THE LINKS BETWEEN ECONOMIC AND SOCIAL POLICIES

DESA

JOSÉ ANTONIO OCAMPO UNDER-SECRETARY GENERAL ECONOMIC AND SOCIAL AFFAIRS

INITIAL CONSIDERATIONS

 The “United Nations Development Agenda” recognizes the central role of the social, gender and environmental dimensions of development  But this integrated view is far from being reflected in practice  Rather, a “leader/follower” model prevails, in which economic policy is determined first, and other policies are called for to manage its social, gender and environmental outcomes

INITIAL CONSIDERATIONS

 To implement the “United Nations Development Agenda”, we should thus move towards “mainstreaming” the social, gender and environmental dimensions into

economic

decision-making, at the global as well as at the national levels

FOUR MAJOR LINKS BETWEEN THE ECONOMIC AND SOCIAL SYSTEMS

 Ability of the economic system to offer opportunities for adequate income generation → Employment plays the central role.

 Management of risks generated by the economic system and associated insecurity

FOUR MAJOR LINKS BETWEEN THE ECONOMIC AND SOCIAL SYSTEMS

 Ability of the social system to facilitate the accumulation of capabilities, and the associated effects on the functioning of the economic system (human capital)  Capacity of the economic system to provide adequate resources for that task, and the implications of the way the provision of services is organized

INCOME GENERATION

 Growth facilitates the reduction of poverty, but not all growth is equally “pro-poor”  Two major concerns in this regard • • Fairly widespread increase in income inequality Poor employment generation, and rising labor market dualism

NOT ALL GROWTH IS EQUALLY “PRO-POOR”

Upper middle income -1.5% -1.0% 4% 2% -0.5% 0% 0.0% -2% -4% -6% 0.5% 1981-1990 1990-2001 1.0% 1.5% 2.0% Low income Upper middle income Lower middle income -8% Annual average per capita GDP growth Lower middle income

CONTRIBUTIONS OF INTRA-COUNTRY INEQUALITY TO WORLD INEQUALITY Contribution of countries to world inequality 0.300

0.275

0.250

0.225

0.200

0.175

0.150

1980 1990 2000 Large countries World total

POOR EMPLOYMENT GENERATION

20 18 16 14 12 10 8 6 4 2 0 1980-1981 1990-1991 2000-2001 Developed countries Transition economies Eastern Asia South Asia Latin America and Caribbean Middle East and Africa

RISING LABOR MARKET DUALISM

60 50 40 30 20 1980-1990 1990-2000 10 0 WORLD Developed regions Eastern Europe Western Europe Other Developed Northern Africa Sub Saharan Africa Latin America Asia

INCOME GENERATION

 It is hard not to see here the adverse effects of market based reforms without adequate mechanisms in place to guarantee acceptable social outcomes  Also, growth may be more effective (indeed, essential) to reduce high levels of poverty, but redistributive policies may be essential at low levels of poverty

POLICY IMPLICATIONS

 Employment generation should be at the center of economic policy, including macroeconomic policy and structural reforms  Accumulation of productive assets of the poor  Rural development is the crucial issue in poor countries, but economic opportunities for the urban poor become critical in middle-income countries  Need to consider bringing issues of income distribution to the center of economic policy

ECONOMIC INSECURITY

 High risks of real macroeconomic volatility, particularly employment risks  Structural change requires a change in the structure of employment  In developing countries, the real exchange rate is crucial for both dimensions

ECONOMIC INSECURITY

 Financial risks • Financial risks associated with pensions are increasingly shifting to households • Interest rate variations affect house mortgages • Interest rate variations also affect smallholder credit and production  Agricultural price variations affect smallholders

POLICY IMPLICATIONS

 Adaptability of the labor force to change should be a major policy concern …but pure labor market flexibility with inadequate social protection has many downsides  Safety nets for macroeconomic crises should evolve into a component of well-designed and universal social protection systems  Need for a broader risk management framework, through public interventions or creation of markets to manage risks faced by the poor

DEVELOPMENT OF CAPABILITIES

 Human development: the capabilities provided by social policy are more than “human capital”; they directly affect the well-being of individuals and societies, and other dimensions of development (e.g. political participation)  Low levels of human capital are a crucial element of the “poverty trap”

DEVELOPMENT OF CAPABILITIES

 However, the links running from human development to economic development are not linear  Important risk: in the absence of opportunities, there may be considerable “waste” and loss of human capital

POLICY IMPLICATIONS

 Human development should be at the center of any development strategy  It is possible to make major advances even at low levels of development  A major effort to break out of the poverty trap of low-income countries should be at the center of international cooperation  Need to better understand ways to maximize the effects of social policy on economic development

2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2 -0.5%

IT IS POSSIBLE TO MAKE MAJOR ADVANCES EVEN AT LOW LEVELS OF DEVELOPMENT

Nepa Gamb Chin Mala Buru Oman Indi Chad Nige Guin Mali Indo Beni Egyp Maur Sene Ghan Syri Hond Togo Nige Sri Mada Came Leso Keny Cent Moro Tuni Alge Cong Boli Papu Thai Phil Guat Domi Para Mala Turk Kore El S Chil Malt Braz Fiji Jama Cost Hung Guya Cote Swaz Sout Sing Hong Port Barb Isra Arge Gree Saud 2.5

3 3.5

4 Cong Zimb Zamb Kuwa 4.5

-1.0% log of per capita GDP in 1975

FINANCING AND DESIGN OF SOCIAL POLICY

 There are significant differences in the levels of social spending at comparable levels of development; countries spending little should raise it  There is also strong evidence that social spending –and, particularly, social protection— is associated with high levels of development  The redistributive effects of spending may be more important than those of taxation, though the latter are not irrelevant

FINANCING AND DESIGN OF SOCIAL POLICY

 The stability of social spending is crucial. Instability reduces the efficiency of social investments  Universal policies may have stronger effects than targeted interventions if the aim is to reduce inequalities  The state always plays the central role, but social and private participation can help

SIGNIFICANT DIFFERENCES IN THE LEVELS OF SOCIAL SPENDING AT COMPARABLE LEVELS OF DEVELOPMENT

50 Denmark 45 40 Low Mean High 35 Croatia 30 25 Belarus 22 26.3

20 17.8

15 10 Bhutan Oman Bahamas 5 0 Lower income Upper middle income High income

SOCIAL SPENDING – PARTICULARLY, SOCIAL PROTECTION — IS ASSOCIATED WITH HIGH LEVELS OF DEVELOPMENT 30.00

25.00

health education social protection 15.88% 20.00

10.91% 15.00

7.26% 10.00

6.61% 5.4% 4.6% 5.00

5.93% 4.93% 3.04% 0.00

LLMIE UMIE Economic grouping HIE

LLMIE – lower income, UMIE – upper middle, HIE – high income

SOCIAL SPENDING HAS BEEN INCREASING IN MIDDLE INCOME COUNTRIES 30.00

25.00

Year 1995 1997 1999 2001

20.00

15.00

10.00

5.00

0.00

LLMIE UMIE Economic grouping HIE

LLMIE – lower income, UMIE – upper middle, HIE – high income Source: Kelly and Saiz Omeñaca

POLICY IMPLICATIONS

 Adequate and stable levels of social spending should be explicit objectives of economic policy  Some universal policies are essential even at low levels of development  It is important to guarantee access of the poor to social services: targeting should be seen as an instrument, rather than as a substitute for universality

POLICY IMPLICATIONS

 But a broader system of social protection may be impossible  The design of specific, targeted interventions should be, in the long run, part of universal systems  Private sector participation should be done in a framework that guarantees the basic principles of universality and solidarity

INSTITUTIONAL IMPLICATIONS

 Poverty-reduction strategies can become the major instrument of integration of economic and social policies, particularly in poor countries  It is essential that, in this process, needs assessment become a regular practice… … and that the leader/follower model be abandoned

INSTITUTIONAL IMPLICATIONS

 In broader terms, it is essential that social objectives are explicitly mainstreamed into economic policy-making: • Start by making “visible” the social effects of economic policies • Regular analysis of the social implications of budgets and tax reforms • Also, regular analysis of the distributive effects of other economic policies (e.g. agricultural and industrial interventions)

INSTITUTIONAL IMPLICATIONS

 Go beyond “inflation targeting” towards the explicit incorporation of employment and output, as well as real exchange rate targeting, in monetary and exchange rate policy in developing countries

THE LINKS BETWEEN ECONOMIC AND SOCIAL POLICIES

DESA

JOSÉ ANTONIO OCAMPO UNDER-SECRETARY GENERAL ECONOMIC AND SOCIAL AFFAIRS