17 December 2005

Social Policy Bonds and developing countries

I’m often asked whether Social Policy Bonds could be applied to developing countries. The answer is yes. They could be issued by interested, wealthy outsiders, concerned, for instance, about female literacy in Pakistan (click here for a pdf file on how philanthropists could issue Female Literacy Bonds).

Of course, developing country governments could issue their own Social Policy Bonds. Their public sector is not so well documented as in the rich countries. This makes discussion of their policymaking more difficult, but it should not inhibit the transition to a Social Policy Bond regime for several reasons:

  • Public sectors are growing even faster in developing countries than in the developed world from, of course, a smaller base. There is the opportunity therefore to avoid the mistakes that developed countries made when their public sectors grew.

  • While public sectors in the developing countries are growing rapidly, they are still not big enough to cope with their very severe social problems and the enormous social changes that are occurring. Developing countries are urbanising rapidly, with all the social dislocation this entails. Crime rates are high, and there is a great deal of urban poverty and unemployment. Many children are outside the educational system altogether and standards in state systems, while variable, are generally very low. Environmental problems are especially severe in developing countries.

  • Public sector employees in developing countries are generally not well paid, and are more susceptible to corruption than in most developed countries. This lowers their motivation to act in the public interest. So, even more than in developed countries, there is often little relationship between government spending and desirable outcomes. One pointer: an International Monetary Fund (IMF) survey of 50 developing countries concluded that ‘there is little empirical evidence to support the claim that public spending improves education and health indicators’. (Source: Anjeev Gupta, Marijn Verhoeven and Erwin Tiongson, Does higher government spending buy better results in education and health care?, IMF Working Paper WP/99/21, February 1999.)

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