Fairer societies - the secret of economic growth
José Antonio Ocampo, Executive Secretary of the UN Economic Commission for Latin America and the Caribbean, explains how the mere reduction of the state is no recipe for a country’s success
Issue 4, Volume 49, 2000
A commitment to reduce poverty, eliminate extreme poverty, and enhance equity and social integration requires persistent actions to reconcile economic growth, employment generation and an active social policy, within a consistent macro-economic framework.
The links between social development and macro-economic policies are multidimensional. First, and foremost, social cohesion and an adequate accumulation of human capital are widely recognised today as essential prerequisites for dynamic economic growth. Given their central role in human capital formation, social investment policies are thus essential to reconcile growth and social development. Social investment is, thus, a productive factor. On the other hand, macro-economic adjustment and structural reform are more likely to be sustainable when they are equitable. Social policies and programmes aimed at improving social performance in the long run, need stable funding, which largely depends on stable economic growth. Macro-economic instability — especially episodes of recession or hyperinflation — increases poverty and inequality. Finally, there is no unique macro-economic policy mix to tackle a given situation.
The evidence of the past two decades in the developing world is not encouraging in terms of an adequate exploitation of these positive links. With the notable exception of some Asian countries, growth rates have been disappointing. In particular, growth rates in Africa, Central and Eastern Europe, Latin America and the Middle East over the last decade were far below the post-war record up to the mid- or late 1970s. Moreover, several least developed countries and transition economies have per capita GDP levels that are sometimes substantially below those of a decade or even two decades ago.
From a different perspective, growth also became more volatile during the 1990s, imposing additional social costs. The Mexican crisis of 1994-1995 and the recent Asian crisis revealed the presence of underestimated contagion effects and more subtle types of vulnerability. In this respect, macro-economic policy efforts and structural reforms failed to anticipate and prevent the crisis, with unacceptable and unfair social effects.
Do these developments reflect a contradiction between pursuing macro-economic consistency and improving social performance? There are a number of reasons for a strong negative response to that question. For public policy — including social policy — to be effective and sustainable, comprehensive consistency among the different targets of authorities is needed. The absence of such consistency was precisely a major cause for painful adjustments in policy design, as was the case in the 1980s. There is also a consensus that macro-economic instability is harmful for both growth and equity, and that a sound macro-economic environment is a necessary condition for a successful social policy. In particular, episodes of instability disproportionately affect vulnerable groups in the short run. In addition, it also acts as a deterrent for the determinants of growth, since they affect the process of savings and investment and, thus, reduce long term growth and the potential for productive job creation. Given their structural nature, poverty reduction and equity enhancement require a context of macro-economic consistency and stability.
These positive links between macro-economic consistency and social performance must, nonetheless, be adequately interpreted. First and most important, stability and consistency are necessary but not sufficient conditions for better social performance. In general, they are necessary conditions for any set of structural goals, which may not necessarily have a straightforward social content. For example, it may be the case that the ultimate and prioritised structural target of the authority is purely and simply to reduce the size of the State, even at the expense of sacrificing social policy efforts.
Second, low inflation and balanced fiscal accounts are components of stability and consistency, but they are not synonymous. This is an important consideration, since most of the macro-economic effort has concentrated on these two aspects. Among other examples, Mexico and the Southeast Asian economies, on the eve of their respective crises of the 1990s, exhibited fiscal balances or surpluses and low inflation rates, along with exchange rate misalignments and unsustainable current account deficits.
Financial globalisation provides additional sources of funding for development but, as these episodes reflect, it has also shown that new components of systemic risks may arise. There are no conventional ways to keep international capital flows at manageable levels during periods of financial euphoria. The constraint that macro-economic consistency does impose on social policies is that these need sustainable funding through time, and should operate in such a way that they do not deter savings and investment decisions or job creation. In many developing countries, it may be necessary to increase gradually the overall magnitude of public expenditures and that, in turn, would require sustainable additional financing beyond the proceeds from economic growth.
Labour income is the main source of revenue for the poor. To that extent, human capital accumulation, job creation and improvement of the quality of employment are key issues for sustainable poverty alleviation. All these ingredients are attainable in a context of dynamic economic growth.
The structural reforms were aimed mainly at enhancing growth, under the conviction that growth alone could provide the ingredients for social relief. In this sense, the main scope of the reforms were to strengthen market structures, to reduce government intervention and privatise public firms, and to dismantle protectionist practices by opening to international markets. These efforts had to be coupled with short-term macro-economic efforts to ensure stability, which required major cutbacks in government expenditures in most of the developing world. The main social effort prescribed by this process was the introduction of reforms aimed at targeting, decentralising and promoting private sector participation in the administration of social policy, as well as the introduction of social safety nets during the transition period. The outcome of this process was mixed.
Globalisation and the wave of technological change have opened a world of opportunities to do new things, and to do the same things better. In terms of economic growth, there are net advantages to these processes, but the likely social consequences are not clear, however. The mix of creation and destruction inherent to growth has become more evident, creating distinct winners and losers. A context of pure economic "Darwinism", where the strongest, the fittest and the best endowed agents displace the weakest ones may have disastrous social consequences. It may also have disruptive political consequences if the anguish of insecurity provoked by economic change promotes coalitions against globalisation, as has been recently observed. On the other hand, rigid structures aimed at protecting against change may eventually discourage change, which would also be counterproductive.
It seems far more promising to take an integral view of this process. The main line of thought in this vein is that growth and equity, if correctly tackled, may reinforce each other. In fact, social efforts should concentrate mainly in supporting an inclusive growth process. The best social outcome is one in which all individuals share the benefits but also contribute to economic development. A social policy which seeks to strengthen the weakest, to fit the less adapted, to endow the poorer agents — especially with human capital — and to re-insert the losers as active economic citizens is one that not only contributes to equity, but also to growth. This is all the more true as growth and development is clearly a positive sum game. The attitude should be to see globalisation and innovation as an opportunity to attain higher and more equitable levels of prosperity, rather than as a threat to them.
The original stabilisation and structural adjustment programmes had few provisions for dealing with social consequences. Consequently, at the United Nations Social Summit a commitment was made to include social development goals in structural adjustment programmes. Three central goals were then promulgated: poverty eradication, employment growth and social integration. This commitment was partly based on the conviction that a stable economy cannot be built in an unstable society. To some extent this is what is problematic about a non-integrated structural adjustment strategy. It carries the seeds of its own failure if it creates the type of instability and unrest that are linked to unfairness. Thus, the social dimensions need to be brought explicitly into discussions on structural adjustment and macro-economic policy design.
A necessary condition for the creation of more just and harmonious societies is the strengthening of policies in support of greater economic and social equity. Equity should be understood as the broad-based access to resources, basic protections, voice (empowerment) and participation.
Social policy should act on the structural determinants of income distribution and poverty: education, employment, nutrition, wealth distribution and demography, as well as on their associated gender and ethnic dimensions. This effort should be carried out through an integrated policy to support the poor.
The accumulation of human capital is a key component of comprehensive development, since it has a simultaneous impact on equity, poverty reduction, growth and social and political integration. It should be viewed both as a human right in itself and an indispensable means of realising all human rights. The likelihood of being poor is highest when basic education is incomplete. Education is thus the primary vehicle for lifting marginalised adults and children out of poverty, as well as for enabling them to obtain the means by which they can participate fully in their communities.
A different but no less important dimension of human capital accumulation is that of training programmes. The need for competitiveness in a global economy, along with the rapid development of technological innovation, calls for quick and significant changes in manpower training. Therefore, a large-scale effort should be made to provide individuals with the up-to-date knowledge and skills they need in order to be competitive on the labour market. Also, recognition of the fact that human capital also depreciates, especially when skills are specific to declining sectors, introduces an important additional dimension for re-training programmes.
Formal education and training are the most obvious forms of investment in human capital, but they are not the only ones. Nutrition — especially at the early stages of life, including pregnancy — and access to preventive and curative health are also important components of a strategy aimed at human capital accumulation. In the same vein, investing in water supplies and sanitation and, in general, improving the quality of life in rural and urban areas are other aspects of the integral development of human capital.
Given the crucial role it plays in the growth-distribution link and its ability to reduce poverty and generate social integration, employment deserves special attention. As mentioned before, to the extent that earned income is the main source of revenue for the poor, job creation, human capital accumulation and improvement in the quality of employment are key issues for sustainable poverty alleviation.
An inadequate generation of quality jobs will defeat efforts in the area of education. The central issue is the adaptability of labour to technical change and the business cycle. Some crucial contributing factors are: strong manpower training schemes; institutions that enhance cooperation, both at the national level (social dialogue) and within firms; adequate social protection, both permanent and for emergencies; and a prudent minimum wage policy. Institutions that facilitate the employment of women also have a significant impact on equity.
Improved social security systems and safety nets are also key elements of an integrated approach to eradicating poverty and improving equity. These systems should provide for universal coverage and solidarity and should cover basic risks — particularly health, ageing and unemployment — in an integral way. In countries where the labour force is largely rural or informal, such schemes can only be developed gradually. Moreover, social security systems do not come without costs, as may be noted in many developed countries, particularly as the result of population ageing, changing family structures, increasingly expensive medical care, persistent unemployment and the abuses and disincentives they may generate.
One of the main weaknesses in this regard is the lack of appropriate institutions for integrated policy frameworks. Such institutions should include: participation of social actors to speak for the poor, systems to allow for the definition of explicit social targets of public sector policies, effective systems to ensure coordination between economic and social authorities, and rules to enhance the "visibility" of the social effects of economic policy.
With rising inequality, the Social Summit commitment of promoting social integration will become more elusive. Social cohesion and solidarity are a fundamental condition of development and social progress, and efforts to develop and reinforce institutions and mechanisms encouraging social integration must be sustained. By promoting inclusion and reducing deprivation, social development strengthens democratic institutions and processes, makes social and economic relations more harmonious, and provides a firm foundation for achieving long-term development and prosperity.
Tackling the agenda of the Social Summit requires efforts not only at a national level but also an explicit commitment of the international community, in terms of accepting, promoting and demanding that priority be given to more effective social investment efforts to promote solidarity and equity. In the case of the richest countries, such commitment should also be reflected in the channelling of aid, in accordance with the internationally-agreed target of 0.7 per cent of GDP, and in the opening up of markets to products from developing countries.