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The Paradigms of Inclusive Growth, Development and Welfare Policy
Reza Hasmath
The global financial crisis, from 2008 to 2012, has increased the scope of poverty and inequality. In 2012, 200 million were out of work worldwide, a figure estimated to rise by 5.1 million in 2013, and an additional 3 million in 2014 (ILO 2013). The ILOâs figures further indicate that global unemployment has risen by 28 million since 2007, and, more alarmingly, there are 39 million individuals withdrawing from the labour market over the same timeframe.
The period of the financial crisis has also seen âdevelopingâ nations replace âdevelopedâ nations in leading global economic growth. According to the International Monetary Fund (2013), âdevelopedâ nations accounted for 29 percent of incremental global nominal GDP from 2007 to 2013, and the remaining 71 percent were attributed to âdeveloping nationsâ.
In many respects, we have grown accustomed over the past few decades to sustained global economic growth, which has simultaneously increased living standards worldwide and reduced extreme poverty in aggregate. In spite of the global population rising to more than 2 billion in the past twenty-five years, the number of individuals living in extreme poverty fell by 650 million to 1.3 billion. Yet the benefits of sustained economic growth were not enjoyed evenly. The gap between the richest and poorest nation-states has become wider: 13 percent of the worldâs population (approximately 500 million) received 45 percent of the worldâs income (>USD 11,500 PPP), and 42 percent of the global population (approximately 2.1 billion) receive 9 percent of the worldâs income (<USD 1,000 PPP) (Milanovic 2001). In OECD nations, the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent (OECD 2011).
Income inequality at the national level has also been on the rise, irrespective of whether one is a developed/developing or welfare/non-welfare, nation-state. For instance, despite relatively high rates of economic growth in mainland China, averaging 8 to 9 percent in the past two decades, the nation continues to experience a high rate of income inequality with a Gini coefficient of 0.474 in 2012, peaking at 0.491 in 2008. In welfare states such as Sweden, viewed as staunchly egalitarian and the gold standard for social and economic equity, after a marginal dip in 2008, the nationâs economy has outperformed the United States and Germany. Notwithstanding, even Sweden has experienced a slight increase in income inequality moving from a Gini coefficient of 0.21 in 1995 to 0.24 in 2000 and 2005 to 0.26 in 2008.
The recognition of widening income gaps has highlighted concerns that structural reforms may increase income inequality. As discussed at length in Pier Carlo Padoanâs chapter, such concerns have gained further prominence in nation-states where current reform action is being driven primarily by fiscal consolidation objectives. Many structural reforms entail a double dividend, as they reduce income inequality while at the same time boosting long-run GDP per capita. Examples include facilitating the accumulation of human capital notably at the secondary level, improving the efficiency and the equity of education, reducing labour market dualism, promoting the integration of immigrants and fostering female labour force participation. Reducing tax expenditures along with reducing marginal tax rates also typically contributes to both goals of reducing inequality and enhancing economic growth. By contrast, other reforms may entail a trade-off between growth and income distribution objectives. As a case in point, shifting the tax mix away from labour and corporate income taxes towards consumption taxes improves incentives to work, save and invest but can undermine equity. However, cash transfers targeted to lower incomes can be used to ease this trade-off, as illustrated in the cases of Brazil and South Africa discussed in Jane Jenson and Rebecca Surenderâs chapters respectively.
The distribution of income is not only shaped by long-term trends like changes in policies and institutions, technological change or globalization, but it is also affected, sometimes durably, by macroeconomic shocks such as the recent global financial crisis. There are distributive effects of macroeconomic shocks on both income and employment, and the role of policies and institutions in shaping such policies. As Padoan continues to argue in his chapter, incomes of the poor and jobs of the young have in general been most affected by macroeconomic fluctuations in bad times, although they have risen more strongly in good times. In the case of past financial crises, both high-income households and the poor have been hurt severely. Moreover, reforms that can improve risk sharing while also benefiting growth and jobs, not least by facilitating the reallocation of labour across the economy, include liberalizing product markets, removing barriers to trade and FDI and lowering high taxes on labour. Arguably, the experience of the global financial crisis has reinforced the notion that growth is not the only salient issue but also how to make it inclusive.
The Inclusive Growth Paradigm
Inclusive growth goes beyond traditional economic growth models. While traditional economic growth has a tendency to focus on increasing the market value of goods and services produced, inclusive growth adopts a wider perspective combining economic growth with an improvement in the equality of living standards, and factoring dimensions such as labour market participation, human capital, health, environment quality, social protection, housing, food security, etc. Pragmatically, the inclusive growth paradigm considers not only how income increases over time but also how to ensure that income gains are enjoyed by the widest population feasible.
The inclusive growth paradigm stems from the philosophical roots of Amartya Senâs (1992) capabilities approach, which is about improving and enhancing the quality of life and capabilities of all individuals by striving for a level of equitable parity within a community, not only via economic means but social ones as well. Inclusive growth is thus a policy response to this idea. Using different formulations for the measure of inequality allows us to represent the diversity of social and economic preferences and can be expressed through the formulation and implementation of policy-making.
Of course, there are challenges for adopting an inclusive growth model in policy-making, which can be understood in two ways: (1) an evaluative challenge and (2) an agency challenge. The first challenge looks at evaluating the improvements of individuals and groups by using specific objectives as key indicators of progress. The second challenge is broadly concerned with the implementation of such improvements.
The establishment of measurement tools and objectives for evaluating inclusive growth is difficult. Given the potentially long list of indicators measuring inclusive growth, the evaluative challenge is to decide which measures should be adopted. Inevitably, this list will vary from group to group and from one reference point to another. Proposals such as the OECDâs Better Life Index, or national proposals, which for the most part have adopted the Stiglitz-Sen-Fitoussi Commissionâs recommendations (Stiglitz et al. 2009), are by no means universally accepted. Whereas we can expect inclusive growth measurements to be deliberately general in espousing what should be used for evaluation, at the very least there are basic principles and commitments.
In this spirit, the agency challenge is to offer a framework that spells out the basic principles and commitments in a more tangible manner, with a mindset for policy implementation. Foremost in this basic framework is the role of education and employment. Education makes it possible for people to be responsible and informed members of the community and, in turn, allows the individual to have a voice in the politics and direction of a community. In Senâs language, education can be thought of gathering and using information inherent in the concept of capabilities. Conversely, the issue of employment is a basic principle/commitment that is critical to inclusive growth. Policies to eradicate poverty, reduce income disparities and combat social exclusion ultimately require the creation of employment opportunities. Put differently, a major component of employment is to promote an environment where opportunities can be created, by encouraging individuals to develop necessary skills and training to succeed in the employment market. Thus, education is embroiled heavily in an employment component.
Once the evaluative and agency challenges have been understood and dissected, another task is to compare and contrast global patterns of institutional, social and economic performances. In this pursuit, there are potentially four groups of nations that share similar settings for analytical purposes throughout the book. Most nations of continental Europe (group one) provide income risk sharing primarily via social protection programs, while English-speaking and Asian OECD nations (group two) rely mainly on reallocation-facilitating institutions. The Nordic nations (group three) tend to have both, while in emerging nations (group four) neither class of institutions are fully developed. An effective policy mix can potentially deliver on both risk-sharing and growth objectives and combine reallocation-facilitating institutionsâwhich always benefit both goalsâand a well-designed social protection system, that is, one that achieves a given insurance objective at minimum cost. But we are getting ahead of ourselves. Once the dimensions of inclusive growth can be clarified, understanding the nature and operations of the current development and welfare policy paradigm is the next step.
Development Policy Paradigm
The prospect of a shift in designing and implementing development and welfare policies is strong in this new environment. The neoliberal policies of the Washington Consensus are giving way to models that look to a more active government role in both economic and social policies. As Hasmath in his chapter on the Beijing Consensus argues, there is a growing philosophical movement towards an ultra-pragmatic view of development policy practice. This is contrary to models of development that provide a hard subset of policy prescriptions at the policymakersâ disposal, such as the Washington Consensus, or a fundamentalist adherence to a particular economic tradition, e.g. neoliberalism. The philosophical intentionality of the Beijing Consensus is reflected in the infamous words of Deng Xiaoping: âI do not care if it is a white cat or a black cat. ⌠It is a good cat so long as it catches miceâ. In short, the Beijing Consensus inherently recognizes that each development scenario has a potential set of challenges that may require unique solutions factoring the social, economic and political environments. This ultra-pragmatism provides room for greater experimentation in development and welfare policy.
Shailaja Fennellâs and Jennifer Hsuâs chapters reinforce this new pragmatic optimism for experimentation. In the context of Asia, they observe that radical and innovative answers lie not in tinkering with the existing system but in looking at the distinctive and systematically different manner in which new global players are engaging new principles to manage their domestic economy, as well as the international stage. The global economic crisis has led to a questioning of the current paradigm of economic development where the development experience of new players and the value of heterodox methods could be accorded new, as well as greater value.
Inclusive growth models demand sources of financing with varying levels of risk appetite. Whereas traditional sources of financing such as Official Development Assistance (ODA) are useful, they are not sustainable. In the case of South Korea, Kim and Jungâs chapter reminds the reader that the East Asian nation achieved rapid economic growth in the late twentieth century, to the extent of taking the majority of its population out of poverty in record time. This was achieved without adequate social protections or a safety net, as if South Korea were making a case for pro-growth and pro-poor theories. The 1997 Asian Financial Crisis, however, made a huge dent in this kind of narrative as the sudden economic collapse brought poverty and mass unemployment back in a spectacular fashion, akin to the global financial crisis from 2008 to 2012. In response, the International Monetary Fund urged the South Korean government to establish a social safety net. The ensuing welfare reform changed the perspectives of South Korean policymakers and citizens alike on social policies addressing poverty and economic vulnerabilities. Still, there remains a tension between pro-growth and pro-poor policy orientations in the political arena.
Since recovering from the economic meltdown, South Korea had been pursuing the global status as an emerging donor of ODA, which culminated in its ascension to the OECD/DAC in 2010. Whereas the old foreign aid policy was motivated by the Cold War diplomatic competition against North Korea and/or economic cooperation with resource-rich countries, the new ODA policy appears to focus more on poverty reduction and socio-economic development of the recipient nations. One plausible interpretation of this policy shift is that the South Korean government needed a policy reorientation in accordance with the global norms as represented by the OECD/DAC guidelines. As Kim and Jungâs chapter suggests, there has been a deeper undercurrent in terms of public awareness of poverty as not only a domestic problem but also a global one that requires policy intervention and material support.
Welfare Policy Paradigm
Meanwhile, in what has been the parallel universe of welfare policy, a fundamental realignment has already taken place. As discussed in James Midgleyâs chapter, commitments to inclusive growth and social inclusion, more generally, have become a preoccupation of policy communities. They have sought viable models for reforming welfare regimes. In their original design, welfare regimes contained a commitment to social equality, although they also varied in their willingness to accept inequality. Faced with the current economic and social challenges, contemporary policy communities have turned to a variety of models and policy instruments to ensure that growth and social inclusion go together.
One of these models is the social investment perspective. This policy perspective focuses on labour market participation of parents and anti-child-poverty strategies, as well as investments in human capital notably in the early years. The perspective takes on different colouration depending on the political circumstances and intellectual influences that shape it in each case. Yet there are a number of shared premises that underpin it. The emphasis is on policies for children and their families, on the future more than the present, and the societal as well as individual advantages of social investments. Jane Jensonâs chapter identifies three key building blocks. First is the notion of constant learning. Second is an orientation to the future. Third, the social investment perspective promotes the notion that investments in individuals enrich our common future.
The social investment schemes and welfare policies discussed in this book appear to have mitigated the job or income losses of vulnerable groups in the wake of past shocks, but since such schemes and policies can come at a cost in terms of jobs and income, particular care is needed in designing and implementing them. Following this logic, Morel, Palier and Palmeâs chapter begs us to be critical of the social investment perspective, both at the ideational level and in terms of the policies implemented in some of the most affluent nations in the world. This includes an attempt at assessing the achievements, as well as the shortcomings, of social investmentâoriented policies. In doing so it provides the ground for a more normative discussion of what is missing in the social investment approach in relation to the new challenges that many nations in the world are facing in terms of population change, rising inequalities, unemployment, the impact of the financial crisis and environmental issues. The question is whether the social investment perspective can provide adequate responses to these challenges.
For Morel, Palier and Palme, the answer is contingent not only on the specific design of the policies where the quest for quality is a key element, but also on a successful combination with other policies that can reduce inequalities, notably social protection policies and policies aimed at promoting gender equality. Moreover, the social investment policies need greater experimentationâakin to the call made in Hasmathâs chapterâto ultimately foster a new macroeconomic framework to underpin the policy framework.
The empirical evidence for the social investment perspective is observed in Ito Pengâs chapter on Japan and South Korea. Since the mid-1990s, the Japanese and the South Korean governments have significantly enlarged public support for women and family. In Japan the government implemented the Angel Plan in 1994 and the long-term care insurance program in 2000. These changes led to a rapid expansion of publicly funded child care and elder care programs. In South Korea, similar public support for the family also began in the early 2000s, starting with the expansion of public child care programs beginning around 2004 and the introduction of long-term-care insurance in 2008. In both nations, government support for child and elder care programs remain strong. Indeed, both nationsâ governments claim that investing in children, women and family is not only socially important, but that it is good for the nation and the economy. Simply put, both Japan and South Korea appear to be firmly committed to their social investment strategies. Peng wonders whether these observations of similar social policy directions demonstrate a mere coincidence or a new and a more universal public policy trajectory being followed by other industrialized nations.
Clues responding to Pengâs query can be found in the Australian, New Zealand and South African cases. Australia is at the front line of debate over ânew welfareâ. Up until the turn of the century, Australiaâs model of wage earnersâ welfare was commonly recognized as an Antipodean exception to Esping Andersenâs threefold typology of welfare regimes. Its characteristically residual approach to state welfare provision was explained not as evidence of a liberal regime, but rather as the result of an historical preference for a regulated living wage as a substitute for welfare. However, in the 1990s the institutional basis of the model was largely removed by extensive labour market deregulation leaving Australia very much in need of a ânew welfareâ architecture. With its employment-centred, wage-based, productivist welfare tradition, Paul Smyth suggests in his chapter, it is not surprising that Australia has experienced a pronounced shift from âwelfareâ to âsocial investmentâ in keeping with the British and European Union trend but also in line with the inclusive growth thinking in development policy post the Washington Consensus. While welcoming this rehabilitation of the productive value of social investment, Smythâs chapter further observes the shadowy side of this policy renewal. This is found in the diminution of the âwelfare rolesâ of protection and compensation along internationally recognized lines in terms of the âgreat risk shiftâ. A rebalancing of the investment and protection functions is proposed as the basis of a durable ânew welfareâ policy architecture for Australia.
Akin to Australia, New Zealand has undertaken a range of welfare reforms over the last two decades, the most recent of which is built around the idea of welfare dependence as the central unifying theme used to justify a range of policies aimed at reducing benefit numbers. Mike OâBrienâs chapter reviews these reforms around two central questions: (1) How do the reforms enhance and advance social inclusion? And (2) how do the reforms change the idea of, and approach to, citizenship that has been central to welfare development historically?
The extent to which welfare and social policy should be about economic development and social reproduction, the management of risks or a means for creating a more egalitarian and solidaristic society has been a ubiquitous element of social policy analysis. South Africaâs role as an emerging development actor and its conceptualization of welfare and social policy issues, both domestically and...
