POTSDAM SUMMER ACADEMY JULY 2006 Program : Banking, Insurance and - - PowerPoint PPT Presentation

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POTSDAM SUMMER ACADEMY JULY 2006

Program : Banking, Insurance and the Public Sector: Empirical Evidence and Policy Advice Course: Financing the Welfare State: Economical Social Protection Lecturer: Professor Glenn Withers, ANU < glenn.withers@anu.edu.au>

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Course Purpose

Theory: To understand the rationale for the welfare state History: To review the evolution and nature

• f a relatively economical version of the

welfare state in a developed economy Application: To examine detailed policy

• peration in selected fields of social

protection I nstitutions: To appreciate the broader political economy context for policy

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Course Sequence

Theory of Welfare Intervention Evolution of the Australian Welfare State Providing and Financing Infrastructure- especially Private Finance Initiatives Providing and Financing Higher Education- especially Income Contingent Loans Providing and Financing Retirement Incomes-especially Compulsory Superannuation The Demographic Future-especially labour participation and immigration and social savings

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Sessions:

2.00-3.30, Monday 10 July 4.00-5.30, Monday 10 July 6.00-7.30, Monday 10 July 2.00-3.30, Tuesday 11 July 4.00-5.30, Tuesday 11 July 2.00-3.30, Wednesday 12 July

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GENERAL BACKGROUND READING

• P. Abelson, Public Economics,

Sydney: Applied Economics, 2004

• F. Argy, Where to From Here:

Australian Egalitarianism Under Threat, Sydney: Allen & Unwin, 2003 R.Gittins & R. Tiffin, How Australia Compares, Cambridge: Cambridge University Press, 2004

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SPECIFIC READINGS

• M. Keating & D. Mitchell, “Security and

Equity in a Changing Society: Social Policy” in G.Davis & M. Keating (eds), The Future

• f Governance, Sydney: Allen & Unwin,

2001, ch.5

• R. Maddock & I. McLean (eds), The

Australian Economy in the Long-Run, Cambridge: Cambridge University Press, 1987, chs. 1, 12 Economic Planning Advisory Commission, Private Infrastructure Task Force Report, Canberra: AGPS, 1995, Overview

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Specific Readings (cont’d)

B.Chapman, “Conceptual Issues and the Australian Experience with Income Contingent Charges for Higher Education”, Economic Journal, 107 (442),1997,pp.738- 751. Q.Khan, “Social Protection: the Australian Way”, in Productivity Commission, Policy Implications of Ageing, Canberra: Productivity Commission, 1999. OECD, Innovations in Labour Market Policies-the Australian Way, Paris: OECD, 2001

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Specific Readings (cont’d)

OECD Economic Surveys, Australia, Volume 2004/ 18, February 2005. G.Withers, “Population Ageing and the Role of Immigration”, Australian Economic Review, 35 (1), 2002, pp.104-12

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Session 1: The Economical Welfare State

THEORETICAL FRAMEWORKS

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CORE WELFARE ECONOMICS

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THE CORRESPONDENCE PRINCIPLE: welfare economics

COMPETITIVE EQUILIBRIUM

• 1. CONSUMER: households possess initial

resources and choose commodities to maximise utility at a given set of prices 2. PRODUCER: firms choose production bundles to maximise profits at the same set of prices 3. CONSISTENCY: aggregate production plus the initial resources equals aggregate consumption PARETIAN EFFICIENCY: A resource allocation is Pareto Efficient if there is no other allocation which would make every individual better off or as well off, in their own evaluation.

THE INVISIBLE HAND

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Efficiency propositions

Individual markets vs many markets Technical efficiency Allocative efficiency Dynamic efficiency FIRST FUNDAMENTAL THEOREM OF WELFARE ECONOMICS

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Limits to First Fundamental Theorem of Welfare Economics

• 1. Market Failure

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The Visible Hand

Dismembered hand (Public Goods) Clumsy hand (Externalities Information) Invisible fist (Monopoly) Arthritic hand (Disequilibrium) Helping hand (Equity) Guiding hand (Merit)

THE LIMITS TO RATIONAL MARKET CHOICE WELFARE ENHANCEMENT

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Minimal Functions:

Providing pure public goods: Defence Law and order Property rights Macroeconomic management Public health Protecting the poor: Antipoverty programs Disaster relief

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Intermediate Functions

Regulating market power: Utility regulation Antitrust policy Addressing externalities: Basic education Environmental protection

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Intermediate Functions (cont’d)

Overcoming imperfect information: Insurance (health, life, pensions) Financial regulation Consumer protection Providing Social insurance: Age/ disability pensions Family allowances Unemployment insurance

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Activist Functions

Coordinating/ directing private activity: Fostering markets Cluster initiatives Supporting individual industries Public Ownership Redistribution/ Merit: Income and wealth redistribution Provision of merit goods

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Limits to first fundamental theorem of welfare economics

• 2. Public Choice

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Alternative Institutions of Co-

• rdination and Decision

Official President Parliament Parties Elections Bureaucracy Military Courts Unofficial Interest groups Social movements Religion Media Public opinion Patronage Family A STAKEHOLDER MAP

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Theory of the state

Voting: Median Voter Rule Bureaucracy: Niskanen’s Theory Interest Groups: Olsen/ Stigler Theories But INDIVIDUALIST MAXIMISING CONSTRAINED CHOICE MODELS !

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INVISIBLE VS VISIBLE HAND

Market vs State is core issue Their balance defines the extent of the welfare state This balance varies massively eg Europe vs Anglo-American vs East Asian Culture and Values play their own role eg Fukuyama vs Huntington

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THE MODERN WELFARE STATE

Public Expenditure (share of GDP, 2002): Sweden: 63.3% France: 52.2% Germany: 48.1% United Kingdom: 42.8% Australia: 36.7% Japan: 35.0% Plus taxes, debt, ownership & regulation

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Session 2: The Economical Welfare State

THE RISE AND DECLINE OF THE WORKER WELFARE STATE

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1432

The year the Chinese Emperor ordered his navy back to coastal waters Europeans then quested unchallenged: to Africa, the Indies, Americas and ultimately Australasia The loss of the American colonies in 1776 as a convict dumping ground, plus French interest and naval provisioning needs, turned Britain towards Australia Hence Australians speak English and not Chinese

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Post European Chronology: 200 years

First 50 years: Convict Settlement Second 50 years: Long Boom Third 50 years: War & Depression Fourth 50 years: Long Boom Footnote: European population grew from 15,000 in 1815 to 20 million in

• 2000. Native population declined

from 1 million to 250,000.

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1788-1850

An early struggling penal colony, heavily subsidised But with free settlement permitted after 1815, local taxes expanded and employment prospered This was because the Industrial Revolution allowed trade, investment and labour to flow: a virtuous circle for “core” and “periphery” Smith and Ricardo understood: wool, wheat,copper but urban and with fluctuations eg 1840s recession

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1850-1900

GOLD: population rose from400,000 to 1.1 million in 10 years . Alluvial gold in agricultural zones, so miners stayed. More settlers came or were sought , mixed farming and mining output grew, cities flourished and colonial administration waxed fat producing the “working mans’ paradise.” Until the early 1890s, when drought, unwise investments and diversion of migration inflow brought a severe depression

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1900-1950

1901 saw federation of the separate colonies and a new independent country emerged But drought, world war 1, the Great Depression, world war 2 and early post-war uncertainties ensued The earlier global era of trade, investment and migration and national development gave way to risk-reduction and protection: a worker welfare state

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1950-2000

Post-war reconstruction and growth of the world economy saw a long boom again emerge, with growing cities, export trade and high employment Structural issues common to the West emerged from the mid 1970s,approaching stagflation until a reform era from the mid 1980s saw growth return and accelerate in intensiveness The reform era moderated the worker welfare state and blended it with social and economic liberalism to produce a “third way”

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Reprise

A small open economy of great affluence and democratic temper had been established on the edge of Asia By 1900 it was “World’s best practice” but thereafter fell back with: declining terms of trade and a high security preference The cost of early success was later gradual senescence, only recently challenged. But in that experience and in that challenge important lessons for Europe and Japan are today to be found.

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20th century Australia: the three C’s

COSSETING: most of the time COMPETITION: some of the time CAPABILITY: work in progress But timing is good to ride on the dragon’s coat tails, asleep since 1432 but now awakening

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REINVENTING AUSTRALIA

1 9 5 0 s 1.Industry Protection 2.Wage Regulation 3.State Production 4.Imperial Dependence 5.Domestic Paternalism 6.White Australia 2 0 0 0 s 1.Minimal Tariffs 2.Bargaining 3.Contracting Out 4.Regional and Global Engagement 5.Equal Opportunity 6.Multiculturalism

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ONCE WE WERE WARRIORS

Globally open and engaged: trade and investment free, deregulated finance and balanced labour flows Investment in infrastructure, plant and equipment, cities, education, innovation, and good governance BUT also exploitation of natural capital and participation restriction and absence of safety net So add today: an economical safety net, tolerance and ecological sustainability.

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Additional Australian Reading

Frank Castles, The Working Class and Welfare, Sydney: Allen & Unwin, 1985 Paul Kelly, The End of Certainty, Sydney: Allen & Unwin, 1992

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Lessons for Economic Success Beyond Australia

Have good luck-the global environment especially Create your own luck via flexible structures to facilitate not inhibit change Create your own luck via building the capabilities to compete in an open environment An Economical Welfare State is at the centre of these lessons

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THE GLOBAL SCENE

1 9 5 0 s 1.Cold War 2.Bretton Woods Financial System 3.US Economic Hegemony 4.Radio and Television 5.Welfare Intervention 2 0 0 0 s 1.Communist Collapse 2.Free Global Capital Markets

• 3. Asian Growth

4.Digitalisation 5.Mutual Responsibility

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What Remains?

Developing mutual responsibility principles through an economical welfare state is one

• f the areas least touched in a lot of OECD

countries Individual Positioning: David Clarke, Gary Weaven, Bruce Chapman and the roles for Public Private Partnerships, Superannuation Guarantee Charges and Income Contingent Loans Add Private Health Insurance if time permits