Strengthened Social Protection Systems can help the Caribbean weather the next crisis

Here is how Tamika, a hardworking Caribbean mother of three, searched several markets seeking affordable essentials, only to discover that the cost of basic items had skyrocketed. Her salary was already stretched even for simple items like rice, peas, and cooking oil. Just when Tamika thought her family had weathered the worst of the COVID-19 pandemic and was beginning to recover from hardship, she, like many others in the Caribbean, noticed a significant increase in living costs.

While Tamika was grateful for the support she had received through fuel and electricity subsidies, she also thought about how the wealthy benefited by cheaper fuel for the tanks of their luxurious cars and electricity subsidies for their houses, including the ones they rent out.

Inflation shock and welfare impacts

In 2022, driven by soaring fuel, food, and energy prices, the Caribbean faced its first double-digit increase in living costs in over 14 years. The region saw an average 12.6% hike in living expenses compared to 2021. Inflation rates nevertheless varied widely - from 3% in Grenada to Suriname's 52%.

Families like Tamika's found their ability to meet basic needs threatened by the increase in food and energy costs. The inflation spike exacerbated not just the andemic's effects on people’s living standards, but also another major problem in the region: the food security crisis. In August 2022, nearly 6 out of every 10 people in the Caribbean faced food insecurity, especially impacting lower-income families. The high cost of essentials forced many to make tough choices, sacrificing health and education expenses for other immediate needs.

Social protection responses to the inflation shock

Caribbean governments implemented 94 measures across 23 economies to combat inflation, benefiting 7 million people or 15% of the region's population, at a cost of US$664 million (0.21% of GDP). The most popular responses were subsidies (35%), tax relief (29%), and social assistance (22%). While subsidies provide short-term relief - for expenses like fuel and electricity - they are costly, disproportionately benefit wealthier households, and damage the environment.

Here is an example: a hypothetical universal subsidy to electricity in Jamaica would benefit the richest 10% of the population up to seven times more than the poorest 10%. This is because the benefit of a universal subsidy is proportional to the level of consumption. Subsidies can also distort commodity prices, accidentally encouraging overconsumption and not promoting energy conservation.

Alternative policy responses, such as targeted cash transfers, would have been more effective, efficient, and equitable than universal subsidies. For instance, simulations suggest that Jamaica saved 45% on fiscal costs by implementing a targeted electricity subsidy by excluding the top 20% of electricity consumers, instead of a universal subsidy. Opting for targeted cash transfers to the poorest could have increased Jamaica’s fiscal savings further.

Governments favor subsidies for their political popularity and ease to implement with broad coverage. Social protection systems in the Caribbean often struggle to respond to shocks, with outdated policies and procedures limiting access to those in need. Higher fiscal cost, less equitable benefit distribution, and negative environmental impacts of subsidies are some of the reasons to urgently invest in social protection systems to improve preparedness and responsiveness to shocks.

Strengthening social protection systems to be better prepared to respond to shocks

Progress has been made in addressing some social protection challenges, including the capacity to manage cash transfers, although it has been uneven at times, and challenges still remain.

To strengthen social protection systems' resilience to future shocks, reforms in several areas are needed, especially to modernize the delivery systems. This can increase the feasibility of using cash transfers. 

Critical reforms to strengthen the adaptive capacity of social protection systems in the Caribbean include:

• Intake and registration: Provide on demand access for intake and registration, adaptable to post-disaster surges, with emergency protocols, contingent capacity pre-identified to collect additional data rapidly and at scale, and ability to mobilize local and humanitarian organizations.
• Needs assessment: Establish systems for objective eligibility; implement verification processes, including digital ID cross-checks; and develop social registries with broad coverage, especially in areas vulnerable to shocks, maintaining up-to-date socio-economic data, including through interoperability with other administrative records (e.g., vital statistics, taxes, land ownership, utilities).
• Enrollment: Establish emergency streamlined enrollment, including with pre-enrolling options for potential beneficiaries, waiving requirements, using non-traditional data like detailed mobile data for remote sign-ups, and support for vulnerable groups inclusion.
• Payments: Transition to electronic payments, with flexible cash-out options and multiple payment methods and providers. Establish protocols to make payments adaptable, including alternative delivery mechanisms and stand-by agreements with service providers.
• Social protection information systems: Design, develop and operationalize integrated, interoperable, and risk-informed social protection information systems that include high-quality data on actual and potential beneficiaries.

Other social protection areas include modernizing institutional and policy frameworks, expanding financing mechanisms for social protection to respond to disasters, and improving data and information management.

To learn more about Caribbean responses to surging inflation and preparedness of social protection systems to respond to shocks, explore our report here.