Innovations to address the social protection needs of the informal economy — an operational perspective

If you are a policy maker or a social protection practitioner in a developing country, then as the COVID-19 pandemic spread across urban and rural populations you likely found yourself thinking hard on how to support the informal economy, which was hit the hardest. The ingenuity of solutions from countries, in the face of travel and social-distancing restrictions, was both inspiring and revealing. However, the need to better prepare for future shocks through new approaches to social protection is acutely felt. A recent World Bank report, “Social Protection for the Informal Economy: Operational Lessons for Developing Countries in Africa and Beyond,” aims to answer some of the questions policy makers face as they embark on creating the next generation of social protection programs, building on experience from the pandemic.

Not poor and not formal: Who are the “missed middle” of social protection?

Understanding the characteristics of households in the informal economy is critical as governments revisit social protection policy in the wake of the pandemic. Using household surveys to group households according to their ability to cope with shocks can be a good first step. Between households below the poverty line at one end of the income spectrum, and formal households at the other end, lie nonpoor informal (NPI) households. NPI households are not eligible for social safety nets as they are not poor enough nor are they covered by formal sector social insurance. They are the “missed middle” of social protection. They remain largely unobservable by governments and therefore difficult to support in case of a major shock. NPI households were found to range between 32% and 74% of all households in the six African countries (Benin, Kenya, Rwanda, Togo, Uganda, and Zambia) where this analysis was carried out, for illustration in the report. They are diverse; some are resilient with the ability to save while others are more vulnerable and may need fiscal incentives to save — an important consideration in social protection programming.

What are the suitable social protection instruments in the informal economy?

How countries make progress toward the goal of universal social protection, including covering the large informal economy, will vary based on their unique circumstances. In doing so, a suite of instruments is needed because of the varying risks informal workers face. Along with efforts to expand coverage of safety nets, economic inclusion programs and productivity-enhancing measures would be needed as part of anti-poverty efforts and to increase returns to labor with particular focus on women and girls, and youth. Expanding social safety nets alone is unlikely to be the answer to support all workers in the informal economy — especially in urban areas where many in the informal economy are slightly more resilient. Developing an innovative suite of instruments to meet needs of the diverse “missed middle” while being cognizant of fiscal and administrative challenges would be needed.

How can social protection digital platforms help countries bridge the coverage gap at the operational level?

Cost-effective and rapid coverage expansion among the “missed middle” is possible at the operational level if digital technology can be leveraged. A trio of digital platforms — social registries, payment systems, and ID systems — facilitates the creation of an integrated system that can deliver social assistance benefits efficiently. Similarly, leveraging digital platforms, a social insurance system that tracks individual savings accounts, assesses eligibility for fiscal subsidies, assigns investment gains in real time, manages withdrawals, etc. can allow governments to offer schemes to the “missed middle.” Links to social registries to assess eligibility for fiscal incentives in the social insurance savings schemes is crucial given the transient nature of poverty and vulnerability in the informal economy. Such a link could also help prepare beneficiaries to graduate from safety nets.

Figure:  Informal Economy: Integrated Social Insurance Platform

How can countries operationalize the social insurance scheme for the informal economy?

A social insurance scheme for the informal economy should take into account the irregularity of the incomes. The scheme can provide fiscal incentives, such as matching contributions, to reach scale. This is especially relevant for the non-resilient NPI households that typically have less ability to save. Scheme design should be easy to understand. A defined contribution scheme that mimics bank savings accounts has been found to be more intuitive. The scheme should be designed as a combination of short-term and long-term accounts or include flexibility in withdrawals and level of contributions. Adding a short-term account renders the scheme more relevant for the informal economy given its short-term liquidity needs. The bundling of health, weather, or life insurance could incentivize workers to contribute to the scheme. If possible, assessing the viability of the scheme would be an important input to the decision-making process. The World Bank Social Protection and Jobs Global Practice has developed the Scheme Viability Assessment Tool (SVAT) to serve this purpose. Lastly, pilot testing of the scheme to identify bottlenecks is extremely important as a country’s ability to offer such scheme, savings culture, and trust in such scheme is likely to vary. Once the scheme is launched, monitoring and evaluation are especially critical in the first few years.
 

This blog post is the first in a series focused on the different chapters of the report, "Social Protection for the Informal Economy: Operational Lessons for Developing Countries in Africa and Beyond."