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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