# **1. Introduction**

Social protection (SP) has long been seen as an important task for governments in rich countries but much less so in poor ones.<sup>2</sup> Public spending on SP tends to account for a higher share of national income in richer countries, implying an overall income elasticity exceeding unity.<sup>3</sup> In short, SP spending appears to be a “luxury good” at the national level. We can call this the “luxury good hypothesis for social protection,” or “luxury good hypothesis” for short.

<u>Figure 1</u> plots the relationship between the share of GDP devoted to SP and (log) GDP per capita across countries, mostly for 2019.<sup>4</sup> The line of best fit is an example of what we will call the Social Protection Engel Curve (SPEC for short), defined as the mean share of national income devoted to SP, conditional on national income.<sup>5</sup> Consistently with the luxury good hypothesis, we see that the SPEC rises through almost the whole range of GDP (only turning down when we reach the five countries with the highest GDP per capita). We see a large difference between rich and poor countries in the mean shares of GDP devoted to SP; the share is 15% on average among the top quintile of countries ranked by GDP per capita (albeit with a large variance), as compared to around 3% for the bottom quintile.

The luxury good hypothesis for social protection has been influential in development policy discussions. Evidence such as Figure 1 has been used to argue that poor countries have higher priorities than SP. Indeed, SP is not even mentioned in the classic policy package for developing countries that emerged in the 1990s, often referred to as the “Washington Consensus,” following Williamson (1990). Williamson identifies health and education as “proper objects of government expenditure,” but says nothing about SP. The more explicitly poverty-

> 2 Following World Bank usage, SP refers to public programs for “social assistance” (in the form of cash or in-kind benefits often targeted to poor families), “social insurance” (mainly unemployment benefits and pensions), and “active labor market programs” (such as job training schemes). On the history of thought on the role of SP see <u>Ravallion (2016a, Part 1).</u>

> 3 See, for example, Kristov et al. (1992), Lindert (1994), <u>Peracchi (1998), Cornelisse and Goudswaard (2002), Auteri and Costantini (2004), Shelton (2007), Brückner et al (2012), and Clemente et al. (2012). The finding that</u> public spending as a whole tends to rise as a share of GDP as GDP rises is sometimes referred to as Wagner’s Law. 4 Figure 1 uses the most recent pre-pandemic data on total SP spending for each country. We consider the pandemic period separately. We also consider the effect of dropping spending on pensions; the pattern in Figure 1 is very similar in this case (Addendum).

> 5 As estimated by a nonparametric regression function in Figure 1. Our use of the term “Engel curve” borrows from the more familiar usage in the context of modeling consumer demands. We are not the first to use the term in the context of public spending, which appears to be Bird (1971). Figure 1 and other SP Engel curves in this paper are nonlinear (and non-parametric) generalizations of the longstanding Working-Leser specification for such Engel curves, for which the share of total income (or total spending) is taken to be linear in log total income (Working <u>1943; Leser 1963).</u>

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