Social policies in Small States

Naren Prasad

United Nations Research Institute for Social Development (UNRISD)

Presentation for International Conference on Small States and Economic

Resilience, 23-25 April 2007, Malta

What we know We know the inherent challenges

associated with smallness (& islandness)

Policies designed to overcome them Strategies:

OFCs, EPZs, tourism, Remittance, niche But most countries have tried to put

some sort of “good” development policy EPZs, or OFCs, but very few have been

successful like Mauritius, Barbados

Good policies are not enough

Market reform with good institutions have shown good historical track record of growth and development institutions emerge from social norms and

arrangements of many actors Some consensus that small states tend to be

democracies Anckar 2002, Srebrnik 2004

Democracy may be necessary but insufficient conditions (Baldacchino 2005)

Look beyond good governance and democracy

Social structure Good economic policy reform can be

hampered by social constraints. Social structures or social cohesion

influences the quality of institutions, which in turn influences whether policies are successful or not

strength/quality of institutions is determined by social cohesion Such cohesion is essential in generating

confidence for reforms Inclusiveness of a country’s communities and

institutions can build cohesion while divided societies (ethnic or class) hamper reforms

Social cohesion

Quality of institutions

Effectiveness of policies

Socio-economic outcomes

Small states do slightly better on HDI

HDI according to country groups0

.68

77

0.6

42

63

0.5

81

22

0.6

53

08

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

small non small small_DC non small_DC

HDI

Human_Index

Social policies In order to achieve policy objectives,

there are three public policy instruments that are broadly used by governments: expenditure policy, tax policy, regulatory policy

Each of these policy instruments depends on the overall development strategy of a country

most countries have growth, equity or employment creation, and poverty reduction as their objectives

Social Spending Social spending heavily influences social

outcomes in health and education. There is a long list of studies that elaborated

this link See Baldacci et al. 2004, IMF Social spending

10.499.87 9.74

7.60

0

2

4

6

8

10

12

small non small small_DC non small_DC

Spending (GDP)

Per capita (log)

ARG

AUSAUT

AZE

BDI

BEL

BFA

BGD

BGRBHR

BHS

BLR

BLZ

BOL

BRB

BTN

CAF

CANCHE

CHL

CHN

COG

COL

CRICYP

CZE

DEUDNK

DOM

EGY

ESP

EST

FJI

FRAGBR

GEO

GHA

GMB

GNB

GRC

GRD

GTM

GUY

HKG

HTI

HUN

IDN

IRL

IRN

ISRITA

JAMJOR

JPN

KEN

KGZ

KNA

KOR

KWT

LAO

LBNLCA

LKA

LSO

LTU

LUX

LVA

MAR

MDA

MDG

MDV

MEX

MLI

MLT

MMR

MNG

MUS

MYS

NER

NIC

NPL

PAK

PAN

PERPHL

POL

PRT

PRYROM

RUS

SDN

SEN

SGP

SLB

SLE

SLV

SVK

SVN

SWE

SWZ

SYC

TGO

THATJK

TONTTO

TUN

TUR

TZA

UKR

URY

USA

VCT

VEN

VUT

ZAF

ZWE

BHR

BHS BLZ

BRB

BTN

CYP

EST

FJI

GMB

GNB

GRD GUY

KNALCA

LUX

MDV

MLT

MUS

SLB

SWZ

SYC TONTTO

VCT

VUT

.2.4

.6.8

1H

DI*

0 10 20 30 40Social Spending (%GDP)

Social spending and HDI*

Sectoral Spending

Small states do better in education, health, sanitation

Behind in social welfare spending

Social spending according to country group

0

1

2

3

4

5

6

7

small non small small_DC non small_DC

% G

DP Education

Health

Sanitation

Welfare

Confirmed by Social Security index

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

small non small small_DC non small_DC

Why do small states spend less in welfare programs?

spending in social security is very regressive compared to spending in health or education (De Ferranti et al 2004) Social security benefits often go to the higher

income groups since they are the ones who are part of formal sector (Lindert 2005).

Developing countries have high informal sector workers

informal employment comprises 50-75% of non-agricultural employment in developing countries (Flanagan 2006, p. 32).

Theory of social spending Theory says that democracies (countries

having competitive elections) tend to spend more on social services compared to autocratic regimes

Democracies also tend to give priority to those services that are demanded by the majority of the population such as education and health

Large literature Avelino et al. 2005, Kaufman & Segura-

Ubiergo 2001 , UNRISD 2005

Strong correlation between governance and HDI Voice and accountability, Political stability and absence of violence, Government effectiveness, Regulatory quality, Rule of law, Control of corruption

ARG

AUSAUT

AZE

BDI

BEL

BFA

BGD

BGRBHR

BHS

BLR

BLZ

BOL

BRA

BRB

BTN

CAF

CANCHE

CHL

CHN

CMR

COG

COL

CRICYP

CZE

DEU DNK

DOM

EGY

ESP

EST

ETH

FIN

FJI

FRA GBR

GEO

GHA

GMB

GNB

GRC

GRD

GTM

GUY

HKG

HRV

HTI

HUN

IDN

IRL

IRN

ISR ITA

JAMJOR

JPN

KEN

KGZ

KNA

KOR

KWT

LAO

LBNLCA

LKA

LSO

LTU

LUX

LVA

MAR

MDA

MDG

MDV

MEX

MLI

MLT

MMR

MNG

MUS

MYS

NER

NIC

NOR

NPL

PAK

PAN

PERPHL

PNG

POL

PRT

PRYROM

RUS

SDN

SEN

SGP

SLB

SLE

SLV

SUR

SVK

SVN

SWE

SWZ

SYC

SYR

TGO

THATJK

TONTTO

TUN

TUR

TZA

UKR

URY

USA

VCT

VEN

VUT

ZAF

ZWE

BHR

BHSBLZ

BRB

BTN

CYP

EST

FJI

GMB

GNB

GRDGUY

KNALCA

LUX

MDV

MLT

MUS

SLB

SUR

SWZ

SYCTONTTO

VCT

VUT

.2.4

.6.8

1H

DI*

0 .2 .4 .6 .8 1Governance

Governance and HDI*

Small states have better governance indicators

Governance indicators

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

small non small small_DC non small_DC

voice

stability

g_effectiveness

regulation

law

cont_corruption

So far we have

Seen that small states generally tend to have better: social outcome like HDI social policies like spending in human

capital governance indicators, democracy

How to explain this? Consensual democracy or politics of accommodation

Lijphart (1968, 1969, 1975), Katzenstein (1985; 2003) refers to neo-corporatism where labour-capital-government come together because of perceived vulnerability

Embedded liberalism Cameron (1978) small open economies tend to have higher

social welfare spending to cushion external shocks. Ruggie (1983) Rodrik (1997) But our statistics shows the contrary?

Power of sovereignty Baldacchino & Milne (2000); Baldacchino (2006), Prasad

2004 Social capital/social cohesion

Baldacchino (2005), Read (2005)

Social cohesion

Social cohesion is defined as the “nature and extent of social and economic divisions within society” Easterly, Ritzen et al. 2006

These divisions (income, ethnicity, political party, caste, language or demographic) form societal cleavages

Which determines the success or failure of policies through the quality of institutions.

Measure to social cohesion “memberships rates of organizations

and civic participation”, trust, other indirect measures like income

distribution (Gini coefficient), and ethnic fractionalization

Yeoh 2005 Alesina, Devleeschauwer et al. 2003

Ethnic fractionalizationEthnic fractionalization

0.38

0.4

0.42

0.44

0.46

0.48

0.5

0.52

0.54

small non small small_DC non small_DC

ARG

AUSAUT

AZE

BDI

BEL

BFA

BGD

BGR BHR

BHS

BLR

BLZ

BOL

BRA

BRB

BTN

CAF

CANCHE

CHL

CHN

CMR

COG

COL

CRICYP

CZE

DEUDNK

DOM

EGY

ESP

EST

ETH

FIN

FJI

FRA GBR

GEO

GHA

GMB

GNB

GRC

GRD

GTM

GUY

HKG

HRV

HTI

HUN

IDN

IRL

IRN

ISRITA

JAMJOR

JPN

KEN

KGZ

KNA

KOR

KWT

LAO

LBNLCA

LKA

LSO

LTU

LUX

LVA

MAR

MDG

MDV

MEX

MLI

MLT

MMR

MNG

MUS

MYS

NER

NIC

NOR

NPL

PAK

PAN

PERPHL

PNG

POL

PRT

PRYROM

RUS

SDN

SEN

SGP

SLB

SLE

SLV

SUR

SVK

SWE

SWZ

SYC

SYR

TGO

THA TJK

TONTTO

TUN

TUR

TZA

UKR

URY

USA

VEN

VUT

ZAF

ZWE

BHR

BHS BLZ

BRB

BTN

CYP

EST

FJI

GMB

GNB

GRD GUY

KNALCA

LUX

MDV

MLT

MUS

SLB

SUR

SWZ

SYC TONTTO

VUT

.2.4

.6.8

1H

DI*

0 .2 .4 .6 .8ethnic index

HDI* and ethnic index

ARG

AUSAUT

AZE

BDI

BEL

BFA

BGD

BGR BHR

BHS

BLR

BLZ

BOL

BRA

BRB

BTN

CAF

CANCHE

CHL

CHN

CMR

COG

COL

CRICYP

CZE

DEUDNK

DOM

EGY

ESP

EST

ETH

FIN

FJI

FRAGBR

GEO

GHA

GMB

GNB

GRC

GRD

GTM

GUY

HKG

HRV

HTI

HUN

IDN

IRL

IRN

ISRITA

JAMJOR

JPN

KEN

KGZ

KNA

KOR

KWT

LAO

LBNLCA

LKA

LSO

LTU

LUX

LVA

MAR

MDA

MDG

MEX

MLI

MLT

MMR

MNG

MUS

MYS

NER

NIC

NOR

NPL

PAK

PAN

PERPHL

PNG

POL

PRT

PRYROM

RUS

SDN

SEN

SGP

SLB

SLE

SLV

SUR

SVK

SVN

SWE

SWZ

SYC

SYR

TGO

THATJK

TONTTO

TUN

TUR

TZA

UKR

URY

USA

VCT

VEN

VUT

ZAF

ZWE

BHR

BHS BLZ

BRB

BTN

CYP

EST

FJI

GMB

GNB

GRD GUY

KNALCA

LUX

MLT

MUS

SLB

SUR

SWZ

SYCTONTTO

VCT

VUT

.2.4

.6.8

1H

DI*

0 .2 .4 .6 .8 1Ethnic

HDI*and ethnic fractionalization (Alesina et al.)

Determinants Each researchers has his/her own favourite

explanatory variable to explain why certain countries have better outcome than others. These variables could be purely economic,

geographic, legal, political, cultural, historical or a combination of all of these

Durlauf, Johnson et al (2005) identify 145 different determinants of growth and 43 distinct growth “theories” which has been taken in divers literature for over 4 decades.

Models Social policies are affected by the level of governance of

countries and social cohesion impacts on the quality of governance. system of structural equations, where some equations

contain endogenous variables among the explanatory variables. Estimation is via three-stage least squares (3SLS). Typically, the endogenous explanatory variables are dependent variables from other equations in the system.

iiiii ZGovTSSGDPHDI 210*

XEthGovTSSGDP

XsmallEthGov

ii

iii

210

210

(1) (2) (3) (4)

loggdp 0.050 0.063 0.058 0.069

(7.30)*** (6.01)*** (6.22)*** (6.00)***

TSSGDP 0.003 0.005 0.004 0.006

(2.61)*** (2.89)*** (2.90)*** (3.05)***

Ethnic* -0.331 -0.149 -0.309 -0.139

(3.93)*** (1.61) (4.51)*** (2.27)**

small 0.067 0.122 0.045 0.089

(1.29) (2.24)** (1.06) (2.49)**

voice 0.038 0.002

(0.96) (0.04)

governance -0.037 -0.075

(0.54) (0.90)

Observations 114 86 114 86

3SLS

iiii ZXHDI 210*

iitiiiiiiii ZsmallESmallGsmallEGHDI *** 654321

Ethnicgov

ethnicsmallcoefgovsmallcoefsmallcoefsmall

HDI

654

)*()*()(*

Models

Results We tried to saw that small states have higher

social development, reflecting better social policies

Generally, small states have higher levels of social cohesion, which may impact positively on governance and then better social policies

Some small states have high levels of ethnic fractionalization like Mauritius but nonetheless have managed to have high levels of good quality institutions impacting positively on social development

While others like Fiji, Guyana, Solomon, Suriname with high levels of fractionalization tend to have have weaker institutions

Conclusion Lesson, strengthen social cohesion

for better quality institutions to have better policy impact. How? Shaped by national leaders, history,

language Ethnic or linguistic diversity is not

bad. Cohesion reflects how countries have evolved over time to form national identities

Conclusion Where such cohesion is lacking, opportunistic

politicians exploit these (ethnic/language) differences to reinforce division

Ethnic groups are politically mobilized Pessimist: countries with large diversity are

doomed to failure No forceful assimilation or redistribution neither Lack of social cohesion exploited by politicians to

undermine institutions, which impacts policies negatively

Where good institutions exist, there are no negative impact of diversity

Conclusion

Good institutions are most needed and desirable in countries with high diversity These institutions act like the “social

glue” Role of education in enhancing

social cohesion Provision of public services fairly

THANK YOU

ARG

AUSAUT

AZE

BDI

BEL

BFA

BGD

BGRBHR

BHS

BLR

BLZ

BOL

BRA

BRB

BTN

CAF

CANCHE

CHL

CHN

CMR

COG

COL

CRICYP

CZE

DEU DNK

DOM

EGY

ESP

EST

ETH

FIN

FJI

FRA GBR

GEO

GHA

GMB

GNB

GRC

GRD

GTM

GUY

HKG

HRV

HTI

HUN

IDN

IRL

IRN

ISRITA

JAMJOR

JPN

KEN

KGZ

KNA

KOR

KWT

LAO

LBNLCA

LKA

LSO

LTU

LUX

LVA

MAR

MDA

MDG

MDV

MEX

MLI

MLT

MMR

MNG

MUS

MYS

NER

NIC

NOR

NPL

PAK

PAN

PERPHL

PNG

POL

PRT

PRYROM

RUS

SDN

SEN

SGP

SLB

SLE

SLV

SUR

SVK

SVN

SWE

SWZ

SYC

SYR

TGO

THATJK

TONTTO

TUN

TUR

TZA

UKR

URY

USA

VCT

VEN

VUT

ZAF

ZWE

BHR

BHSBLZ

BRB

BTN

CYP

EST

FJI

GMB

GNB

GRD GUY

KNALCA

LUX

MDV

MLT

MUS

SLB

SUR

SWZ

SYC TONTTO

VCT

VUT

.2.4

.6.8

1H

DI*

.2 .3 .4 .5 .6SPI

(humancapital_index, welfare_index, tax_index)

Social policy index and HDI*

(1) All (2) Hi=0 (3) robust (4) robust

TSSGDP 0.005 0.008 0.005 0.008

(3.66)*** (3.51)*** (3.43)*** (3.20)***

loggdp 0.099 0.115 0.099 0.114

(8.02)*** (8.00)*** (7.82)*** (7.46)***

small -0.015 -0.029 -0.097 -0.153

(0.73) (1.14) (0.71) (0.95)

Ethnic -0.046 -0.020 -0.064 -0.049

(1.18) (0.43) (1.40) (0.82)

governance -0.196 -0.163 -0.207 -0.186

(2.11)** (1.42) (2.25)** (1.61)

small*ethnic 0.075 0.094

(0.84) (0.95)

small*governan 0.083 0.152

(0.46) (0.70)

Marg. Eff -.018 -.029

(-0.70) (-1.18)

Constant 0.050 -0.098 0.069 -0.065

(0.64) (1.01) (0.83) (0.59)

Obser 112 85 112 85

R-squared 0.73 0.70 0.73 0.70

(1) (2) (3) (4)

TSSGDP 0.005 0.007 0.005 0.008

(3.14)*** (3.11)*** (3.12)*** (3.27)***

loggdp 0.080 0.106 0.081 0.103

(8.65)*** (7.67)*** (8.61)*** (7.31)***

small -0.021 -0.036 -0.187 -0.231

(0.96) (1.49) (1.99)** (2.34)**

Ethnic -0.050 -0.029 -0.071 -0.052

(1.28) (0.63) (1.53) (0.92)

voice 0.000 -0.017 -0.044 -0.074

(0.01) (0.27) (0.74) (1.14)

small*ethnic 0.102 0.107

(1.24) (1.16)

small*voice 0.190 0.245

(1.82)* (2.26)**

Marg. Eff -.033 -.044

-1.49 -2.00**

Constant 0.104 -0.085 0.132 -0.034

(1.46) (0.88) (1.77)* (0.33)

Observa 112 85 112 85

R-squared 0.72 0.69 0.73 0.71