Asian Nations Revisit Safety Net in Effort to Bolster Spending

By PATRICK BARTA

Bangkok

Asian countries are beginning to build extensive social-welfare programs like those that long have existed in the West, a move they hope will encourage their people to save less, spend more and help put the region -- and the world -- on a stronger economic footing in the years ahead.

But creating a reliable social safety net is hard work, and it may be a long time, perhaps decades, before Asia sees results.

Analysts have long worried that Asians lack sufficient health, unemployment and other benefits to tide them over when downturns or emergencies occur, or to prepare for old age. Only about 30% of Asia's elderly receive a pension, according to the United Nations. Just 20% of its unemployed have access to unemployment benefits or other work-related social programs.

Partly as a result, Asians tend to save more and spend less of their income than their counterparts in the West. That contributed to the global imbalances that are one cause of the current world recession: U.S. consumers went deep into debt to finance consumption while Asians socked away money and relied on exports to Western consumers.

Social-welfare programs are one way of addressing those imbalances. The idea is that if Asian consumers have more confidence in their governments to take care of them in times of trouble, they will be more willing to spend today, igniting new demand for consumer goods and leaving the world economy less dependent on Western shoppers.

China recently said it will invest $120 billion to improve health care by building clinics and extending basic medical coverage to 90% of its 1.3 billion people within three years. Vietnam is implementing a national unemployment-benefits system. India has unveiled a voluntary pension system for up to several hundred million people who work at small companies, and is developing a nationwide identification database to better provide health care and other benefits.

Those programs build on efforts undertaken in recent years. Thailand launched a national health-care program in 2001 that offers basic medical care for just 30 Thai baht, about $1, to most citizens. India's latest national budget expands a program begun in 2005 that guarantees 100 days of work per year for rural laborers.

Public health expenditure* as a percentage of GDP in 2006

India	0.9
Indonesia	1.3
Philippines	1.3
Cambodia	1.5
Malaysia	1.9
China	1.9
Vietnam	2.1
Thailand	2.3
Australia	5.9
Japan	6.6
United States	7.0
High-income OECD	7.0
New Zealand	7.2

*Includes recurrent and capital spending from government, borrowings, grants and social insurance funds

Source: World Bank

The expansion of Asia's safety net "is happening, and it will help" wean Asia from an over-reliance on exports, says Robert Subbaraman, chief Asia economist at Nomura International in Hong Kong.

But many governments, including India, suffer from large budget deficits or lax tax collection, and may find it hard to finance expanded welfare programs.

In addition, a stronger safety net is no guarantee Asians will consume more. Europeans enjoy one of the world's most robust safety nets, and they tend to save more than Americans.

And it can take years, maybe decades, before consumers build up enough trust in welfare programs to modify spending behavior. In many Asian countries, such as Indonesia, services provided by social programs are dismal, with many residents avoiding government medical clinics altogether.

"The credibility of the systems has to be tested, and people have to be comfortable" that they still will be around after changes in government or economic crises, says Joseph Zveglich, an Asian Development Bank economist. Although he supports efforts to expand social safety nets, he says, "it's going to take time for people's activities to change."

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Consumer spending has fueled growth in South Korea, which reported its best quarterly performance in more than five years.

Some analysts say a better way to wean Asia off exports and encourage domestic consumer spending would be to let Asian currencies appreciate. That would make Asian exports less attractive to foreign consumers, give local consumers more spending power to buy imported goods, and force Asian business to diversify beyond exports. But Asian authorities may be unlikely to risk putting exporters in jeopardy by allowing their currencies to rise.

Those countries that have expanded their safety nets over the past decade have seen mixed results. In Thailand, residents were quick to take advantage of the country's new national health-care program. More than 45 million people registered to participate by mid-2003. Consumer spending shot up soon after the program was introduced, but economists believe the surge was driven more by an expansion of consumer credit and a sharp uptick in growth that occurred as Thailand's economy rebounded from the 1997-98 Asian financial crisis.

Growth in consumer spending later slowed, and in recent years Thailand's savings rate has begun climbing again after several years of declines, according to the Asian Development Bank. Most other major Asian countries have likewise seen their savings rates increase or stay about the same since the late 1990s, including Vietnam, where savings climbed to about 32% of gross domestic product in recent years from roughly 18% in 1995. Those trends could intensify in the future as the region struggles to fully recover from the current recession.

"In this economy, I'm trying to save as much as I can," says Banyen Sriwongrak, a 43-year-old vendor in central Bangkok who makes about $12 a day selling jasmine garlands near a religious shrine. She says she used Thailand's 30-baht health-care program to have a lump removed two years ago in a surgery that normally would have cost 16,000 Thai baht, or about $475. Having that protection was helpful, she says, but it hasn't fundamentally changed her spending, which includes squirreling away two or more days' worth of income each month and sending an additional $60 or so to support her mother in rural Thailand. "We don't know what the future will bring," she says.

None of that means Asian governments should stop investing in welfare programs. Such programs can greatly improve residents' lives even if they don't ultimately affect spending patterns. And the benefits in terms of changed consumer behavior may show up later.

Upgrading safety nets "isn't something that's going to get us out of the [current financial] crisis," says Mr. Zveglich, the Asian Development Bank economist. But if investments in the social safety net are made now, it may help the next time.

Write to Patrick Barta at patrick.barta@wsj.com