Hello to all and greetings from a very sunny California. I am currently continuing my fellowship Odyssey with some time at UCLA’s Political Science department, where I have the distinct honor and pleasure to work as a researcher for Professor Michael Ross, of resource curse literature fame (his latest book here).
While here in Los Angeles, I am doing some thinking about fuel subsidies — how they’re priced, and how politics affects the way in which those prices might change over time. The project fits in nicely with the broader research agenda on resource governance, particularly thinking about how resource wealth can be used to fuel or stunt human development depending on how wealth is invested.
The project also dovetails nicely with some recent thinking I did (with many a brainstorming partner in work colleagues, academic colleagues, and friends) on the sustainability of welfare systems and intergenerational responsibility. That thought experiment was for an essay competition that I had entered, unfortunately unsuccessfully. That being said, I still think there is some value in opening up the framework I put forward for debate, particularly keeping newly resource rich countries in mind. Below find the prompt and a slightly abridged version of the essay.
The prompt for the St. Gallen Symposium essay competition:
The presumption of an altruistic relation between generations and its positive effect on the economic well-being of societies is illusionary. Welfare states have widened fiscal gaps to an irreparable extent for the next generations. When aspiring to a sustainable welfare system, how should intergenerational claims balance without having to rely on selflessness?
My slightly abridged response (with some emphasis added):
A critique of the prompt
Firstly, I reject that possibility that an altruistic relation between the generations “and its positive effect on the economic well-being of societies” is illusionary. Eschewing the role of altruism ignores studies on psycho-social drivers of human interaction, along with behavioural economics research on altruism, fairness, and reciprocity. These advancements suggest that altruistic characteristics are an important element of economic well-being in societies.[i] Drawing on Benjamin Friedman’s work on the psycho-social aspects of economic development and its effect on social policy, Haggard and Kauffman find that “Robust growth directly reduces poverty but also influences the way the disadvantaged are viewed and the way societies respond to their plight.”[ii] There is a place for altruism in sustainable welfare policy, it just may need to be viewed hand-in-hand with long term positive economic development.
Secondly, stating that “Welfare states have widened fiscal gaps to an irreparable extent for the next generations” implies that publicly funded services alone are responsible for such macroeconomic maladies. Fiscal gaps are a product of taxing less spending. To be certain, this is true of welfare spending, but it is more difficult to justify in the case of military expenditure or energy subsidies. The debt caused by fiscal gaps today are paid off in the future, so smart investments today that in part cause the fiscal gap, can also pay off this debt in the future. Investing in key human development inputs today is worth it if the debt needed to finance it isn’t too costly for future generations to repay it.
Thirdly, the implication that intergenerational claims must be at odds with welfare policy and practice today is simply wrong. I contend that if welfare policy is considered a guiding principle of a wider development agenda and a key input to economic growth, there is no reason social spending today shouldn’t incite a virtuous cycle for future generations. Human capital formation today, through investments in health, education, and a social safety net in times of severe need, benefit individuals on a personal level and eventually society at large, when these better off individuals work together.
A clear mission with flexible modalities
There are many ways in which “government policies influence the welfare of citizens.”[iii] Indeed this is at the very core of social contract theory, from Hobbes to Rousseau. So, to talk about a ‘welfare state’ as if these states have objectives that are in some way different from the purported objectives of any other state is arguably an invisible line drawn in the sand. Every decision any government makes concerns the welfare of its people.
Yet, when we talk about the “welfare states” to colleagues, friends, and family, the discussion can turn sour. The term “welfare state” has almost a negative connotation to it. Governments that focus on social spending are seen as providing “hand outs” to otherwise unmotivated or undeserving citizens. However, to view welfare policy in such a way is to limit the possibilities of how a state can capitalize on its human capital endowment as a driver of growth.
For the purposes of this essay, a “welfare state,” or more accurately, a “socially conscious state,” is defined not by the specific services it provides, but the underlying policy that guides it. It is impractical to say that specific services provided by a government, such as a particular pension or healthcare arrangement will go unchanged. That practice is unsustainable as demographics and revenue streams change over time. It is more realistic for citizens and government to have a mutual understanding of what is expected of them in terms of quality and dignity of life, while the actual services themselves can be adjusted to account for demographic shifts and citizen needs.
Further, it is important to remember that how government policy affects people goes far beyond the narrow field of ‘welfare policy’ or ‘social policy’. Haggard and Kauffman note that “Policies related to economic growth are often the most important in affecting welfare, such as property rights, macroeconomic stability, economic and trade openness, and provision of public goods.”[iv] This kind of economic decision-making has the real potential to positively or negatively affect the quality of life for current and future generations, but is not controlled by or impacted directly by welfare services delivered.
With this in mind, it is possible that less would need to be spent on traditional service delivery welfare programmes, as economic empowerment may lead to citizens’ ability to procure services for themselves. For example, research shows that people given direct, unconditional, cash transfers put that money to good use to improve their own welfare by investing in education, health, and other contributors to poverty alleviation.[v]
The opposite end of that spectrum from cash transfers, particularly in low-income resource rich countries, are energy subsidies. Too often, governments respond to pressure to quickly deliver benefits from the country’s natural resource endowments by making oil products cheaper. If welfare is an important part of development policy and a potential driver of economic growth, then other parts of government expenditure should be scrutinized for their role in contributing or stunting welfare objectives.
Artificially distorted government-engineered pricing for energy products, accounted for $480 billion USD, or .7 percent of global GDP in 2011, according to a recent IMF report.[vi] If the negative side effects of these subsidies are taken into account, like increased energy consumption and the knock on environmental effects, this figure nears almost $2 trillion. But research has found time and again that these subsidies disproportionately benefit the already wealthy and disproportionately disenfranchise the poor.[vii] While this is counter intuitive – surely cheaper oil means cheaper prices for the poor at the pump – the poorest cross section of the population uses markedly fewer kinds energy products and less of them.
Sustainable welfare means looking beyond welfare spending
Welfare policy is not a burden on the state; it is the investment that links one generation to the next. While altruistic in some respects, keeping more of the population employed, healthy, and educated, means that economies can diversify and further grow. The investment in human capital today may create debt to be paid off in the future, but it also yields a high return on investment that makes repaying that debt possible.
A welfare framework, is a sustainable investment strategy. We can achieve more today without compromising tomorrow, an embodiment of the landmark Brundtland report that has been guiding the sustainability discourse for almost as long as I have been alive.[viii] Further, doing so isn’t a selfless gift from this generation to the next. Human capital formation is good for citizens today and creates a new generation of skilled individuals whose human capital is further multiplied when they work productively together. The cycle continues for the generations that will follow them.
[i] Ernst Fehr and Klaus M. Schmidt, “Chapter 8: The economics of fairness, reciprocity, and altruism – experimental evidence and new theories.” In S. Kolm & Jean Mercier Ythier (ed.), (2006). Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier. Available at: http://www.et.vwl.uni-muenchen.de/personen/professoren/schmidt/publikationen/papers/reciprocalt.pdf
[ii] Stephan Haggard & Robert R. Kaufman (2008) Development, Democracy, and Welfare States: Latin America, East Asia, and Eastern Europe. Princeton University Press, p.355.
[iii] Stephan Haggard & Robert R. Kaufman (2008) Development, Democracy, and Welfare States: Latin America, East Asia, and Eastern Europe. Princeton University Press, p.353.
[iv] Stephan Haggard & Robert R. Kaufman (2008) Development, Democracy, and Welfare States: Latin America, East Asia, and Eastern Europe. Princeton University Press, p.353.
[v] Catherine Arnold with Tim Conway and Matthew Greenslade “Cash Transfers: Evidence Paper” (2011). DFID. Available at: http://webarchive.nationalarchives.gov.uk/+/http:/www.dfid.gov.uk/Documents/publications1/cash-transfers-evidence-paper.pdf
[vi] “Energy Subsidy Reform: Lessons and Implications” (2013) IMF. Available at: http://www.imf.org/external/np/pp/eng/2013/012813.pdf
[vii] See work from the Global Subsidies Initiative at: http://www.iisd.org/gsi/untold-billions-fossil-fuel-subsidies-their-impacts-and-path-reform