1

Inequalities in new capitalism - how do they affect European

integration?Zsuzsa Ferge

Plenary session

8th ESPAnet annual conference 2010

Budapest, 2-4 September 2010

2

Awareness about inequalities on the rise

• New signs in macroeconomy (E.g. the Stiglitz-Sen-Fitoussi report)

• Importance of the issue visible at the present ESPAnet conference: – Presentations here have dealt emphatically with

increasing global, national, local inequalities.

• There are many clustering possibilities. I am particularly concerned with the „East-West” divide (stream 14)– and how it affects European integration.

3

Two topics of this presentation

1. The increase of inequalities and their possibly new features in the EU

2. The East-West divide – formal convergence and substantive divergence?

4

Ad 1. The increase of inequalities and their possibly new features in the EU

Fitoussi and Laurent wrote in 2009:• “In the early 1990s, a theoretical and empirical case was

made in favour of “structural reforms” promoting labour market flexibility and welfare state downsizing as the way out of massive unemployment for European countries. Virtually all of them, as well as EU institutions, embraced this new economic and social strategy”.

•The new strategy contributed to an increase in economic vulnerability and to an increase in inequalities.

5

The „structural refoms” have weakened for decades the automatic stabilizers such as the progressivity of the tax system, the size of the public sector, wages and labour market protection (particularly unemployment benefits).

The weakening of automatic stabilisers undermined the capacity of the economic system to respond efficiently to shocks. This aggravated the impact of the present crisis on European economies.

The automatic stabilizers have all contributed to the containment of inequalities. Their slashing obviously promoted the increase of inequalities.

6

Most automatic (economic) stabilizers are, in a social policy approach, instruments of social policy.

I find important the insight of economists because it strengthens our argument for a strong and active welfare state. A strong social policy is needed not only for “humanitarian” or value purposes, but also for the sake of a resilient economy.

7

New (or more pronounced) traits of inequality

• The new traits of inequality include unlimited competition between the fields of forces: no more „live and let live” principle.

• Deepening splits between the parts of society (e.g. increasing life expectancy in the upper strata, decreasing life expectancy lower down.)

• The absence of any ceiling (E.g. A. Sinfield’s paper on earnings of bankers.)

• Most importantly, the absence of a floor to offer at least minimal protection to those who are losing ground.

8

Anything particular about inequalities in the Eastern block?

These traits of increasing inequalities exist in most European countries.

In the East, though, (with a few exceptions) - changes happened more rapidly and unexpectedly (privatisation,

mass unemployment); - the market missed for long exercised a fatal attraction. Moral

considerations were altogether absent from fields connected with inequality and poverty;

- civil society has been very weak and inarticulate: - there seemed to be no alternative on offer, - therefore even the idea of resistance was lacking,

- trimming of state intervention (also EU request) came too early, before the creation of many „civilised conditions” (infrastructure, etc.) This East-West civilisation gap impossible to overcome individually.

9

Long-term unemployment rate and unemployment benefits in % of GDP, 2007.

8,3

4,7

4,1 4,13,8 3,8 3,8

3,4 3,4 3,22,9 2,8 2,7

2,3 2,21,7 1,6 1,6 1,4 1,4 1,3 1,3 1,2 1,2

0,8 0,7 0,60,6

1,51,1

0,3

3,3

1,2

0,4

1,8

0,80,3 0,5 0,6 0,5

0,10,5

2,41,9

0,3

1,4

0,3

1,2

0,5

1,40,9 1,1 0,9

1,6

0

1

2

3

45

6

7

8

9

SK DE EL BG BE PT PL FR HU RO IT CZ MT EE SI ES FI LV IE LT NL UK AT LU SE CY DK

Long term unemployment rate, 2007 Unemployment benefits, percentage of GDP, 2007

-Unemployment benefit in red: under 1 % of GDP, disproportionately low as compared to long-term unemployment rate.

-Western block: IT, MT,

-Eastern block: SK, BG, PL, HU, RO, CZ, EE, SI, LV. LT (all countries in the block)

Illustration of lack of floor

Example: The long-term unemployed are particularly (if differently) vulnerable in the eastern countries – low and missing benefits

10

Can not afford meat every 2nd day

2 2 2 2 2 3 3 4 4 5 5 5 6 7 811 12 12 13

19 20 2123

2629 30

0

5

10

15

20

25

30

35

40

45

50

LU DK NL ES SE IE FI PT UK BE CY EE FR GR IT DE SI CZ AT LT RO PL LV HU SK BG

No indoor flushing toilet for sole use

0 0 0 0 1 1 1 1 1 1 1 2 1 2 2 3 3 4 57 7

14

1821

38

43

0

5

10

15

20

25

30

35

40

45

50

SE DK ES IT UK LU CY BE FR IE NL SI DE AT CZ GR PT SK FI HU PL EE LV LT BG RO

A. Individual deep poverty: practically ended in the West, medium problem in the East

B. Individual poverty and public „civilisation gap” (lack of roads, sewage, water conduit) – solved in the West, huge problem in some Eastern counntries.

Individually impossible to overcome

Illustration of the infrastructural gap: individual need that cannot be satisfied without public intervention

Red: Eastern member states

11

If floor is missing, poverty is deepening, solidarity may be weakening

Increasing deep poverty turns the „deserving majority” against the poor – entailing anti-poor measures

The victims of deep poverty are in many CEE countries in increasing number the Roma. About one third of the poor, half of the very poor are Roma (in Hungary).

The number is high enough to give an ethnic coloration to the veneer that coats poverty.

A growing portion of society views poverty as a "Gypsy question” and requests the cruelly harsh treatment of the poor.

12

Ad 2. How did the enlargement affect the East-West welfare gap?

• The enlargement intended to create a less unequal and hence stronger Union. This implied the closing of the welfare gap.

• The early intentions seem to have failed in many respects. Some traits have converged (particularly those connected with fiscal discipline), others are diverging.

13

Some illustrations of the trends following 2004:

(i) In case of components of deep poverty the difference between the two blocks has become more marked.

(Note: Poverty statistics must be completed: incongruous universal ownership of modern appliances masks country differences (everybody has a TV).

(ii) Individual poverty is aggravated when combined with inadequate public infrastructure that had to be publicly financed

(iii) Despite the need for state activity in closing the welfare gap, the role of the state is weakening faster in the East than in the West

14

Change of poverty rates in 2 years:

-Some convergence in the West

- Increasing inequalities between Eastern countries

- Shift of some Eastern countries towards the wrong end of the scale

Ad i) increasing distance in poverty rates

Poverty rates (Laeken 60) 2005

10 11 12 12 12 12 12 13 13 14 14 1415

1618 18 19 19 19 20 20 20 21

10

21

0

5

10

15

20

25

Poverty rate (Laeken 60), 2007

911 11 12 12 12 12 12 13 13 14 15 15 15 15 16 17

19 19 19 20 20 20 2021

2326

0

5

10

15

20

25

30

Red: Eastern member states

15

Ad i) increasing distance in life expectancy:

Life expectancy at birth,male, 2004

78 78 77 77 77 77 77 77 77 76 76 76 76 76 75 75 75 74 7371 70

69 6866 66 66

55

60

65

70

75

80

Sweden Ita

ly

Malt

a

Spain

Nethe

rl UK

Fran

ce

Cypru

s

Greec

e

Germ

any

Irelan

d

Austri

a

Luxe

mb

Belgium

Denm

ark

Finla

nd

Portu

gal

Sloven

ia

Czech

Rep

Poland

Slovak

ia

Hunga

ry

Roman

ia

Estonia

Lithu

aniaLa

tvia

Life expectancy at birth, male, 2007

79 79 78 78 78 78 78 77 77 77 77 77 77 77 76 76 76 75 7471 71 70 69

6766 65

55

60

65

70

75

80

Significant and increasing gap between West and East

West: slight convergence

East: increasing between-country divergence

Red: Eastern member states

16

EU 27 average

Highest rate of lack

2nd highest rate of lack

3rd highest rate of lack

Colour TV 0,5 Bulgaria:

4

Romania:

3

Lithuania:

1

Telephone 1,2 Romania:

13

Bulgaria:

5

Portugaliia

5

Washing machine 1,8 Romania:

20

Bulgaria:

15

Lithuania:

5

(Meat every second day)

9,2 Bulgaria:

30

Slovakia:

29

Hungary:

26

Ad i-Note) Importance of new approaches because of incongruous poverty: fuller satisfaction of „non-basic” than

of more basic needs:% of households that cannot afford:

Note: TV is more wide-spread than electricity, washing machines more than electricity and running water

17

Ad iii) Does public expenditure help to lessen the between-country welfare gap within the EU?

Probably not. Social protection benefits are not converging (even if we disregard their per capita value)

• The rate of social expenditures increased between 2000 and 2007

-in 11 out of 17 W countries;- in 1 out of 10 E countries

• There was between-country convergence between W countries, increasing variance between, and shift towards the lower rates of social protection of, E countries.

18

In the last decade:-Convergence in the western block,

- Shift of E countries towards the wrong (low) end

Social protection benefits in % of GDP, 2000

2530 28 28 28 28

26 25 25 24 24 24 2320 19 19 19 19 19 19

17 15 15 15 14 13 13

05

101520253035

Social protection benefits in % of GDP, 2007

2529 29 28 28 27 27 27 26 25 25 24 23 22 21 21 19 18 18 18 18 18

15 15 14 13 12 11

05

101520253035

Red: Eastren Member States

19

Conclusion

• Increasing inequalities within countries may generate new conflicts not only „at home”, but within the EU (Roma flight and its consequences).

• The rejection of the poor seems to be a spreading trend – strengthening social exclusion.

• Socially two-speed EU: Increasing inequalities between country blocks may undermine the EU’s main objectives (world role, social and economic development, integrated Europe).