Development / Economics

The East’s Welfare State: A Model for Growth?

Following liberation from the former communist rule, Eastern member-states  entered a gradual economic transition towards liberal capitalism. Dadiana Chiran argues that the strengths of Eastern welfare states have been compromised since the 1990s.

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At the beginning of the 80s, in full neoliberal mode, Claus Offe voiced a controversial statement, namely that “capitalism cannot live with the welfare state but it cannot survive without one either, the fact that guarantees its existence”. Two decades after, during the Lisbon European Council in 2000, the thumping aim of the EU was set out: by 2010 Europe was “to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion”. The same Lisbon strategy emphasized that “investing in people and developing an active welfare state will be crucial both to Europe’s place in the knowledge economy and for ensuring that the emergence of this new economy does not compound the existing social problems of unemployment, social exclusion and poverty.”

The aims set in 2000 were bold and far-fetched to some extent, but noble nonetheless. However, if we give a glance to the standards and the economic potential of most of the MS at that time (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK) it is not misleading to say that the prediction for 2010 might have even been  achievable, if not for the crisis. But what of the Eastern new joiners?

The Central and Eastern European countries that acceded to the EU brotherhood in 2004 and 2007 respectively were at a disadvantage compared to their Western counterparts. Even today, Eastern Europe remains, in many respects, the stray sheep that needs to return to the flock on a regular basis. For the new Eastern European member-states, the Lisbon strategy was right on target but overall wrong on achievement.

Within the discourse of economic growth for Eastern European countries, there are several matters to bear in mind. Firstly, although they loath to remember it, Eastern countries preserve a communist legacy, and attached to it multi-fold economic and social drawbacks. After the mastodonic communist industry collapse in 1990, all Eastern economies faced drastic economic downfalls (peak inflation, current account deficits and foreign debts, unemployment, poverty, etc.), often resulting in path dependency, crony-capitalism and severe lack of know-how. These issues hindered the much desired “sustainable economic development” and rapid convergence with the developed Western capitalist economies. A considerable number of unhealthy, unemployed, low-skilled, and above all, impoverished people became EU citizens in a highly competitive EU market. Secondly, during the transition period, the ex-communist countries went through deep system transformation. The CEE countries had to reform and redesign their structural functionalism – from a paternalistic full-employment welfare scheme to the market economy scheme and pluralist democracy. The Washington Consensus (the ten economic measures for transitional economies) did not make any references to employment, social externalities or social benefits. At the beginning of transition, the Hungarian economist János Kornai affirmed that the Eastern bloc countries had “premature welfare states” since social policy transformation was a matter of coping with the adjustment to the market economy rather that a pledge for socio-economic convergence with the developed western societies. The social policy framework was influenced by the system transformations and by the economic circumstances rather than being an influencing factor in itself.

But is the Eastern welfare state model bound remain a mere response to circumstantial economic sequences and succumb to idleness? If so, and unless the welfare state is able to structure the preconditions for success, the Eastern part of Europe is consequently bound to remain the backyard of the Union for an extended period of time.

For over twenty years, employment levels in the region remained low compared to the rest of the EU; household income, disposable income, wages and living standards are not lining to the EU average benchmarks either, although prices were fast in doing so. Competitiveness and innovation indexes do not look cheerful for Eastern Europe, especially after the slowdown provoked by the 2008 economic recession. Until now, new Eastern European member-states have been a heaven for corporate gild (due to the cheap labour force, lack of labour unions and purposeful maintenance of low wages). Low-added value chains of production of multinationals and corporate businesses were moved in EE and, truthfully, it was a happy-go-lucky situation for both sides involved. Eastern Europe was in need of capital and investments and the investors were lulled by the new markets open for them to explore. In most cases (perhaps Slovenia and Czech Republic as exceptions to the rule) the Eastern countries became FDI dependent competitive states. Is that the success story for EE countries?

For years now, Eastern European brains have been draining, populations shrinking and demographic trends are negative with no prospects for change for the medium- to long-term. Youth employment is a problematic issue Europe-wide and Eastern countries do not make an exception. This poses a problem with long-term consequences as well because the older population is increasing, while the fertility rates and child per woman indicators show a significant decrease. Translated into economic language, “the coming working-age cohorts will be small, and they must sustain huge retirement population”(Gosta Esping Andersen), putting a significant pressure on the wage-tax and endangering the balance between work and secure pension, unless the productivity of the young is maximized. But the young are migrating; in search for more welcoming prospects, Polish, Slovak, Estonian or Bulgarian brains find satisfaction for their endeavours in countries that nurture innovation and personal development opportunities (Southern Europe follows the same stream, heavily affected by the 2008 economic recession). The North of the continent seems to fully match the requirements in that respect.

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Green means that more brains moved here than left (brain gain), red means more brains left the country than moving here (brain drain). The date is for 2014. Source: European Union, Regulated Professions Database. Full analysis available at http://www.alpbach.org

Expectations for sustainable economic growth in the CEE area without a comprehensive welfare strategy is much like putting the cart before the horse and hoping for the best. The welfare state has been in the last decades in an erosion process although the nostalgia for a high level of protection remained.

Finding the most feasible and sustainable growth strategy for Eastern Europe is not easy task but it certainly presupposes the involvement of an active welfare strategy, not just a safety-net catch. To withstand, endure and encompass the avatars of the globalization and international competitiveness any successful economy will definitely be demand-led, highly productive, diversified and  innovative. Hence, a hefty and sustainable economy leans on a stockpile of educated human capital, prepared to participate actively in a labour market with high added value jobs and an efficient incentive-based system of redistribution of wealth.

Welfare represents quality social investment and quality social investment means high quality education, health, housing, employment and social services for the society at all its levels. Expenditure on education or health will certainly make people more productive, while a child oriented family policy will render sustainability to the welfare mechanism. The creation of a hefty middle class is one of the key issues of a feasible welfare strategy, which in long term will determine the stability of the democratic system, the sustainability of economic development and well-being for the majority of the population.

The success equation of how much welfare will produce sustainable and constant economic growth is already known. Researchers agree that the Scandinavian countries seem to have found the recipe for it. Although maintained with considerable expenditure, the Nordic welfare is based on labour market flexibility and maximization of the population’s employability, productivity and self-confidence. Notwithstanding the existence of a success model, the Eastern countries need to carve their own slice of specificity and recalibrate their welfare strategy accordingly. Focus on education, social inclusion (especially for Roma) and economic empowerment of the disadvantaged strata of the society, professional life-long training, active labour market policies and investments in the health and social services systems are herein sine qua non for a comprehensive long term welfare strategy in EE member states.

If socio-economic development is desired, Eastern Europe is not in the position to have a ‘relaxed welfare state’ ensuring only as little as it can in order to make it through the fiscal and macroeconomic annual benchmarks imposed by circumstances. In this respect, the two pillars of the present EU growth strategy, namely fiscal balance and structural reform, do not leave much space for welfare state re-calibration. Spending is needed in the key areas of welfare, which will create inflation and budget deficits above the norm, but the re-definition of the welfare state in the East ought to go beyond the sole poverty amelioration and remedial policies while equality of opportunity and social justice are essential  in order to create an empowered middle class with the heft to influence not only the economic condition of the society but also the democratic ethos of Europe.

 

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