I was happy to see that my blog post “Who needs a safety net?” stimulated a lively debate, which was exactly its purpose. However, so many points have been raised that I have decided to write a new post on the topic rather than answering to each one of them separately.
Johannes Jütting (Head of the Poverty Reduction section at the OECD Development Center in Paris) argues in an article recently published by The Georgian Times in its online version that “rising inequality, lack of civic participation, political apathy, and a dearth of good jobs, particularly for the young, comprise the Achilles heel of emerging-market countries' current development model”. Jütting’s view of the future is optimistic, but with a caveat. He sees the potential for the beginning of a new period, in which the emergence of a new – global – middle class, could “transform the world's social, political, and economic landscape” for the better, BUT ONLY if governments will manage “fostering cohesive societies - in which people feel protected, citizens trust one another, and efforts are rewarded …”. Unfortunately too many governments around the world seem to be taking this for granted. They should not.
In many parts of the developing world, where safety nets are either absent or insufficiently developed, poverty is still a concrete risk for many individuals belonging to this “new global middle class” on which so many hopes are placed. An illness in the household, a natural catastrophe or simply a period of economic stagnation can always happen and turn an apparently rosy picture into a bleak one. This is not just a risk for the individuals that might be affected. It can easily spread to entire countries, with the initial shock triggering a dangerous and vicious circle of growing poverty, inequality and underdevelopment.
Growth by itself may not be sufficient to take away this risk. The extent to which growth leads to true and sustainable development and helps reducing individuals’ and households’ vulnerability to negative shocks depends crucially from the characteristics of the process and from how benefits from growth are distributed across the members of a society. The only way a country can take the path towards sustainable development is, therefore, setting up an institutional framework capable of minimizing the risk that a substantial part of the population falls into poverty when negative shocks hit. The cornerstone of most societies that have managed to achieve this around the world is, arguably, a well functioning welfare state.
Of course, devising a well functioning welfare system (which does not necessarily mean turning a market economy into a socialist economy) can be difficult and maintaining it can be costly. However, these difficulties and costs have not prevented the countries we define now as "developed" from adopting one, nor from developing. One might even argue – in the same line of Jütting - that their welfare systems helped those countries achieve their level of development in several ways (for example by increasing social cohesion and mutual trust, encouraging risk-taking and the accumulation of human capital, reducing social conflicts and political instability to cite a few). As a matter of fact, the welfare state has constituted for these countries a crucial component of the “social contract” between governments and their citizens of the sort wished by Jütting for developing countries.
It has been argued that even the “best” countries (take Germany for example) have to adjust and revise their welfare state from time to time. This is certainly true, and for sure more adjustments will be necessary in the future. Should developing countries then, simply give up the idea of building a welfare state and let free markets take care of everything? This can hardly be the solution. The need to be adjusted and revised is not a distinctive feature of the welfare state and of modern societies. All human institutions have always required revisions and adjustments, exactly because of human nature and of the changing environment in which societies and economies live and develop. Even the market is an institution created by humans and, as such, is not perfect. Also markets (while very effective most of the time) can fail and cause problems at least as serious as those associated with a “big government”. The choice to ignore this, hoping that some invisible force will take care of everything, is not only conceptually wrong. It is a recipe for disaster.
So, should developing countries accept that they are bound to fail whatever path they choose and give up to their hope to develop? Not necessarily. Recognizing that there cannot be any development if a substantial part of the population is left behind and under the constant risk of falling into poverty is already a first (crucial) step in the right direction. Governments must work to make sure that development will be inclusive and based on the creation of opportunities for the whole population. Only in this way will it become sustainable. For all these reasons, despite the existing difficulties, they should not renounce a priori to the development of a well functioning welfare state. They should rather try to understand how to design one that will be optimal (and sustainable) for them. In doing this, they should take advantage of the lessons learned thanks to developed countries’ past experiences (and mistakes). Afterwards, success will require a continuous monitoring of the economic, social and political environment, and the willingness and the possibility to intervene when necessary.
Will increasingly small governments, with more limited functions and smaller budgets, be able to take up this challenge? There are good reasons to doubt this is the case. That’s why we need a rethinking of the development model currently adopted by most emerging-market countries. Economists could and should play a big role in this. They have the huge responsibility of making sure that potential costs and benefits of different alternatives are clear to the public. It will be then up to the people (or societies if you prefer), to decide what path they prefer to take.
Comments
Few people would argue against some form of social insurance in the abstract, but I wonder whether you have any concrete proposals for Georgia today? What kind of social security should it provide, to whom and how? How should it be financed?
There is also the question of timing: should elements of the welfare state be strengthened now while Georgia needs every bit of investment to increase the size of the pie? Or perhaps it should do so at a later stage, when the economy can afford a higher tax burden to support greater redistribution?
It's also the question of a country having the capacity to administer social welfare, and to make changes if necessary. Even for developed countriese social welfare reforms are perennial issue, indicating that it puts a substantial, non-financial burden on governments and their administrative capacity.
The other question is about social capital. Arguably social capital is important in minimiizing the monitoring and administrative costs of social welfare. Arguably it also runs in the other direction - elaborate social welfare networks strengthen social capital. But given Georgia's exceptionally low level of social capital I have my doubts that introducing a comprehensive social safety net is feasible anytime soon. And that is even ignoring the financing question.
The question of social capital and how it relates to the need for the Georgian government to provide a social safety net is a very interesting one. The typical claim is that Georgia is very low on one kind of social capital (bridging) and high on another (bonding). Here is how these are defined on Wikipedia.
"Bonding refers to the value assigned to social networks between homogeneous groups of people and bridging refers to that of social networks between socially heterogeneous groups. Typical examples are that criminal gangs create bonding social capital, while choirs and bowling clubs (hence the title, as Putnam lamented their decline) create bridging social capital. Bridging social capital is argued to have a host of other benefits for societies, governments, individuals, and communities; Putnam likes to note that joining an organization that performs the "bridging" function cuts in half an individual's chance of dying within the next year."
The fact that Georgia is very high on the bonding type of social capital (i.e. among homogeneous groups of people) is best illustrated by the very strong ties within the extended families or tribes. While informal, the Georgian kinship networks provide a powerful safety net for its members. In doing so, they fill in the gap created by the state's reduced role in redistributing income and providing social insurance.
I admit that the North European high-tax-high-social-security model looks aesthetically more attractive, however:
a) it may be too costly for poor developing countries and
b) countries like Georgia may have the option of living (surviving) with the fallback option of kinship network-provided safety nets.
I wish the Georgian people were as high on the bridging type of social capital, because then we would be able to live in better maintained condominiums, as well as cleaner and greener cities, etc. etc.
I am with Michael on this - there are two possible ways people can view the state:
a) as the system that organizes their collective energy for the good of each member of the society; a system each of them can help create, and actively contribute towards or
b) as an inherently parasitic, inefficient system of institutions alienated from their everyday lives; a system that should be at worst eliminated or at best made use of for private benefit.
I agree that the desire to have as little government intervention as possible (the views currently at the heart of the Republican presidential nomination debates in the US) is driven primarily by (b) type of beliefs. In turn, the laissez faire approach and lack of social security are only likely to perpetuate such beliefs, feeding a vicious circle.
However, it does not follow that if a big welfare state is created and financed by high taxes, the (a) type of beliefs will follow. The most likely outcome would be a further strengthening of the view of a parasitic government that should be beaten in its own game.
Under the circumstances when the society cannot afford the high cost of monitoring its own welfare system, the most realistic approach seems to involve the "ground up". This seems to be one of those cases when the cooperation between the existing civic institutions (even the church) and the state should be considered.
The (a) type views are likely to develop over time in Georgia given how efficient, transparent (literally :-)) and modern are its state institutions, certainly as far as citizen services are concerned. While Georgia is very low on social safety, its bureaucracy is among the best, if not THE best, in the entire region. This includes police, tax administration, customs, public registry (property, cars, businesses), private registry (passports, IDs, any other certificates, etc.)