Sustainable social policies in an era of globalisation: lessons from the Swedish case.

• Author: Palme, Joakim

Abstract

The welfare state is challenged by the globalisation of the world economy and by the fact that ageing populations demand more redistribution. To promote political and social sustainability in this context, the "destructive" forces of market competition have to be met by "constructive" social policies. In Europe, the Scandinavian countries are the best performers in combining inequality reductions with high employment rates and excellent growth records. A framework for reform inspired by this starts from the notion that in order to be successful in meeting new needs with restricted resources we must improve incentives, human resources, social services and employment opportunities. The ageing of our societies means we also need to rethink our policies in other ways. The discussion has, however, been unduly focused on pension reforms and savings to ensure future living standards for the elderly. Instead, we should focus more on how social policy interacts with education, fertility and other fundamental determinants of the future tax base. In order to design social policies that are sustainable for the future, we need to put our children and youth first. The Swedish case is relevant here, with its institutions that promote gender balance and investment in life-long learning. We should, however, make sure that we base our policy recommendations not on wishful thinking but on a knowledge-based and realistic assessment of how the world works.

CHALLENGES: GLOBALISATION AND AGEING POPULATIONS

The globalisation of the world economy is most often perceived as a threat to national systems of social protection. It is not all that clear, however, why the welfare state is not possible for nation states with open economies. The old conventional wisdom used to be that most open economies among the advanced industrial societies also had developed the most generous social security systems, as an alternative, in fact, to the kind of social protection that high tariffs and other import restrictions offered domestic employment.

The globalisation process is, however, still often used as an argument, or excuse, for welfare state retrenchments. It has been used to create "a climate of no choice". It is thus an important challenge to seek reform strategies that can make welfare state commitments compatible with exposure to a globalised economy. What appears clear is that the liberalisation of capital implies that the profitability of investments in any country would roughly have to follow what applies in the rest of the world, otherwise investors--foreign as well as domestic--will move their capital. This puts very clear constraints on the financing of social protection.

The mobility of labour also puts restrictions on how high levels of taxes can be raised in relation to the kinds of benefits and services that are provided. Yet the level of income taxation and the size of social security contributions are not of primary importance as such, as long as employees and their trade unions recognise the cost of social security. If the cost of social policy--the social wage--is not taken into consideration in wage negotiations, the result might be inflation and eroded competitiveness. However, competitiveness is not threatened as long as the cost of the social wage is recognised, and even if profit levels are difficult to reduce in single countries, the division between what is paid as direct wage and what is paid as social wage ought to be flexible.

In Europe, as in New Zealand, demographic projections indicate a quite considerable ageing of the populations. These projections also indicate a high probability that this trend will last for most of the current century. An important part of this ageing is due to increasing longevity of persons above retirement age, but the trend is reinforced by birth rates falling below reproduction levels in most countries. Social security and the welfare state are strongly redistributive over the life cycle of individuals. From that perspective, it is obvious that financial pressures on social policy will increase, and it becomes an important concern how social policy can be designed to generate positive feedback for fertility and human capital formation in general, as well as other fundamental determinants of the future tax base such as labour supply (Institute for Futures Studies 2006).

SOCIALLY CONSTRUCTIVE RESPONSES TO DESTRUCTIVE PROCESSES

The 19th and 20th centuries have witnessed great transformations of economic systems around the world. During such transformations there are always winners and losers. In the wake of big changes, old forms of security are vanishing and new ones are taking shape (Kangas and Palme 2005). Following the Austrian economist Schumpeter (1950), we can speak about a "constructive destruction". This term refers to a situation where the old, inefficient forms of production are destroyed and replaced by more efficient systems. How and to what extent it is possible to exploit the destruction in a socially justifiable way, and to create social and economic institutions that can effectively utilise the potentials and possibilities the new situation opens, is the underlying question of this paper. I will use the Swedish experience as an illustration of the problems and potentials.

Views on the merits and drawbacks of the Swedish model diverge widely among observers. There are those who think that the Swedish welfare state is the best of all possible worlds. Indeed, there are notable achievements in the field of poverty reduction. The Swedish poverty rates--and those of the other Scandinavian countries--have been the lowest in the world for decades. And it appears possible to unify equality, big welfare state and a high level of taxation with economic growth. Critical voices phrase the situation quite differently. They argue that by equalising incomes through generous welfare benefits, the welfare state creates work disincentives and discourages individual initiatives, which hampers economic growth, meaning that in the longer run this will also hurt the poor. The extreme views expressed on both sides are often based on wishful thinking or prejudice, on myths rather than reality. This is a challenge for social science research. If we want to take social policy making as a "learning process" seriously, we need to base our evaluation of different social policy strategies on facts and systematic analysis--not on assumptions. Comparative studies can make a contribution by contrasting different solutions and their advantages and problems (Kangas and Palme 2005).

What appears to be a real challenge for those who want to defend the welfare state is to promote social cohesion in open economies within this new context of deregulated financial markets and mobile global capital. It is hence of vital importance to find social policy strategies that can combine equality and efficiency considerations.

EQUALITY AND EFFICIENCY

During the decades following World War II, most countries with large welfare states came to combine several objectives previously regarded as incompatible. High economic growth was combined with far-reaching economic equalisation and, moreover, full employment. The oil crises of the 1970s were followed by slower growth rates, but this is a feature common to all the most affluent of the industrialised countries, including countries with less generous welfare models. Empirical research in this field does not serve to show that major welfare state commitments in themselves have a negative impact on growth. An encompassing welfare state appears to be compatible with growth (Atkinson 1999).

Criticism of encompassing welfare states has focused on the incentive problems associated with the high levels of taxation involved, and the lack of control over the growth of public expenditure. As far as actual labour market behaviour is concerned, however, it is hard to find any pronounced negative deviations in the patterns of economic activity in, for example, the large Swedish welfare state in comparison with the patterns prevailing in other kinds of welfare state in the Western world. On the contrary, Sweden has one of the world's highest employment participation rates despite the high level of unemployment. This is largely due to the high participation among women.

However, the relationship between the welfare state and efficiency is under-theorised and under-studied, both theoretically and empirically. Several factors contribute to this. One factor is that intentions are confused with actual outcomes. Another factor is that the architects of the systems might have feared a critical examination of the outcomes. There is also an unfortunate combination of perspectives in economics. The neo-classical starting point is that all forms of taxation mean efficiency losses. This starting point leads to a bias towards focusing on the negatives aspects of all state intervention. I would argue that it is misleading to compare state intervention in the form of benefits and taxation with no intervention at all. In our kinds of society--in fact, in all advanced industrial countries--the state intervenes in many different ways. This suggests that it is more fruitful to compare different kinds of intervention; i.e. how the size and design of transfers/services and taxation...