Transfers, Social Safety Nets, and Economic Growth

31 Pages Posted: 15 Feb 2006

See all articles by Xavier Sala-i-Martin

Xavier Sala-i-Martin

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: April 1996

Abstract

This paper analyses the role of social safety nets in the form of redistributional transfers and wage subsidies. It is argued that public welfare programs can be viewed as a crime-preventing or disruption-preventing devices because they tend to increase the opportunity cost of engaging in crime or disruptive activities. It is shown that, in the presence of a leisure choice, wage subsidies may be better than pure transfers. Using a simple growth model, the optimal size of the public welfare program is found and it is argued that public welfare should be financed with income (not lump-sum) taxes, despite the fact that income taxes are distortionary. The intuition for this result is that income taxes act as a user fee on congested public goods and transfers can be thought of as productive public goods subject to congestion. Finally, using a cross-section of 75 countries, the partial correlation between transfers and growth is shown to be significantly positive.

Keywords: Social Safety Nets, Public Welfare, Economic Growth, Transfers, Productive Public Spending

JEL Classification: H53, H55, H56, O40, O15

Suggested Citation

Sala-i-Martin, Xavier, Transfers, Social Safety Nets, and Economic Growth (April 1996). IMF Working Paper, Vol. , pp. 1-31, 1996. Available at SSRN: https://ssrn.com/abstract=882940

Xavier Sala-i-Martin (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34 93 542 27 41 (Phone)
34 93 542 17 46 (Fax)

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