Cost of social policy

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ISLAMABAD:

Well-being is an elusive term. Politicians talk about welfare all the time and demand votes based on the welfare of the masses.

There is a popular concept of a welfare state, which is supposed to take care of the masses, for example by providing them with unemployment benefits, subsidies or food.

However, it is clear that despite being presented as free or subsidized, social assistance is not free. Someone always pays the cost of this welfare.

It’s a matter of resource allocation and market structures of who gets the benefits and who pays the costs. From an academic perspective, welfare economics deals with this and considers policies that can maximize benefits for all or most members of a society.

The distribution of well-being generally takes the form of an allocation of resources to a specific component of the population.

Consider an example – the subsidy or concession for housing loans. Homeownership has become difficult for the current generation, which is made up more and more of nuclear families.

In a recent publication by PIDE, the popular notion of a 10 million home shortage is challenged, citing 70% homeowners nationally according to PSLM 2019-20.

However, the government has announced a program to build or facilitate the construction of five million houses. Following this objective, the government announced various fiscal and monetary incentives with the aim of correcting “market failures”.

He announced a major amnesty program to attract real estate investment. It also set mandatory lending targets for commercial banks.

To date, with 38 billion rupees disbursed, the Mera Pakistan Mera Ghar financing program has only benefited 10,000 households.

On the other hand, land prices, which account for up to 80% of the cost of a house in one city, have risen by 60% for everyone in cities like Lahore and Islamabad in just two years.

This has resulted from an unusual flow of capital into real estate – according to a recent report, as much as $19 billion was buried in empty city lots in 2021 alone.

This is the direct consequence of a policy defined by tax exemptions and tax subsidies.

Lesson 1: Social protection policy in the name of the poor has benefited a few thousand people while causing losses to millions.

A majority of households would have benefited in the absence of these incentives and in particular thanks to reforms in building regulations.

Another example of social policy is Universal Health Insurance – Sehat Sahulat Card, which provided Rs 1 million medical insurance to all eligible citizens of Punjab and Khyber-Pakhtunkhwa.

This was generally welcomed by all. However, with close scrutiny – and over time – the problems with universal medical insurance will become clear.

The government will find it impossible to finance the program on its own very soon as the public health system deteriorates.

A differently designed health protection program would have resulted in a greater flow of investment into the public health system.

A small entrance fee is affordable for everyone and should be charged without exception. The government should have left the insurance to be managed by the private sector.

This is how resource allocation and adjustment to market structures can help maximize the welfare of most people at the least cost.

Lesson 2: Publicly funded universal health insurance is a bad idea and the government can do more by investing in the public health system.

Another popular example of social policy is price controls. The prime minister and federal cabinet continue to monitor fruit and vegetable prices – with noble intentions.

The government created price control committees and hired more price inspectors than before.

The prices are only going up. If the government were to focus on a two-pillar strategy – investing in agricultural productivity and allowing cross-border trade, it would have provided both short-term and long-term solutions.

On the other hand, price controls have ensured that no one invests in agriculture, thus undermining the main objective of keeping prices low.

Price controls provide clear signals to investors and traders – do not enter the trade.

Lesson 3: Price controls distort welfare.

Social protection policies must be posed to a simple theoretical question of efficiency and incentives. Going back to welfare economics, we can look at economic surplus – the sum of consumer surplus and producer surplus.

I will also add a budget equation here given our constraints and caution against any policy becoming a budget burden.

As the three examples above indicate, in each case social protection policies distorted incentives and contributed to the reduction in de facto well-being. Therefore, it is very difficult to design a wellness program that can ensure an increase in overall well-being without more loss.

A wiser option for a government may actually be to do nothing at all, especially if it is about to do more harm than good.

The author is the executive director of PRIME, an Islamabad-based independent economic policy think tank.

Published in The Express Tribune, February 28and2022.

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