Can an unequal, emerging market country become a social democracy?

The case of India

Michael WaltonHarvard Kennedy School

Tokyo26th November, 2010

Motivation:No rich country has very high income inequality

Rich country social provisioning also more equal

• Almost all rich countries have some form of social democracy

– Even US has an incomplete and inegalitarian social democracy

• Some unequal middle income countries—Brazil and Chile—are moving to social democracy:

– [high inequality + truncated welfare state] to… [declining inequality + inclusive social democracy]

Inequality

Conflict

Social patronage

+

Unbridled,or crony,capitalism

Social democracy

+

EfficientlyRegulatedcapitalism

Alternative pathways

Can social democracy be growth-supporting?• Take the following features of a social democracy:

1) universal, state-guaranteed, provisioning to manage household risks—of health, old age, unemployment, disability.

2) universal, state-guaranteed, access to quality education3) assuring a minimum level of material well-being4) state regulation of capitalism, including legal underpinnings for

labour-capital relations5) citizen participation

• This can be growth-promoting:– Resolves social conflict– Solves market failures for households—education and risks– Offsets market failures for firms—environment, social costs,

coordination, risk-taking

• If well-designed, especially:– Taxes– Targeting – Separating provisioning from the labour contract

But what of the US “model”?

• Yes, innovative; defines global frontier– High rewards for innovation

– Universities cradles for talent

– Venture capital

• Not because of its incomplete social democracy– Exclusionary

– Lower mobility than Scandinavia

• And increasing capture of state by lobbies, channeling rents, privatizing gains and socializing losses

• Not a good model for an emerging market country

So how to get on to the good path?

First order: politics, interests and institutions

Politics: an encompassing coalition

Interests: supportive (or weak) capitalists

Institutions: a reasonably effective state

Second order: designs that

• Reduce patronage

• Adapt to state capabilities

• Increase accountability

Social democratic transitions

Encompassingcoalition?

Capitalist interests? Effective state?

Sweden Yes Supportive Yes

US New Deal Yes Supportive Yes

Brazil Yes Low resistance Good enough

Chile Yes Low resistance Yes

Why low capitalist resistance in Brazil and Chile?

(a) Critical juncture post democratic transition(b) Credible threat of populist alternative

Example: Brazil

• Encompassing coalition of social groups in response to military rule

• Heritage of “truncated” welfare state

• 1988 constitutional settlement– Extensive social rights, plus

– Participatory institutions

• Almost two decades of continuous governmental action: Presidents Cardoso and Lula da Silva

Brazil in transition to social democracy

Features of Brazil’s transition

• Rights became politically salient• Innovative programmes

– Mass education, rising quality• the school system at all levels knows how much each child is learning

– Social pensions– Health– Fome Zero – Bolsa Famílaplus– Participation—city level participatory budgeting; health councils etc.—

making the state more accountable

• Inequality now falling, due to educational expansion and transfers• Yes, issues of continued dualism and high costs of doing business;

but over time transformational

Inequality

Conflict

Social patronage

+

Unbridled,or crony,capitalism

Social democracy

+

EfficientlyRegulatedcapitalism

Which path is India on?

Structural inequalities could put India on the bad path

• Yes, social provisioning is politically salient, and there are innovative programmes and substantial effort—SSA, NREGA, health insurance,etc.

• But three inequalities are distorting the path– Inequalities of citizenship: the patronage-corruption-

political finance nexus of the state– The rising economic power of capitalists, with unclear

interests in social democracy– State-society interactions at the margins of legality—

Naxalite areas; slums

• A high risk of a half-baked, inefficient and exclusionary social resolution

Transforming the state

• The transformational task is making the state more accountable—via external societal pressures and internal reforms—a huge and difficult task.

• Example: Right To Information Act missed an opportunity in making quality, and public information on measured outcomes central

• Expanding subsidies, reinforces the social patronage route, even if the state worked better, it is a costly and inefficient way of achieving equity

The position of capitalistsCorporate profits

….has supported unusually high wealth creation: billionaire wealth the tip of the iceberg

A political economy timebomb?Prime Minister already talking of crony capitalism

State-society relations at the margins

• Maoist areas

• Cities, and the creation of illegality

Levers for transformational change?

• Will rights + internal governmental reform + participatory institutions transform the state, or become captured?

• Are there progressive capitalist groups with an interest in a new social contract?

• Will major Indian political parties be able to undertake internal reforms to change thepolitican incentives from patronage to providing public goods?

Summary

• Social democracy is necessary for equity; if well-designed, good for long-run growth

• Only in Sweden? No. Social democracy canemerge in highly unequal societies e.g. Brazil and Chile

• But India’s structural inequalities are more likely to create a distorted social democracy, that is bad for equity and for growth

• Brazil and elsewhere suggests another path is feasible but uncertain