Government, Market and the Civic Sector: The Search for a Productive Partnership



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The Impact of Globalisation on Systems of Social Security
prepared for the 9 th NISPAcee Annual Conference:

“Government, Market and the Civic Sector: The Search for a Productive Partnership” (Working group on System of Social Security with Special Emphasis on Problems of Unemployment, Poverty and Gender)


Jitka Dolezalova

University of Economics, Prague
Abstract
The objective of this paper is to analyse the influence of globalisation on systems of Social Security in Europe (with a view to the CEE countries). The hypothesis of the contribution is that the influence of globalisation is becoming more and more substantial and globalisation process will force the Social Security Systems on a revision. Not only because of indefensible state of the pension scheme (and social protection sphere generally) in most of the European countries but also for the maintenance of competitiveness of European countries in the more and more global world. In the paper I will analyse the current indefensible situation of Social Security System in Europe, based on empirical data. Then I will focus on the impact of globalisation on the Social Security System in general and with respect to the situation in European Countries. In the end I try to analyses the possible Impacts under various circumstances (political, economical). Both positive and normative approach will be included in the analysis. I expect the given hypothesis will be proved.
Keywords: Social Security System, Globalisation, Europe, Pension system.

History & Present

The view of the role of the state has changed considerably over the last two centuries. In the 19th century, the minimal state activity was required due to the distortions that government induces. In this time, classical economy governed the political and economical philosophy, governments in their opinion should be small and their role limited to the allocation of resources. The level of government spending in Europe was minimal; the ratio of public spending in GDP reached around 11 %. A slight emphasis laid on the system of social protection, public expenditures for pension was about 0,4 % of GDP, public expenditure of unemployment compensation were insignificant.


In the later part of the nineteenth century the Marxian thinking strongly influenced the European countries. The German economist Wagner defined redistribution as a legitimate government function.
After the World War I., attitudes towards the role of the state started changing, many European countries had introduced social security systems, and the Great Depression justified the governmental intervention.
Public spending started however to grow significantly after the World War II with the rapid entry of the Welfare State. Social protection systems were developed that aimed at protecting citizens against risks associated with old age, illness, unemployment and others. Government started to provide social protection through the use of public spending, progressive tax system and regulations. The role of the state was seen in the so-called “social market economy”. The growth of expenditure supported by lobbying groups and bureaucrats brought deficits of the budget, their monetary financing weakened expenditure control. Public expenditure as a share of GDP increased from around 30 % in 1960 to approximately 48 % in 1990.

The Growth of Public Expenditure as a % of GDP

 

Country/Year

1920

1937

1960

1990

United Kingdom



26,2

30,0

32,2

39,9

The most dramatic change in the composition of government expenditure could be observed for social protection expenditure. Their share on GDP increased from 0,5 % in 19th century to 12 % in 1990.



Public Expenditure on Subsidies & Transfers as a % of GDP

 

Country

1920

1937

1960

1995

United Kingdom



na

10,3

9,2

23,6

The rapid growth of social programmes in fifties and sixties in European countries was closely related to the high rates of economic growth. The lower growth since the early seventies put the European welfare states in crisis. Scepticism about the role of government emerged as well as the question of the primary function of the Welfare State.



The Crisis of the Welfare State


The Welfare State should for the citizens ensure a minimal level of protection against social risks. But the question arises, what is this adequate minimum? The tendency of politicians is to cover practically all risks as far as possible for all group of society. But in a democratic, market-oriented economy basic aim of social policy should be not to provide what is desirable but what is necessary.
Social policies of the European countries were designed for a period when there was full employment, when families were stable and when the social help was concern on the ensuring of elderly people. Hence, there are three main difficulties connected with the system of social protection today:

  • The increased number of elderly people

  • The decline of the importance of the family as a main social unit

  • High and persistent unemployment

Most of the European countries are today in a favourable situation due to the baby-boomers of working age supporting relatively fewer retired people. But by the second decade of this century, the baby-boom generation will have reach retirement and the working age population will have fallen in many countries. According to demographic estimations, the old-age dependency ratio expressed as the ratio of older people to people of working age have risen up to 38 % in 2030 whereas it reaches 20 % nowadays. The number of people of retirement age is growing, people are living longer when retired and in most countries there was a trend towards earlier retirement. That makes a big pressure of fiscal sustainability, and reform of the pension system became unavoidable. First, the existing pensions cannot be afforded, second, we cannot assume that the next decades voters and workers may have as their priority allocating more and more of the income to the pensions.


The current pension system, “Pay-as-you-go” notes already now permanent deficits and its reform is unavoidable. If the reform will be introduced only on the contribution side of PAYGO, the future working population would have to pay contributions as rates so high that a negative impacts on labour supply would become likely. It has to be started with reforms on the benefit side, implying that individuals will receive lower pensions that they expected and will have to work for a longer period. There are also other systems of pension financing, system with defined contributions and system with defined benefit, each system has its strengths and weaknesses. The reform is, however, necessary, the contemporary changes in both family and labour market cut the foundation of the existing social system.
But the contemporary system has to be also changed due to other external factors, especially due to the globalisation process.

Process of Globalisation


In recent years we can see the progressive integration of the world’s economies. Technical progress, improved communications and expanded trade and investment flow have led to a growing globalisation of economic activity. Capital, firms and labour are now able to move freely across regions, state and countries and can exploit differences in fiscal and monetary stances.
The impact of globalisation comes from increasing competition, increasing mobility of factors of production, capital and labour forces. Capital can move from regions where its return is low and labour costs are high to regions where it return is high and labour costs are low. Workers, especially high-skilled ones can move to countries with low tax levels, or underreport the incomes earned abroad.
A tax competition has become a new phenomenon of the globalise world. The competition is provided by low tax rates or by tax incentives, especially with the goal of the attraction of foreign investments. In European countries, high tax rates, high social contribution duties increase the costs and mainly the costs of labour for Enterprises, which leads to deterioration of the international competitive position of Europe.
In comparison to Europe, for example, the quickly developing Southeast Asian economies have never developed such a social security scheme, essentially people still relied on the informal safety nets such as families and friends rather than formal security schemes. Enterprises can thus in these countries operate in more favourable environment.
Enterprises, like all taxpayers have a strong incentive to lower their tax liabilities. And they can pursue this objective in today’s globalise world. The European countries will lose their revenues if no reform will be commenced. What could be a problem is that government will experience the fall of revenues at the same time when there will be a need for more spending, especially in social protection areas, as a consequence of the ageing problem or the distribution inequality. It is necessary to realize that globalisation reduces the capacity of the state to intervene and government lose the instruments for intervention. By realizing that and by the well-timed reform of social security system many problems of the resources absence could be precluded.

Conclusion


The rapid growth of social programmes during last 40 years has put the European Welfare States in crisis. High unemployment rates, low economic growth, ageing problem and globalisation among others are the causes of this crisis. The main conflict emerges from the pressure of demand for social protection with regard to the rigidity or decrease of the financial base. Globalisation forces the countries to compete for the investments with lower taxes, lower social contributions, more cost favourable climax for Enterprises.
The other question not discussed in this paper is without regarding globalisation, the fact that social policy should be based on the principle of personal freedom and self help, the personnel should be responsible for its own needs and the state should only intervene if the income or property is insufficient. Contemporary social systems of the European countries do not only create a big disadvantage for the European Enterprises and all skilled people de facto, but also have generally a disincentive effects on labour with given preference for particular individuals. The current situation is hence not only unsustainable but also unfair.


Bibliography


Tanzi, V.: The changing role of the state in the economy: a historical perspective. IMF 1997
The welfare state in crisis: an account of the Conference on Social Policies in the 1980s, OECD, Paris, 20-23 October, 1980

Blank, R.M.: Social protection versus economic flexibility: is there a trade – off? NBER 1994


Bayer, R.: State against market, the limits of globalisation. London 1998
Reinicke, W.: Global Tax Policy. Foreign Affairs. 11-12/1997
Tanzi, V.: Globalisation, Tax Competition and the Future of the Tax System. IMF 1996
Owens, J.: Taxation within a context of economic globalisation. Bulletin for international Fiscal Documentation, Vol.52, No.7, 1998
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