failure of poverty targeting — a misunderstanding of what constitutes poverty and that there is simply a fixed group of “poor” versus the “non-poor”. Individuals and household incomes — and consumption — are actually highly dynamic, Kidd says, and being poor is a situation that anyone may find themselves in. This is clearly demonstrated by how some 20% of Malaysia’s M40 income earners have fallen into the B40 income group due to the impact of the pandemic, according to the Household Income and Basic Amenities Survey Report 2020 released by the Department of Statistics Malaysia towards the end of 2022.

The impact of poverty-targeted programmes on indicators of national poverty or inequality is also usually small compared to universal benefits (see Chart 1). And the budget for such programmes tends to shrink over time because they are unpopular as these are asking taxpayers to pay for benefits that they don’t receive. This was the case in the UK, Kidd says, where they had poor relief programmes with a relatively generous 2.5% of gross domestic product (GDP) at the start of the 19th century when there was no democracy. But the budget shrank over time, as the middle classes gained the vote and opposed their taxes being used for handouts to the poor.

“Where did the money go? It went into universal primary education because that’s what’s important to the middle class. So, you have a reduction in poor reliefs as democracy strengthened, and the money went to more universal benefits,” says Kidd.

In fact, he thinks there is a significant link between a strong democracy and universal benefits, “because you win an election on the basis of introducing programmes that benefit everyone”. In the case of a non-democratic system like Vietnam, which incidentally still has a universal pension for anyone over 80 though it is a small one, Kidd says more social spending goes to the ex-freedom fighters, the civil servants.

“It’s an authoritarian regime that is still run by the communists, so who do they need to keep happy? The military, the civil servants who will keep them in power. That’s how it functions. You give benefits to those who you’re most threatened by, who can move you out of power.”

By the same token, he argues that universal benefits make sense for democracies because these give something back to everyone, including the often neglected precariat — that portmanteau of precarious and proletariat that refers to people like gig workers with no job security.

“Otherwise, the people can vote you out in the election, so you have to do something that has a significant portion of the population supporting it. This is the kind of political economy that exists, which is why poverty-targeted benefits are not a good idea because they’re not sustainable,” says Kidd.

Not only is universal social protection seen as a better choice that helps build political stability and reduce social tensions and conflicts, it also brings higher net benefits to a society, according to Kidd. Well-designed ones can not only protect people against losses due to shocks like economic downturns or natural disasters, but also help contribute to inclusive growth and promote human development.

A universal cash transfer programme for every child in the country, for example, will help tackle undernutrition and ensure better education, which will help children grow up to be a more productive and skilled labour force. With better skill sets, they are more likely to secure better income and with that greater income security means more money available that they can spend or invest in small businesses. Such spending generates an economic stimulus and provides markets for businesses and entrepreneurs. With improved economic growth, governments will earn more revenues and the people, who are benefiting from the universal benefits programme, are more willing to pay taxes that will help sustain such programmes.

Hence, inclusive social security should not be viewed as just a cost to a country, says Kidd, but seen as a core component of an effective economic growth strategy. This realisation has driven many parties, including the Employees Provident Fund, Khazanah Research Institute and the Malaysian Institute of Economic Research, to call on the Malaysian government to adopt more inclusive, universal social protection for its people.

Yet, considering Malaysia’s tight fiscal constraints, wouldn’t it make better sense to just give adequate benefits to those who need it most?

Not really, according to Kidd, because there is no way to ensure that those who really need it get the help, due to the high exclusion errors of poverty-targeted benefits.

“And the transfer values — the net benefit — of poverty-targeted programmes are not high because the amount involved is small. You also have to take into account the political economy of how the world really works,” Kidd says.

And countries that are significantly less wealthy than Malaysia have managed to start universal social protection schemes, he says, such as Timor Leste and Georgia, which spend a higher percentage of their GDP in tax-financed social security (see Chart 2). Georgia, according to a report by Kidd and his colleagues in 2017, has a social protection system that is known for the relative adequacy and near-universal coverage of its tax-financed old-age pension, which makes it one of the most effective social pensions in the world.

While implementing something that has got high transfer value will mean higher costs, Kidd believes governments can start small — say, with a lower age group for children, a cash transfer programme for those aged one and below; and a higher age group for the older people, say, 80.

“Something is better than nothing. For example, RM600 a month for old people is not a lot but it is better than nothing. And once these universal programmes start, there will be pressure on the government to address the adequacy. So, you address the coverage question first and you build support for the programme — and everyone will want to be involved because they’re either in the programme or expecting to get into it. The politics of the country, and the country’s own economic growth over time, will take care of the adequacy element. That’s the whole point and that’s what we have seen in a number of countries,” Kidd says.

Malaysia’s low tax revenue-to-GDP ratio, which stood at about 11.7% in 2022, he notes, means there is a lot of room for the country to raise taxation to help fund the universal programmes.

If countries are committed to “leaving no one behind”, they need to move towards universal schemes, Kidd adds.  

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