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Affordable social security: the case of Uzbekistan

09/03/2015

Uzbekistan social protection

It is an article of faith among neoliberals that developing countries can afford to invest very little in social security. For example, in its Social Protection Strategy for Africa, the World Bank questions the fiscal affordability of universal pensions of southern Africa despite their relatively small budgets of between 0.5% and 1.5% of GDP. Neoliberals would also have us believe that higher levels of spending on social security will increase taxes on the rich and, as a result, will damage economic growth.

How, then, do we explain Uzbekistan’s level of investment in social security, which reaches almost 12% of GDP, similar to that found in many upper income countries? Uzbekistan is a lower middle-income country, with a GDP per capita of around US$2,060, lower than countries such as Indonesia, the Philippines and Viet Nam, where social security spending is minimal (but in line with the aspirations of neoliberals), and has little impact. Uzbekistan’s largest schemes are old age, disability and survivors’ pensions, but it also invests nearly 2% of GDP in child benefits.   If we believe conventional neoliberal economic theory, this level of spending must have a significant negative impact on Uzbekistan’s economy and government finances. Surprisingly, the evidence suggests the contrary. In recent years, Uzbekistan has enjoyed strong economic growth, with GDP per capita growth averaging 5.7% from 2001-05, 8% between 2004-9 and 8.4% from 2010-11.[1]   Furthermore, Uzbekistan’s finances appear to be in a healthy state. In 2011, government revenues were around 9% higher than expenditure (40.2% compared to 31.4%[2]) while government gross debt fell from 59% to 9% of GDP between 2001 and 2011.[3]

Clearly, this pattern of high social security spending, good economic growth and healthy government finances does not fit with the neoliberal belief that high taxes and social expenditure hinder economic growth. In fact, it leads us to consider the possibility that Uzbekistan’s investment in social security may be contributing to the growth of its economy (although, clearly, only one factor among many).   Evidence for the link between social security and economic growth can be found in Uzbekistan’s recent history. Following the fall of the Soviet Union, Uzbekistan was the least affected of all the former Soviet republics. In part, this was due to its investment in a universal child benefit, which reached a total cost of 4% of GDP in the early 1990s, stimulating greater consumption and demand in the economy. Similarly, during the global recession of 2008-10, Uzbekistan significantly expanded investment in its child benefits, once more generating greater demand in the economy and, as a result, was almost unaffected by the crisis.

Of course, Uzbekistan’s social security system faces a number of challenges and needs strengthening. It is also likely that the level of investment in certain elements of the system is currently too high and could be reduced through improved design. Nonetheless, Uzbekistan demonstrates that it is possible for low- and middle-income developing countries to significantly increase their investment in social security without necessarily damaging their economies. Indeed, a significant increase in investment may well result in greater economic growth, even if it implies overall higher taxation.   Many neoliberals will, of course, disagree and continue to argue the merits of ‘targeting’ social protection at those living in extreme poverty, so as to keep levels of investment to a minimum.

Yet, Uzbekistan indicates that their economic theories are based on shaky ideological foundations. In fact, there are other examples of middle-income countries with significant investment in social security. Brazil’s investment in social security is similar to that of Uzbekistan, at around 12% of GDP (although it is true that investment in Bolsa Familia – a favoured programme of neoliberals – is minimal, at 0.4% of GDP). In recent years, Georgia has significantly increased its investment in social security to over 6% of GDP, with large impacts on poverty and inequality while generating economic growth of around 5% per year. And, of course, the most successful economies are those of Nordic countries, which also have the highest levels of taxation and investment in social security.

So, the question we need to ask is whether developing countries can learn from these experiences and reflect on whether investing in social security is not necessarily a cost to the economy but, instead, essential to underpinning long-term, sustainable economic growth.

[1]McKinley and Weeks (2007) and UNICEF (2012b).
[2] although much of the surplus is likely to be invested in the national Fund for Reconstruction and Development, which supports long-term capital investment.
[3]Source: IMF World Economic Database for 2013 at: http://www.imf.org/external/ns/cs.aspx?id=28

 

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