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> 1
Course Purpose � Theory : To understand the rationale for the welfare state � History : To review the evolution and nature of a relatively economical version of the welfare state in a developed economy � Application : To examine detailed policy operation in selected fields of social protection � I nstitutions : To appreciate the broader political economy context for policy 2
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 3
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 4
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 5
SPECIFIC READINGS � M. Keating & D. Mitchell, “Security and Equity in a Changing Society: Social Policy” in G.Davis & M. Keating (eds), The Future of 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 6
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 7
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 8
Session 1: The Economical Welfare State THEORETICAL FRAMEWORKS 9
10 CORE WELFARE ECONOMICS
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 11
Efficiency propositions � Individual markets vs many markets � Technical efficiency � Allocative efficiency � Dynamic efficiency FIRST FUNDAMENTAL THEOREM OF WELFARE ECONOMICS 12
Limits to First Fundamental Theorem of Welfare Economics 1. Market Failure 13
The Visible Hand � Dismembered hand � Helping hand (Public Goods) (Equity) � Clumsy hand (Externalities � Guiding hand Information) (Merit) � Invisible fist (Monopoly) THE LIMITS TO � Arthritic hand RATIONAL MARKET (Disequilibrium) CHOICE WELFARE ENHANCEMENT 14
Minimal Functions: Providing pure public Protecting the poor : goods: � Antipoverty � Defence programs � Law and order � Disaster relief � Property rights � Macroeconomic management � Public health 15
Intermediate Functions Regulating market Addressing power: externalities: � Utility regulation � Basic education � Antitrust policy � Environmental protection 16
Intermediate Functions (cont’d) Overcoming imperfect Providing information: Social insurance : � Insurance (health, � Age/ disability life, pensions) pensions � Financial regulation � Family allowances � Consumer � Unemployment protection insurance 17
Activist Functions Coordinating/ directing private activity : Redistribution/ Merit: � Fostering markets � Income and wealth � Cluster initiatives redistribution � Supporting � Provision of merit individual goods industries � Public Ownership 18
Limits to first fundamental theorem of welfare economics 2. Public Choice 19
Alternative Institutions of Co- ordination and Decision Unofficial Official � Interest groups � President � Social movements � Parliament � Religion � Parties � Media � Elections � Public opinion � Bureaucracy � Patronage � Military � Family � Courts A STAKEHOLDER MAP 20
Theory of the state � Voting: Median Voter Rule � Bureaucracy: Niskanen’s Theory � Interest Groups: Olsen/ Stigler Theories But INDIVIDUALIST MAXIMISING CONSTRAINED CHOICE MODELS ! 21
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 22
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 23
Session 2: The Economical Welfare State THE RISE AND DECLINE OF THE WORKER WELFARE STATE 24
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 25
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. 26
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 27
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 28
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 29
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” 30
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. 31
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 32
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