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French Welfare State Reform

Idealism Versus Swedish, New Zealand and Dutch Pragmatism

Wimbledon Publishing Company

THE CONTEMPORARY WELFARE STATE: THE ISSUE OF SUSTAINABILITY

'While Europe's status quo is unsustainable (and voters know it), it is also comfortable, and too many voters enjoy that comfort too much to vote for change ... The German case is extreme, but most European states face similar pressures. This is not a sustainable social and economic system' (The Economist 2005i: 64).

Introduction: The Main Issue

The welfare state sustainability issue is growing in importance in the face of a looming fiscal crisis in some welfare states. The crisis has been triggered by persistently high unemployment and the associated social and economic costs; rising pension obligations exacerbated by demographic trends; the shift from Western Europe to East Asia of a competitive advantage in the production of many goods and services; and an insufficient level of entrepreneurial activity with concomitantly low rates of job creation and new technology. In the face of this crisis some welfare states have introduced widespread reforms that have had differing degrees of success reversing poor economic performance trends.

This book will focus on the sustainability issue by addressing two questions. First, what factors, both those culturally specific to a particular welfare state and those common to other welfare states, combined to reverse what had been very favourable economic performance in the four welfare states selected for analysis so that existing welfare state policies could not be sustained and substantive reforms became necessary for sustainability to be re-established? Second, what types of reforms were necessary before improved performance and sustainability were once again realized?

To answer these questions a qualitative comparative political economy approach will be used to analyze four welfare states' respective philosophy, performance trends, and the impact of their egalitarian policies on macroeconomic and socioeconomic performance indicators. The detailed case studies include Sweden, New Zealand, the Netherlands and France. Each of these welfare states has faced a similar type of economic crisis at some point over the past few decades. While their institutions, rules, social policies, patterns of development, and reforms introduced in response to such a crisis have differed to some degree, it will be demonstrated that the factors contributing to their respective crises are similar in scope, although they differed considerably in intensity. Organization for Economic Cooperation and Development (OECD) data is utilized principally since this data is widely respected and consistent for the countries being analyzed – and thereby justifiable for comparative analysis. The analysis will identify common patterns, particularly concerning rising and declining performance indicators of the respective welfare states. It also will attempt to identify causal factors contributing to both favourable and unfavourable performance indicators in each case. The resulting inferences concern the extent to which improved performance can be attributed to any substantive reforms that have been introduced in Sweden, New Zealand and the Netherlands, particularly if these reforms have created greater likelihood that welfare state goals and the means to achieve them can be sustained. Lessons for French policymakers will be drawn from the reform and performance experiences of the other three welfare states.

The remainder of the chapter begins with a section defining some key terms used throughout the book, followed by a section describing some observations concerning how and why economies evolve. The welfare state's evolution, development of its philosophy, and policies introduced over the past century and a half follow. The next section includes a description of the contemporary (i.e., Post World War II) welfare state, the primary objectives of such an economy, and the range of means used to achieve these objectives that are common among welfare states. The following section introduces the sustainability issue. It describes how the history of the contemporary welfare state has featured rising aspirations and demands for more state intervention from special interest groups, and that these increasing aspirations and demands have coincided with improved economic performance of the case study welfare state economies until the mid 1980s – mid 1990s period. Since then, each welfare state has either approached or reached a 'breaking point' (defined below) at which rising costs and disincentive problems have threatened the economy's financial ability to sustain achievement of its welfare state objectives. Data in support of this assertion are included for the case study of welfare states, as well as for Italy and Germany. The next section describes the current economic malaise being experienced by these two large welfare states. The concluding section summarizes the themes of Chapters 2–6.

Some Key Terms

Some key terms will be utilized throughout the following chapters as they pertain to the development and performance of each welfare state. Six such terms are defined below: welfare state, sustainable economy, breaking point, international product life cycle, the Old Economy, and the New Economy. First, a clarification of the term 'welfare state' as it is used in this book is in order before the analysis begins. Comparative economics literature contains references to categories (e.g., 'capitalist', 'socialist' and 'welfare state') that permit analysts to study, compare, and contrast characteristics that are shared by a number of economies, and to document their findings in a concise manner. This approach to the study of comparative economics, and the terminology to which it gives rise, is a necessary element in the study of economic performance. However, classifying economies and dividing them into strict categories of 'economic systems' inhibits a broad understanding of each of the individual economies included in this study, among other economies. Each economy is characterized by principal institutions and corresponding working rules that are to an extent contextually specific and culturally determined, since those institutions evolved in a particular cultural and historical setting. There is a philosophical basis underlying the choices of specific institutions and rules, choices influenced by a country's particular historical, political, and socio-economic conditions. Further, economies evolve as authorities continually modify or replace institutions and rules, so that nearly all economies' institutions and rules change substantially over long (i.e., 20–40 year) periods. Attitudes of authorities responsible for modifying or introducing new institutions and rules are heavily influenced by their economy's past and recent performances, and by their perceptions as to which factors have contributed most significantly to those performances.

Recognizing that each national economy will differ from all other economies to varying degrees, the evaluations and comparisons of economies considered to be 'welfare states' (e.g., France, Germany, Italy, Netherlands, New Zealand and Sweden) will be presented in Chapters 1–5 under the assumption that broadly similar goals, policies, institutions and rules are generally held in common by these economies. Another assumption is that the degree of difference among these welfare states, particularly when their advanced level of development is considered, is less than the degree of difference between them and nearly all non-Western European economies, particularly those of the USA and Japan. This is particularly the case when the philosophical basis and the extent of their redistributional social insurance and welfare programmes are compared to those of economies that are more market oriented and have a lesser degree of state intervention.

With this clarification in mind, a welfare state is defined as an economy with a philosophy that identifies an ideal set of social and economic conditions, a programme for achieving those conditions, and a justification of that programme that stems from the views contained in the works of Robert Owen, John Stuart Mill, the Fabian Society, the Beveridge Report, Karl Polanyi, and Gunnar Myrdal – among other contributors to welfare state philosophy. A welfare state features institutions and rules that are justified by this philosophy pertaining to both substantial social insurance and welfare programme transfers (e.g., poverty relief, unemployment compensation, publicly provided pensions, public health expenditures, subsidies for housing), and by extensive direct market intervention by the state that is also consistent with the philosophical basis. These interventions tend to establish relatively high minimum wages, considerable protection for employment security, high import barriers, and extensive government regulation, or subsidies, or ownership of enterprises. Welfare states also are intent on achieving social cohesion while pursuing egalitarian objectives such as eliminating poverty and reducing income differentials while protecting individuals and enterprises from some adverse effects of self regulating market forces.

A sustainable economy is one for which currently promised (i.e., estimated future expenditures already committed to funding) social insurance and welfare programmes can be financed either at existing tax levels, or by raising tax rates without creating disincentives and fiscal problems sufficient to contribute to poor economic performance to the extent that investors lose confidence and postpone investment or invest in other countries so that eventually an economic crisis is experienced. What makes an economy unsustainable is not only an adverse trend of its performance indicators, but the expectation that this trend will both persist and even worsen. That an economy has become unsustainable is evident when it reaches its breaking point. This is the point in time when there exists widespread agreement among all interest group leaders and key analysts that the economy's performance trend is so poor that the economy is not sustainable unless substantive reforms are implemented.

The increasing number of manufacturers in welfare states such as Sweden, New Zealand, the Netherlands, France, as well as in Germany and Italy that have become unable to remain competitive globally is due to a range of factors. Two prominent, interrelated factors are the International Product Life Cycle and the shift from the Old Economy to the New Economy. The International Product Life Cycle is a departure from the static Theory of Comparative Advantage which emphasized relative efficiency of production due to factor endowments under a fixed state of technology. The International Product Life Cycle recognizes that economies are dynamic, and that new technology and corresponding innovations are constantly being developed. Consequently, there is a trade cycle of manufactured goods that begins with a product being manufactured in the home country. The successful manufacturer realizes economies of scale and a competitive advantage both at home and in international markets. It begins exporting, and eventually establishes production facilities abroad. Ultimately, due to a combination of factors that include adoption of new technology and innovation abroad, the initial competitive advantage enjoyed by the home country is eroded and cannot be reversed merely by greater economies of scale. In the next stage of this cycle imports of the product begin, and in some cases (e.g., televisions produced in the USA between 1970 and the 1990s) the domestic manufacturer ceases to produce the product. The welfare states selected for this study all have been affected positively and negatively by this cycle.

Exacerbating the adverse effects of the international product life cycle has been the end of the Old Economy and the emergence of the New Economy. The Old Economy existed in an economic and business environment (roughly pre-1980), and included many tangible features such as (1) production of a narrow range of standard products; (2) growth driven by high levels of investment in capital equipment designed for a standard assembly line production process that created considerable economies of scale benefits; (3) a relatively long (5–7 years) product life cycle for the typical product; (4) good possibilities for the first innovating firm to maintain for decades a large market share in an industry characterized by modest competition from new products, partly due to the slow pace of technological development; (5) little integration of the global economy relative to today; and (6) the scientist-inventor being at the disposal of the creative entrepreneur to implement an innovation in the market place, typically with the help of an industrial engineer who adapted the invention to a new product (e.g., using the process of refrigeration to create a refrigerated railroad car).

The New Economy that emerged around 1980 is characterized by (1) technology that develops at an accelerating rate with cumulative effects to the point where technological development has become the main force driving economic growth; (2) more sophisticated, customized production processes that generate thousands of products with much shorter product life cycles; (3) the emergence of a 'learning economy', which requires people involved with technological development and innovation implementation to quickly and continually acquire new skills and be aware of the latest knowledge in their field in order to be competitive; (4) a broader innovation process as those engaged in the innovation process improve their social capital through interactive learning and knowledge creation; (5) very low and declining communication and transportation costs; and (6) wider and deeper globalization that has reduced the number of protected markets and integrated many export-oriented economies.

Economies' Behaviour and Performance: Some Observations

The analysis of welfare states presented throughout this book is based upon a perspective which includes observations pertaining to the evolutionary nature of economies, particularly institutions and policies; the relevance of Mancur Olson's theories of development and public choice to welfare states' economic performance; government and business sector policymaking as related to fallacies of reasoning; institutional resistance to change; the emergence of lazy monopolists in wealthy economies; and the existence of alternative reform packages that have proven to be efficacious for reforming economies that were performing poorly.

My approach is based upon the observation that an invisible hand toward an ideal goal does not guide history, and that there are no universal paradigms of an 'economic system.' There are, instead, innumerable histories of economies with distinctive patterns, institutions and corresponding working rules. The analysis of each welfare state's history identifies the unique principal institutions and working rules (both formal and informal) for such institutions (see Angresano 1996). Convenient stereotypical terms such as 'capitalism' and 'socialism' offer little for understanding the nature and behaviour of an economy. Adopting such terms encourages a dichotomous view that economies can be classified as either market or state-controlled. In reality all economies have adopted institutions, rules and policies pertaining to decision making, ownership and control, and coordination of production and distribution that are unique in some respects, specific to a particular cultural context, as well as some unique combinations of traditional, state-guided, or market-oriented processes for coordinating production and distribution activities.

Further, economies continually evolve, so that institutions, rules and policies that were the basis for stimulating successful performance of an economy should be expected, eventually, to become inappropriate for continued successful performance. Consequently, new institutions, rules and policies emerge as economic reforms are introduced. Such reforms are designed to alter some aspect of economic life. Therefore, they result in the fact that the variables that the policies address are likely to change over time. For this reason, policies that are efficacious for resolving certain problems (e.g., alleviating poverty) may eventually become counterproductive after a certain level of change has been achieved.

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Excerpted from French Welfare State Reform by James Angresano. Copyright © 2007 James Angresano. Excerpted by permission of Wimbledon Publishing Company.
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