Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Government Intervention in OECD Member Countries: Equity at the Expense of Efficiency? Marc Lombard* Abstract This paper examines the assumption that equity considerations prevalent in some of the OECD so-called “welfare states”, and associated with substantial government intervention in the economy, come at the expense of economic efficiency. To verify this assumption, the paper selects the OECD’s five highest spending countries, in terms of government expenditure as a percentage of GDP, as well as the five lowest spending countries in the OECD upper median income group. The performance of eight economic indicators, representative of both equity considerations and economic efficiency, is then evaluated with respect to each group of countries. The paper concludes that while high-spending countries largely outperform low-spending countries with regard to a more equal income distribution, lower child poverty rate, and more generous social benefits, evidence of economic efficiency is not as apparent, with productivity per hour and inflation rates being even between the two groups, and difference in unemployment rates being challenged by the large incidence of part-time and casual employment in low-spending countries. Even the marginal advance that high-spending countries have over low-spending ones, in terms of GDP per capita growth, can be questioned on the basis that this can be achieved by longer working hours, not in itself a sign of economic efficiency. 1. Introduction: Government Intervention in the Economy Of the many issues that divide economists, the one which is probably most debated is the degree of government intervention in the economy, as seen through its many manifestations, such as the size of public expenditure as a percentage of gross domestic product (GDP), the degree of labour and financial market regulation, the structure and level of taxation (direct and indirect taxes), etc. In the so-called developed world (using OECD member countries as a proxy), this issue basically pits two forces against each other: on the one hand (to use a favourite economic term), are the interventionists (mostly Keynesian, with slight degrees of differentiation between post-Keynesian, Neo Keynesian, new Keynesian, or simply unreconstructed Keynesians). On the other hand are those who favour free markets (again with different degrees of freedom). While the latter are dispersed throughout different schools of thought, such as Classical, Neoclassical, New Classical, Supply-siders, Monetarists, Economic Rationalists, etc., they have in common a certain aversion for government interference in the market, perceived to be more harmful than beneficial. Keynesians, in comparison, justify their interventionist approach on the basis of market failures, and the need for more equitable outcomes, rather than the pursuit of economic efficiency, the key performance indicator of free marketeers. According to Keynes himself, “the outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (Keynes, 1936). While somewhat derided since the 1970s for the perceived incapacity of demand management policies to tackle inflation and promote growth, Keynesianism appears to have regained some favour recently, through the rescuing of free markets from the global financial crisis, by governments’ massive fiscal stimuli and bail-outs. The degree of government intervention in an economy is usually measured in terms of public expenditure as percentage of GDP. In the OECD, in 2009, this degree ranged from 34% (Korea) to 56% (Sweden). Yet, government intervention can also take the form of legislation and regulations, not illustrated by the size of its expenditure (e.g. the universal medical coverage provided in Australia, a country whose public expenditure is well below the OECD average). Leaving aside more recent increases in government outlays due to the global financial crisis, better country comparisons can be provided by a 5-year average expenditure prior to 2009. A marked difference in the size of government outlays as percentage of GDP can be observed between Scandinavian countries (Sweden, Denmark in Table 1), and Australia, the US and Japan. While the 5-year average for the two Scandinavian countries is nearly 53%, it is only 34% for Ireland, 35% for Australia, and 36% for the US. The highest public expenditure as a percentage of GDP recorded by an OECD member country since the early 1990s was that of Sweden in 1993, with 70.9%; the lowest was Korea with 19.4% in 1991. Government outlays have gradually increased over the years. At the turn of the 20 th century, government expenditure in the major economic powers did not exceed 20% of GDP. The advent of democracy in the 20th century (New Zealand was, in 1893, the first country where women gained equal voting rights with men), and the associated provision of social welfare benefits, as well as major world wars have contributed to increasing the share of government spending in the economy. Yet, extreme forms of government intervention (so-called “command economies”) such as existed in communist societies have proved a failure in matching the development and economic growth rate of mixed economies. The absence of free enterprise and private property has stifled incentives and innovations, as witnessed nowadays by North Korea and Cuba for example, and the demise, in the past, of the USSR and its satellite countries. Only the repudiation of communist orthodoxy and the openness of its economy have enabled China to prosper. Leaving thus authoritarian regimes aside and focusing purely on OECD economies, the perception has been, in many quarters, that substantial government intervention is detrimental to economic growth, and thus to overall standard of living. Unlike developing countries, where defence is usually the major form of government expenditure, for most OECD member countries, the largest share of government spending is allocated to social welfare measures (cash social services – unemployment and sickness benefits, pensions, family allowances, etc.), education, health, low-rent accommodation, etc. This focus on equity considerations needs to be financed by taxation, which is then perceived by free marketeers as causing inefficiencies through disincentives to work, to enterprise, or, for those who are not directly recipients of government largesse, through a reduction in their standard of living. 2. Equity vs Efficiency The purpose of this paper is to examine whether the focus on equity considerations, by a number of OECD countries, comes at the expense of inefficiency, as the popular belief would suggest. To make this comparison between equity and efficiency worthwhile, eight economic indicators most representative of both concepts have been selected. The degree of a country’s performance is usually illustrated by four key economic indicators: 1) the growth rate of its GDP per capita (the measurement per head, rather than global GDP, is needed in order to eliminate GDP growth due purely to an increase of population, be it natural or through immigration); 2) the country’s unemployment rate; 3) its inflation rate; and 4) its productivity per hour (i.e. the GDP divided by the total number of working hours). This measure is preferred to the other commonly used definition of productivity (GDP divided by people employed), in order to moderate comparisons of GDP growth rates which could be due to countries’ labour forces working different numbers of hours, retiring at different ages, or having fewer or more days off per year. Equity considerations are best reflected by social measures aimed at improving the quality of life of either the general public and/or those most in need. To keep the comparison evenly balanced with efficiency, equity considerations have also been illustrated by four major factors. These are: 1) the degree of equality in income distribution; 2) child poverty rates (a better indicator than poverty rates overall, by eliminating the incidence of self determination, and low-income people living in medium to high-income households; 3) unemployment benefits as a percentage of average wage; and 4) the amount of annual leave and public holidays, reflecting quality of life considerations. Other major policies associated with equity concern are the level of social benefits such as pensions, maternity leave, and expenditure on health and education. These policies have been left out here, due to the complexity in making valid comparisons between countries: for instance, in the case of health the difficulty is in differentiating between the amount of expenditure (whether private or public) and the quality of services provided. With regard to medical services, the World Health Organisation established several years ago a ranking of countries based on the efficiency of health services provided. (The World Health Report 2000). This included, among other aspects, the level of health (measured by disabilityadjusted life expectancy), health inequality (inequality in life expectancy), responsiveness (how the system performed, meeting or not meeting a population’s expectations), fairness in financial distribution (that the risks each household faces due to the costs of the health system are distributed according to ability to pay rather than to the risk of illness). This attempt at comparing countries has since been abandoned and the WHO no longer produces such a ranking table, because of the complexity of the task (http://www.who.int/whr/en/). At the time, the Report ranked France and Italy respectively as first and second best performers; Australia was ranked 32nd and the US 37th. Of the 10 countries listed in this study, the United States is alone in not providing universal medical coverage, at the time of writing. In the case of education, while free compulsory schooling is available in all the countries surveyed below, wide discrepancies in levels of performance do exist within some federal states (notably the US). Finally, with regard to the level of pensions and maternity leave, the absence of a uniform rate, and the presence of many rates applicable to different conditions in different countries, make comparisons difficult to establish. Yet, unlike Australia and the US where no maternity leave was available at the time of writing, many European countries offer 16 weeks at 100% of salary (eg. Austria, France, Luxembourg, the Netherlands, Spain, Switzerland), the most generous being France with up to 26 weeks at 100% pay for the 3rd child. (ILO, 2010, http://www.ilo.org/dyn/travail) 3. Representative Countries and Economic Indicators As the size of government intervention in the economy is best illustrated by its level of expenditure as a percentage of GDP, and in order to compare countries respectively in terms of efficiency and equity considerations, this paper has selected, within the OECD, the 5 nations with the highest level of government expenditure as a percentage of GDP, as well as the 5 nations with the lowest level, as an average over a period of 5 years, prior to the current crisis. To make this comparison more valid (and thus minimise discrepancies between countries with substantial differences in income), all the countries selected have a GDP per capita over USD25 000. This has for effect to exclude, for instance, the former communist countries of Eastern Europe recently admitted into the EU, as well as Korea. The five largest spenders over the 5-year period 2004-2008 were, in order, Sweden, France, Denmark, Austria and Belgium. Sweden and Denmark are representative of the socalled Scandinavian socio-economic model, the epitome of welfare states, associated with high taxes and generous welfare provisions, as well as more egalitarian societies. France, Belgium and Austria are representative of the so-called Continental socio-economic model, i.e. welfare states associated with more regulated labour markets and extensive employment protection legislation. The five smaller spenders (well below the OECD average (see Table 1) were, in decreasing order, Japan, the US, Ireland, Australia and Switzerland. The US and Ireland (along with the UK) are representative of the so-called Anglo-Saxon model, associated with greater market freedom, lower tax structure and a more flexible labour market. Japan, the world’s second largest economy, has a unique model, whilst Australia can be regarded as a hybrid model, being not particularly generous with the level of social provisions compared to the EU (it is, as mentioned above, the only country with the US, of the 10 countries surveyed here, not to provide mandatory maternity leave at the time of writing), yet, unlike the US, it provides universal medical coverage. While the OECD average for total government outlay as a percentage of GDP, for the period 2004-2007, was 40, and the Euro area average was 47, the top 5 spenders ranged from an average of 50 (Belgium) to 53 (Sweden). In contrast, the 5 lower spenders were well below the OECD average, ranging from an average of 34% (Switzerland and Ireland) to 37% (Japan). (Table 1) Table 1 - General government total outlays Per cent of nominal GDP Selected countries 5-year average 2009 (2004-2008) Sweden 53.1 56.2 France 52.9 55.5 Denmark 52.2 57.7 Austria 50.3 52.7 Belgium 49.6 54.0 Japan 36.9* 41.6 US 36.2* 41.5 Australia 34.6* 37.5 Ireland 34.4* 45.0 Switzerland 34.2* 33.9 Total OECD 40.4 44.8 Euro area 46.9 50.7 References * = below OECD average Source: OECD Economic Outlook 86 database (February 2010) ________________________________________________________________________ 4. Equity Factors With consideration of the 4 factors mentioned above, and starting with the Gini coefficient, which measures the degree of income inequality within a country (where 0 equals perfect equality), the high-spending countries had an average of 0.25 compared to 0.32 for the low- spending countries. As expected, the Scandinavian countries of Sweden and Denmark had the least unequal income distribution, while at the other end, the US, with 0.38 was substantially behind the average of the low spenders. (Table 2) __________________________________________________________________________ Table 2 – Equity factors Gini coefficient Child poverty rate Unemployment Days of annual (1) (2) benefits as % of leave & public average wage (3) holidays (4) Sweden 0.23 4.0 58.3 38 France 0.28 7.6 57.4 35 Denmark 0.23 2.7 52.35 40 Austria 0.27 6.2 36.77 38 Belgium 0.27 10.0 33.54 32 Average 0.25 6.1 47.7 37 Japan 0.32 13.7 43.39 33 US 0.38 20.6 49.18 11* Australia 0.30 11.8 19.9 30 Ireland 0.33 16.3 22.83 29 Switzerland 0.28 9.4 70.0 32 Average 0.32 14.3 35.06 27 (1) Gini coefficient based on equivalised household disposable income, after taxes and transfers. The values of the Gini coefficient range between 0, in the case of "perfect equality" (i.e. each share of the population gets the same share of income), and 1, in the case of "perfect inequality" (i.e. all income goes to the individual with the highest income), mid-2000s Source: OECD. StatExtracts, http://stats.oecd.org/index.aspx (2) Percentage of children living below the national poverty line defined as % of households with income below 50% of the national median income, mid-2000s. Data is based on equivalised household disposable income, after taxes and transfers. Source: Society at a Glance 2009: OECD Social Indicators; www.oecd.org/els/social/indicators/SAG (3) Unemployment benefits and wage rates are measured in terms of countries’ currency unit, 2004-2007. Source: OECD. Stat Extracts (4) Source: ILO, http://www.ilo.org/dyn/travail, accessed April, 2010 * While there is no universal provision for annual leave in the US, a couple of states (e.g.Illinois and Florida) do provide days of annual leave based on years of service. __________________________________________________________________________ Of the 4 factors considering equity measures, child poverty rate was the one with the largest gap between high and low-spending countries, the latter having an average child poverty rate more than twice that of the high-spending countries (14.3 to 6.1). Once again, the incidence of poverty was lowest in the two Scandinavian countries, and highest in the US, followed by Ireland and Japan. The difference in unemployment benefits was less marked (an average of 48% of the average wage, for the high-spending countries, against an average of 35% for the lowspending ones). Australia appeared to be the least generous by far of the 10 countries, with the unemployment benefit representing only 20% of the average wage. However, of the four indicators illustrating equity considerations, average unemployment benefits has to be the least reliable, as it does not take into account the duration of the benefits (and its different stages), which varies substantially between countries. Yet, longer duration would be expected to be associated, in most cases, with those countries providing more generous benefits. Days of annual leave and public holidays are also much more generous in high-spending countries than low-spending ones, with an average of 37 days per year compared to 27. While there was little variation for public holidays, ranging from 11 days in the US to 15 days in Japan, there was a significant gap for days of annual leave, ranging from none in the US to 30 in Denmark. In the case of the US, while there is no universal mandatory annual leave, some states (such as Florida and Illinois) do provide a few days of annual leave based on years of service. Overall, there is ample evidence, as shown above, that high-spending countries are much more closely associated with equity factors than low-spending ones. For each of the indicators surveyed, the average of the five high-spending countries largely dominates over that the average of the five low-spending ones. 5. Efficiency Factors When considering efficiency factors, the difference between the average of the highspending countries and that of the low-spending ones is not as evident as it is for equity factors. In fact, low-spending countries only outperform high-spending ones in terms of GDP per capita growth and low unemployment rates, and this by a relatively small margin, compared to those that differentiated them in terms of equity. In the case of productivity per hour worked, they are on an equal footing with the high-spending countries, and in the case of inflation they are doing relatively worse than the high-spending countries, although marginally. ________________________________________________________________________ Table 3 – Efficiency factors GDP/capita Unemployment Inflation 2004- Productivity per growth rate, average 2007, percentage hour worked 2004-2007 (1) 2004-2007 (2) change from 2004-2007 previous year (3) (4) Sweden 5.06 7.2 1.1 2.10 France 4.50 8.6 1.9 1.43 Denmark 4.26 4.5 1.6 0.75 Austria 4.53 5.7 2.0 2.15 Belgium 4.09 8.1 2.1 1.45 Average 4.5 6.8 1.7 1.6 Japan 5.17 4.3 -0.1 2.05 US 4.96 5.0 3.0 1.50 Australia 4.80 4.9 2.7 0.95 Ireland 6.93 4.5 2.5 2.28 Switzerland 5.11 4.1 0.9 1.38 Average 5.4 4.6 1.8 1.6 (1) Growth rate of GDP per capita, percentage change from previous year, 2004-2007 Computed from GDP per capita, US dollars, current prices, 2004-2007 Source: OECD Factbook 2009: Economic, Environmental and Social Statistics (2) As per cent of labour force, 2004-2007. Source: OECD Economic Outlook 86 database. (3) Measured by CPI, 2004-2007, percentage change from previous year; Source: OECD Economic Outlook 86 database (4) Measured by GDP per hour worked, constant 1990 $US at PPP, 2004-2007. Source: ILO, International Labor Organization http://www.ilo.org/empelm/what/pubs/lang--en/WCMS_114060/index.htm _________________________________________________________________________ Considering GDP per capita, there is virtually no marked difference among the 10 countries surveyed. Leaving Ireland aside, with a growth rate of nearly 7% over 5 years, the gap between the best and worst performers of the remaining 9 countries is only 1 % over the same period of time. Where low-spending countries clearly dominate is regarding the unemployment rate: an average of 4.6% compared to 6.8% for the high-spending countries. France and Belgium, with extensive employment protection legislation, are the worst offenders, both with an average unemployment rate over 8%, while Japan and Switzerland are the best performers, both with a rate below 4.5%. Yet, the extent of the unemployment problem can be misleading, as under-employment is not taken into account. OECD common definitions of unemployment exclude part-time employment, even when those surveyed only work few hours and are desperate to secure full-time jobs. Part-time unemployment in the UK (or Australia), for instance, is at a level well above that of France, a country with a higher unemployment rate. There is also the case of hidden unemployment, where discouraged workers no longer appear in the unemployment statistics. Fully or partially idle resources are not conducive to greater efficiency, nor is full time casual employment, paid at very low wages. With regard to inflation, high-spending countries provide both the best and worst performer: Japan, with minus 0.1% (deflation symptomatic of woes facing Japan, for quite some years now), and the US, with 3%. Finally, productivity per hour does not offer a clear cut image. While the average for both groups of countries is nearly identical, there are good and bad performers in both camps. Conclusion What can be drawn as a conclusion? It is well known that statistics not only can be open to interpretation, but also need to be examined in the way they have been constructed. There is also the choice of parameters, and the exceptions made. Nonetheless, and bearing in mind these failings, this study purports to show that government intervention in the economy does not need to be equated with inefficiency, and that the benefits it provides in terms of equity consideration far exceed any potential loss of economic efficiency. * Department of Economics, Faculty of Business and Economics, Macquarie University, Sydney, Australia 3430 words References ILO, International Labor Organisation http://www.ilo.org/empelm/what/pubs/lang--en/WCMS_114060/index.htm ILO, http://www.ilo.org/dyn/travail Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press OECD Factbook 2009: Economic, Environmental and Social Statistics OECD Economic Outlook 86 database. OECD, Global Pension Statistics project, www.oecd.org/daf/pensions/gps OECD Social Indicators: Society at a Glance 2009 www.oecd.org/els/social/indicators/SAG OECD.Stat Extracts http://stats.oecd.org/index.aspx OECD: Pension at a Glance 2005, 2007, and 2009. www.oecd.org/els/social/pensions/PAG State of Florida Employment Benefits http://www.flofr.com/director/jobopp/ofrbenefits.htm#AnnualLeave The World Health Report 2000 http://www.who.int/whr/en/ World Health Organisation, WHOSIS, WHO Statistical Information System http://apps.who.int/whosis/data