The Social Security Sector and Its Financing in Developing Countries Franco Reviglio * HE SOCIAL SECURITY SECTOR plays an important economic Tand social role in many developing and developed countries. Al- though most developing countries are still at the beginning of the process aimed at increasing the size of the social security sector, there are indica- tions that they are moving fast on the same road followed by developed countries. Social security programs have been introduced and expanded because of the inadequacies of older systems,1 the development of a new ethic, and the tendency of social security expenditures to grow with per capita national income. Growth of funded programs can also be explained by their role in mobilizing resources for investment.2 With special reference to the developing countries,3 this paper intends (1) to measure the importance of the social security sector 4 and (2) to * Mr. Reviglio, a graduate of the University of Turin, howf on the faculty of economics of Urbino University, was an economist in the Fund's Department of Fiscal Affairs when this paper was prepared. He is the author of La teoría délia curva di domanda e gli effetti delle imposte (Milán, 1965) and Saggio sulla sicu- rezza sociale in relazione alio sviluppo económico (Milán, 1967). 1 This need is pointed out by V.K.R.V. Rao in his Welcome Speech to the Seminar on Social Welfare in a Developing Economy, held by the India Planning Commission at New Delhi, India, September 22-26, 1963. See also Amar N. Agarwala, Insurance in India: A Study of Insurance Aspects of Social Security in India (Allahabad [I960]), pp. 398 ff.; and J. Henry Richardson, Economic and Financial Aspects of Social Security (London, I960), p. 39. 2 Franco Reviglio, "Social Security: A Means of Savings Mobilization for Economic Development," Staff Papers, Vol. XIV (1967), pp. 324-68. 3 On the financial and economic aspects of social security in the process of economic development, the literature is quite limited. In general, see Organiza- tion of American States, Social Security and Economic Development, Eleventh Inter-American Conference (Washington, 1960); International Bank for Recon- struction and Development, Financial Aspects of Social Security in Latin America, (Washington, 1962); U.S. Department of State, Agency for International Development, The Role of Social Security in Developing Countries (Washington, December 1962); Alan R. Prest, Public Finance in Underdeveloped Countries (London, 1962); Bent Hansen, "Tax Policy and Mobilization of Savings," in Government Finance and Economic Development (papers and proceedings of the Third Study Conference on problems of economic development, Athens, 1963), Alan T. Peacock and Gerald Hauser, eds., Organization for Economic Coopera- tion and Development (Paris, 1965), pp. 143-55. 4 The scope of the social security sector used in this paper covers national provident funds, national health programs, and government programs providing a considerable amount of free medical care directly to all residents, compulsory insurance, family allowances, and special programs for public employees (see Reviglio, op. cit.). 500 ©International Monetary Fund. Not for Redistribution SOCIAL SECURITY FINANCING IN DEVELOPING COUNTRIES 501 review alternative methods of financing social security in developing countries as to their impact on income redistribution and economic growth. In this way, it will convey a better understanding of the actual and the potential role of social security as a means of savings mobiliza- tion for economic development. I. Importance of Social Security Receipts and Expenditures RELATION OF SOCIAL SECURITY RECEIPTS AND EXPENDITURES TO GROSS NATIONAL PRODUCT The importance of the social security sector in the national economy can be measured by the relation of social security receipts and expendi- tures to the gross national product (GNP). Table 1 compares total social security cash receipts and receipts net of government payments5 with GNP in 59 countries. Data on total social security cash receipts and cash receipts excluding government payments are available for 40 developing countries for a recent year.6 They show that total social security cash receipts averaged 2.5 per cent of GNP, with a median of 1.7 per cent. Exclusion of government transfers (necessary to consoli- date the social security and public sectors) reduces the average ratio of the receipts for the 34 countries for which data are available from 2.65 per cent of GNP to 1.9 per cent, and the median from 1.7 per cent to 1.1 per cent. Total cash receipts exceeded 1.9 per cent in 16 countries and ranged from 0.1 per cent (Burma) to 12.6 per cent (Uruguay). In Chile and Uruguay the percentages approached the highest attained in the developed countries. In 19 developed countries, total social security cash receipts repre- sented higher percentages of GNP than in most of the developing coun- tries. They ranged between 4 per cent of GNP (Japan) and 13.7 per cent (Germany) ; receipts net of government payments ranged between 1.3 per cent (Ireland) and 9.9 per cent (the Netherlands). Gross receipts aver- aged 9.1 per cent of GNP, and net receipts 5.3 per cent. It is of interest to compare country differences in the ratio of social security cash receipts to GNP and the ratio of social security outlays to GNP (Table 2). According to the definitions used in this paper, social security generally excludes public health expenditures when a program 5 Government payments as employer, subsidy, and interest on public debt held by social security institutions. 6 Throughout this paper, data given for Malaysia cover only the States of Malaya. ©International Monetary Fund. Not for Redistribution 502 INTERNATIONAL MONETARY FUND STAFF PAPERS TABLE 1. SOCIAL SECURITY CASH RECEIPTS: * RELATION TO GROSS NATIONAL PRODUCT, SELECTED DEVELOPED AND DEVELOPING COUNTRIES, RECENT YEAR (Amount in millions of national currency) Cash Receipts Excluding Total Cash Receipts Government3 As a Asa per cent per cent Year Amount of GNP Amount of GNP Developed countries Japan 1960/61 685,265.0 4.0 510,837.0 3.0 Spain 1960 25,804.0 4.2 22,710.0 3.7 United States 1959/60 22,712.0 4.5 19,477.0 3.9 Portugal 1960 3,868.8 5.6 3,191.4 4.6 Iceland 1960 595.2 7.4 219.7 2.7 Finland 1960 1,217.5 7.7 614.5 3.9 Canada 1959/60 2,792.9 7.7 861.6 2.4 Switzerland 1960 2,839.5 7.7 2,186.7 5.9 Ireland 1959/60 54.6 8.3 8.8 1.3 Denmark 1959/60 3,621.6 8.8 768.3 1.9 United Kingdom 1960/61 2,401.1 8.8 1,043.9 3.8 Norway 1959/60 2,979.7 9.2 1,636.0 5.1 Sweden 1960 6,986.1 10.9 2,217.7 3.5 France 1960 34,849.7 11.8 25,575.3 8.6 Netherlands 1960 5,159.5 12.1 4,228.7 9.9 Belgium 1960 75,075.3 13.1 45,883.8 8.0 Austria 1960 21,354.0 13.2 15,298.0 9.5 Italy 1960 2,640,294.0 13.2 1,932,266.0 9.7 Germany 1960 40,537.0 13.7 27,605.0 9.3 Developing countries Burma 1963/64 12.0 0.1 8.2 0.1 Nigeria 1963 3.7 0.33 2.9 0.23 China, Republic of 1960 203.8 0.4 136.4 0.3 Honduras 1964 3.4* 0.4 2.6 0.3 Upper Volta 1960 275.0 0.63 188.0 0.43 Mali 1962 433.2 0.63 388.9 0.63 Mauritania 1962 165.8 0.7 134.4 0.6 Venezuela 1962 207.1 0.8 191.1 0.7 Nicaragua 1962/63 27.3 0.8 El Salvador 1960 13.2 0.9 5.3 0.4 Guatemala 1959/60 10.1 1.0 7.3 0.7 Colombia 1963 406.4 1.0 265.7 0.6 Morocco 1964 120.0 1.0 Senegal 1962/63 1,546.0 1.05 1,096.0 OJ5 Dominican Republic 1962 8.7 1.1 India 1959/60 1,605.7 1.1e 889.5 0.6 β Libya 1960 0.7 1.15 0.7 I.I« Ghana 1959/60 6.4 1.4 0.2 — Malagasy Republic 1960 1,973.0 1.55 695.0 0.55 Dahomey 1962 583.8 1.7 352.3 1.05 ©International Monetary Fund. Not for Redistribution SOCIAL SECURITY FINANCING IN DEVELOPING COUNTRIES 503 TABLE 1 (concluded). SOCIAL SECURITY CASH RECEIPTS: * RELATION TO GROSS NATIONAL PRODUCT, SELECTED DEVELOPED AND DEVELOPING COUNTRIES, RECENT YEAR (Amount in millions of national currency) Cash Receipts Excluding Total Cash Receipts Government 2 As a As a per cent per cení Year Amount of GNP Amount of GNP Developing countries (concluded) Philippines 1963 297.9 1.7 189.47 1.1 Paraguay 1962 783.5 1.8 712.1 1.6 Congo (Brazzaville) 1963 676.1 1.9 640.4 1.8 Tanzania 1959/60 3.7 1.9 0.4 0.2 Algeria 1964 285.0 2.0 Mexico 1963 3,966.0 2.1 2,801.0 1.5 Turkey 1963 1,591.0 2.3 Bolivia 1963 161.9 2.8 87.8 1.5 South Africa 1959/60 143.5 2.7 72.4 1.3 Argentina 1962/63 64,000.0 3.7 54,300.3 3.1 Costa Rica 1963 131.2 3.8 78.8 2.3 Brazil 1963 368,100.0 3.9 325,100.0 3.4 Panama 1963 24.2 4.4 15.6 2.9 United Arab Republic 1963/64 84.0 4.5 68.6 3.6 Ecuador 1963 790.6 4.6 686.3 4.0 Israel 1960/61 244.6 4.7 221.6 4.3 Malaysia 1960 284.3 4.8 105.3 1.8 Ceylon 1962/63 332.1 4.8 72.5 1.0 Chile 1962 683.2 10.4 446.9 6.8 Uruguay 1963 2,825.9 12.6 2,501.8 11.1 Source: See Reviglio, op.