What Kind of International Support for Social Protection Floors?

Assistance to social protection floors in difficult times

The second type of activity that de Schutter and Sepúlveda envisaged for the GFSP would to help countries deal with temporary surges in need. Their main proposal was reinsurance; that is, since much of domestic social protection is operated as insurance programs, those programs could, in turn, insure themselves against unexpected surges in demand for their services through international reinsurance schemes.

The reinsurance schemes could be specified for individual social protection programs, such as a surge in health-care expenses needed to fight an Ebola epidemic or to rebuild housing devastated by a hurricane. National health insurance or flood insurance programs could be reinsured against sudden higher obligations owing to some such unfortunate event. Such schemes can even be self-financing as long as the insured events happen in only a limited number of insured countries at the same time.

In a similar spirit, the authors refer to “catastrophe bonds”, in which the government raises funds by issuing bonds whose interest and/or principal are waived if a named catastrophe occurs (for which reason, the interest rate on the bonds is usually higher than normal). The World Bank is already supporting governments that want to issue “CAT bonds”, even issuing its own in 2014 to reinsure the Caribbean Catastrophe Risk Insurance Facility for 16 countries.

It is possible to design additional reinsurance schemes or issue additional catastrophe bonds for national insurance programs and subsidize them when the market does not want to assume the risk at reasonable premiums or interest rates. There is already considerable international expertise on such matters that could be mobilized for an additional effort. That would reduce the need to draw on additional budget revenues in emergencies or issue more government debt or sell more foreign exchange reserves.

However, there is a broader financial strategy that would give the government more flexibility in using the additional funds whatever specific emergency it faced. Such a strategy was implicitly followed by the International Monetary Fund (IMF) in the 1960s and 1970s through its Compensatory Financing Facility (CFF). It provided semi-automatic and quickly disbursed foreign exchange loans to developing countries that were impacted by economic “shocks”. Two kinds of triggers opened access to the CFF. One was loss of export revenue caused by the collapse of export commodity prices (or domestic crises like plant disease or hurricanes). The other was surges in cereal import costs. Those funds could be disbursed in weeks following a quick assessment of the losses incurred and decision on the share that IMF was willing to cover.

The CFF was meant to address temporary needs arising from volatility. The analytical difficulty was in knowing whether a country had a temporary shortage or a structural challenge, as from a secular decline in its export prices. The latter would require an economic adjustment, e.g., switching production from export crops with declining price trends to ones with rising prices. However, the demise of the CFF as a distinct policy tool was not caused by the analytical challenge but an ideological one, namely, the market fundamentalism and shrunken economic role of the state that arrived in the 80s with Reagan in the US and Thatcher in the UK.

The IMF today has a variety of lending facilities, but none that operates like the original CFF. However, with a new global commitment to Sustainable Development Goals, perhaps the political winds can once again change. IMF has the capacity to manage a renewed CFF (subsidizing interest payable on poor country drawings) and countries would have no need to negotiate an adjustment program under the terms for drawing from it.

One reason to suspect that it might be time to try to resurrect a CFF is that general finance as part of the international response to crises has become more common. Thus, the Paris Club, consisting of developed country government creditors, has adopted a practice of jointly offering unilateral postponement of debt servicing owed to them following natural and man-made catastrophes (http://www.clubdeparis.org/en/communications/page/exceptional-treatments-in-case-of-crisis). IMF has also created a program of special support for poor countries experiencing shocks, which provides grants to cover debt servicing owed to IMF (Catastrophe Containment and Relief Trust). It has been used by countries fighting Ebola. And on November 19 the Paris Club announced in its debt restructuring for Grenada a first-ever “hurricane clause”.

The governments benefiting from such measures are not constrained in how they use the funds freed by debt relief. An obvious priority would be to help finance their crisis-related social protection needs. The principle thus seems internationally agreed. A reformed and enlarged CFF would be a way to further implement it.

The opinions expressed in this article are those of the author and may not necessarily reflect the position of the ICSW Management Committee. The writer may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..