The welfare state: Status quo or reform ?

  After more than three decades of remarkable progress with sustained economic growth and significant improvement in the standard of living, Mauritius found itself, at crossroads, in the midst of a challenging environment - a new era where the protected environment in which it has been evolving so far is fast withering away. The daunting challenges were:  the phasing out of external trade preferences for its textile and sugar, the entry into the world economy of vast new sources of hard-working and highly motivated cheap labour from economic powerhouses such as China and India; the unbundling of the production chain across frontiers that is accelerating in manufacturing and extending more deeply into services; the reliance on trade is rising almost everywhere; the volatility of prices; prices of labour-intensive manufactures and tradeable services are falling while the prices of a number of commodities , notably energy, are rising. The terms of trade had deteriorated by about 15 percent cumulatively over three years, equivalent to a massive income loss of 10%.  The cut in sugar prices further deteriorated the terms of trade by around 9%, impacting negatively on GDP by around a cumulative 3 percentage points. Mauritius has been increasingly affected by these developments. The budget deficit and public debt had reached unsustainable levels, carrying important risks and implications for the sustainability of the extensive social welfare payments especially the universal and civil service pensions.

Our development agenda and the accompanying role of the state have to be reconfigured in response to the challenges and opportunities of the new setting characterized by greater global integration, fiercer competition and the disappearance of a secure captive market. And there is no other alternative (TINA) but to ensure that the economy - already constrained by macroeconomic disequilibria and numerous rigidities in the product, labour, and financial markets impeding productivity growth - adapts to this new environment. The over-burdened bloated public sector, with its whole gamut of free social services and social welfare programmes was collapsing under its own weight and no longer reached the people they were meant for. For the reformers these were growth blockages and bottlenecks reflecting to some extent the fact that our socio-economic setup was already out of tune with the new global trading and business environment. Our welfare state is under pressure. Ageing and the collective welfare schemes make public finances unsustainable in the future, both in financial terms and in terms of social legitimacy. The reformers are cautioning us that there is a sense of urgency and if we are to avoid the impending crisis, we have to bring our macroeconomic and social policies in line with the fundamental demands of the international markets. We have to get rid of our excess luggage, scrap off our excess fat, streamline or dismantle the exiting social system for reasons of international competitiveness and fiscal exigency, We would not be able to withstand the pervasive role of the state with its panoply of social programs, benefits and protections.-a state which presently employs more than 17 percent of the country’s workforce and devotes some 42 percent of the national budget to civil service salaries and pensions.

 

The reformers are quite blunt about it as confirmed by successive Household Budget Surveys - the unfocussed and non-targeted social safety nets and universal provision of some services have not contributed significantly in getting the core out of poverty. Pensions and social aid, they point out, are lifting a bare 6% of all households out of poverty. The lowest income group benefits the least from Government expenditure on education. “Over 90% of government expenditure on primary and secondary education goes to the middle and higher income groups, while the low income group gets a share of only 7% on outlays for the secondary education sector:” They find it so aberrant that we continue to cling to an archaic and perverse system which  is “subsidizing the rich at the expense of the poor and the more deserving segments of society”. We have to necessarily adjust our social system; many of our social welfare policies need to be redesigned to narrow the scope of recipients by targeting benefits through means tests, income tests, claw-back taxes, diagnostic criteria, behavioural requirements, and status characteristics.

But the pro- welfare group fought back aggressively firing salvos after salvos, even calling the Great leader himself to the front lines for support. The reformers had to call back their troops-a tactical retreat-surreptitiously leaving the battlefield and while allowing the dust to settle they intend to sneak back in with a more palatable version of fine targeting-conditional transfers. The reformers are aware that the middle classes, who tend to see themselves more as perpetual societal victims alienated from the better-off and milked by the lazy and undeserving poor,, may come to accept these types of transfers that are linked to performance in health and education. They tend to reaffirm the middle class values of hard work and self discipline and spur long-term thinking that benefits both the individual and society.

Why such aggressiveness from the staunch supporters of the status quo? Because this is not what they had bargained for in following the clarion call for Changement; they had opposed the educational reform and voted to restore the status quo in this sector that continues to favour the elite at enormous cost to the economy; For them modifying the rules of the programmes (eligibility criteria, contribution standards, level of means testing, etc. ) means a gradual retrenchment of welfare state which  affect their vested interests that have, after all, come about through the growth of the very welfare state; it was mostly the middle classes, who benefit from the programmes, that used their considerable political skills to arrest early attempts at tinkering with the welfare state. If the authorities or the seemingly less deserving threaten to intrude with their needs and demands, this “content majority” reacts with undisguised anger and resistance. The content majority adopts a highly selective perception of the role of the state; on the one hand they will support the comfort and security they themselves enjoy while on the other hand they condemn the high tax burden and are increasingly reluctant to share their income with others. Recall the outcry against the tax on interest income and the national residential property tax.

Over time it has developed a host of interests and solid networks of powerful interest groups becoming enduring sources of persisting support even in the face of failing policies, programmes and institutions. The political sphere is aware that the political costs of abandoning these policies are prohibitively high as most of the social policies are still quite popular among the electorate. They thus continue to champion the strategy of universalism (which is not necessarily superior to more particular approaches). Most public spending programs are to some degree targeted, they argue. The question is, what degree of targeting is optimal? Other things being equal, the more ways one discriminates between beneficiaries, the greater the targeting's impact on poverty. But other things are not equal. Fine targeting sometimes comes at a cost to the poor. Administrative costs may escalate, political support may vanish, and behavioral responses may add costs to targeted interventions. Fine targeting, they are convinced, is usually faced with formidable administrative hurdles.  In a World Bank study (Coady et al. 2004) of 122 targeted anti-poverty interventions in 48 countries, the authors conclude that while the median programme transfers 25 per cent more to individuals than would be the case with universal allocation, a “staggering” 25 per cent of programmes are regressive. Available figures show that the median targeting programme in sub-Saharan Africa transfers 8 per cent less to poor individuals than a universal programme.

The welfare vigilante were quick in digging up considerable evidence to show that stigmatization comes along with such methods and they present the case of the Indonesian rice subsidy programme-“ Thus, in some localities covered by the programme , rather than limit the subsidized rations to poor households as the programme rules formally require, the community or its head chose to divide the ration equally among all households (Klugman 1999).. Moreover, social indicators are extremely difficult to construct, and poverty has a multidimensionality that is far more complex than that of other simpler industrial structures.  One of their big exhibits is that of Amartya Sen (1995) raising exactly the same arguments against targeting in the social sphere and that famous quote of his  “Benefits meant exclusively for the poor often end up being poor benefits.” (Sen 1995). And to cap it all, their most visible banner refers to the possibility of ethnic conflicts. Fine targeting, it points out, often leads to some kind of inequality such that the poor in one area or community might benefit more than the poor in non-targeted areas/communities. Such inequality can be explosive politically and is often the basis of ethnic conflicts. So, in the name of consistency, they favour universalistic social policies because they are less bureaucratic, cumbersome and more market conforming.

On the issue of efficiency, they counter attack, with exhibits from a sample of OECD countries, showing that welfare spending does not diminish economic growth. Within these economies, all of whom have extensive social safety nets, there is very little correlation between economic performance and welfare expenditure.  According to the latest ranking from the World Economic Forum, Denmark is the third most competitive economy on the planet. If by economic competitiveness we mean long hours  low taxes and minimal government , Denmark does not foot the bill . Denmark has the highest tax burden in the capitalist world after Sweden a generous welfare state. The “ model of free education, free health care, a good financial situation if you lose a job, ....somehow has struck something that is the answer to the challenges of globalization.” Denmark gives the lie to the reformers – to the many arguments made over the past quarter century. The provision of free healthcare and education produces a healthier, more skilled labour force than would otherwise be the case. This results in a greater benefit in terms of increased productivity than the cost in increased taxes.  Generous welfare state programmes may enhance and not diminish international competitiveness and can be part of the comparative institutional advantage of an economy rather than solely contributing to its comparative cost disadvantage. “There’s more than one way to be competitive” argues the anti –TINAs.

            The first leg of this tussle seems to have been won by the welfarists-the anti-TINAs. And- the experts say- that this does not bode well for the future dynamism of the economy. The system needs to change but it is not clear that the reformers still have the political muscle to make it happen. Expectations were high, and many political observers are wondering whether the reformist wing of government has the necessary backbone to push through change that goes beyond mere tinkering and the “dialectic of expectations” ( a process of rising expectations by which every increase in state responsibility is followed by a growing demand for more). Some of them believe that a genuine programme of reform will have to go all the way, (supported by some eminent economists and business leaders) nothing short of a dismantling of the whole system –  “What Mauritius  needs today is a revitalizing dose of the type of free-market medicine”. They label our reformers as “short termers” who have carried out the necessary, but not necessarily sufficient, fiscal stabilization and general macroeconomic reforms but have so far avoided making hard choices that will help to raise the long run growth potential. 

 Reforming the Welfare State or creating a more modern and affordable structure before the old edifice falls into total disrepair—Mauritians are learning that this is even harder than building a Welfare State. With this task we are not at the end but just at the beginning.