Social policies in Small States

1. 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

2. 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

3. 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

4. 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

5. Social cohesion Quality of institutions Effectiveness of policies Socio-economic outcomes

6. Small states do slightly better on HDI

7. 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

8. 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

10. Sectoral Spending • Small states do better in education, health, sanitation • Behind in social welfare spending

11. Confirmed by

12. 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).

13. 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

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

15. Small states have better governance indicators

16. 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

17. 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)

18. 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.

19. Measure to social cohesion • “memberships rates of organizations and civic participation”, trust, • other indirect measures like income distribution (Gini coefficient), and ethnic fractionalization • Yeoh 2005Alesina, Devleeschauwer et al. 2003

20. Ethnic fractionalization

23. 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.

24. 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.

25. 3SLS

26. Models

27. 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

28. 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

29. 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

30. 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

31. THANK YOU