Social Safety Nets and Structural Adjustment

Social safety nets protect citizens against hardship. By offering compensation, social safety nets mayhelp overcome the political resistance to trade liberalisation and structural reform, but they can alsoweaken the incentives to work and save. Depending on their design, safety nets may also ease or impairadjustment to changing economic circumstances. Against this backdrop, the paper looks at the impact ofsocial safety nets on output and employment and on the ability of economies to absorb adverse shocks.Dependent on their design, the presence of extensive social safety nets is often associated with morelimited labour resource use and lower per capita GDP levels, even though activation policy can provideoffsets. Moreover, many of the characteristics of social safety nets that reduce output and employmentlevels heighten the persistence of slack in the wake of adverse shocks. By contrast, the impact of socialsafety nets on business investment and household saving, and by extension the current account balance, isnot clear-cut.