An important feature of developing countries is the existence of a big subsistence sector. Many people in that sector have to depend on themselves without social welfare from the state. Put another way, social protection may only come from families, clans or charities rather than the state.

Please go through my paper titled "Inequality, social protection policy, and inclusion: pertinent theories and empirical evidence" The paper presents a conceptual model and empirically measures the nexus of income inequality and social protection policy with inclusive development.

1. Targeted vs. Universal Programs

• Targeted Programs: Focusing on the poorest and most vulnerable segments of the population can ensure that resources are concentrated where they are most needed, which improves social equity and enhances fiscal sustainability by limiting costs.
• Universal Programs: These are often easier to administer and avoid exclusion errors (where needy individuals are left out) but can be more costly. Universal programs may have less of a direct impact on poverty reduction unless they are progressive in structure.
• Hybrid Approaches: A mix of universal programs (e.g., basic healthcare) and targeted programs (e.g., cash transfers for the poor) can balance the demands for broad coverage and fiscal limits.

2. Progressive Financing Mechanisms

• To balance equity and fiscal sustainability, financing should be progressive, where those who can afford to pay more do so (e.g., through taxes on higher incomes, luxury goods, or wealth). This can ensure that the system remains equitable while still being funded adequately.
• In countries with limited tax collection capabilities, taxes on consumption (e.g., value-added tax) might be easier to implement, but regressive taxes need to be compensated by more targeted benefits for the poor.

3. Conditional vs. Unconditional Transfers

• Conditional Cash Transfers (CCTs): CCTs, where benefits are linked to specific behaviors (like sending children to school or attending health check-ups), can help improve human capital (long-term economic efficiency) while supporting social equity. They are also fiscally sustainable if well-targeted.
• Unconditional Cash Transfers (UCTs): These are simpler to administer and do not require monitoring, which reduces costs. They can be effective in reaching the most marginalized groups who might be excluded by conditionality but may not yield the same economic efficiency gains as CCTs.

4. Dynamic Benefits Adjustments

• Benefits can be indexed to inflation or adjusted periodically to ensure they remain adequate over time without creating runaway costs that undermine fiscal sustainability.
• Implementing mechanisms that automatically adjust benefits during periods of economic downturn (counter-cyclical spending) can help protect the most vulnerable while maintaining long-term fiscal balance.

5. Labor Market Integration

• Social protection should be designed in a way that encourages labor force participation and avoids creating dependency traps. This improves economic efficiency.
• For instance, unemployment benefits could be tied to active labor market policies, such as job training or placement programs, helping beneficiaries transition back into work.
• Providing support for informal workers is key in developing countries where a significant share of the labor force works outside the formal economy. Extending social protection to these workers improves equity without compromising efficiency.

6. Strengthening Administrative Capacity

• Effective administration is crucial for balancing these competing demands. Poor administration can lead to high leakage rates (where benefits do not reach the intended recipients), which reduces both efficiency and equity.
• Investments in digital technologies, such as biometric identification or mobile payment systems, can reduce administrative costs and improve targeting, ensuring that the system remains both fiscally sustainable and equitable.

7. Sustainability Through Growth and Employment

• Social protection systems should also be part of a broader development strategy that promotes economic growth and employment. This ensures the system's fiscal sustainability, as a growing economy generates the revenues needed to fund social protection programs.
• Policies that promote investment in human capital (e.g., education, healthcare) through social protection programs can enhance long-term productivity, making the economy more efficient.

8. Phased Implementation

• In countries with limited fiscal capacity, social protection systems can be implemented in phases, starting with pilot programs or focusing on specific vulnerable groups. As fiscal space increases (e.g., through economic growth or improved tax collection), the system can be expanded.
• This phased approach allows governments to balance current fiscal constraints while gradually increasing social equity and improving economic efficiency.

9. Building Political Consensus

• Social protection reforms often require political will and consensus to ensure sustainability. Engaging stakeholders—such as labor unions, the private sector, civil society, and international organizations—can help design a system that is both equitable and fiscally sustainable.

10. International Support and Partnerships

• In many developing countries, external support from international organizations, NGOs, and donor countries is crucial in establishing social protection systems. However, donor dependency should be avoided in the long run. Efforts should focus on building domestic revenue-raising capacities and designing systems that can eventually stand independently.

Balancing Trade-offs: