How Can Safety Nets Contribute to Economic Growth?

The paper provides an up-to date and
selective review of the literature on how social safety nets
contribute to growth. The evidence is carefully chosen to
show how safety nets have the potential to overcome
constraints on growth linked to market failures, and is
organized into 4 distinct pathways: i) encouraging asset
accumulation by changing incentives and by addressing
imperfections in financial markets caused by constraints in
obtaining credit, and from information asymmetries;
overcoming such failures helps households to invest into
their human capital or productive assets; ii) failures in
insurance markets especially in low income setting; safety
nets are assisting in managing risk both ex post and ex
ante; iii) safety nets are overcoming failure to create
assets and other local economy complementary factors to
household-level investments; iv) safety nets are shown to
relax political constraints on policy. Safety nets have a
dual objective of directly alleviating poverty through
transfers to the poor and of triggering higher growth for
the poor. However, the trade-off between the dual objectives
of equity and growth is not eliminated by the potential for
productive safety nets; this remains critical for designing
social policies.