Crisis in capitalism: can the modern welfare state and global competitiveness be reconciled?


Remarks by Angel Gurría, Secretary-General, OECD

St. Petersburg International Economic Forum: Russia Today Open Televised Debate

Saint Petersburg,
20th June, 2013

Mr. Chair,

Rector Mau,

Under Secretary of State, dear Bob,

Ladies and Gentlemen,

The welfare state is under tremendous pressure:

Before the crisis already - as successive OECD studies and analysis (Growing unequal? in 2008, Divided we stand in 2011) documented - inequalities had grown tremendously, thus evidencing that the welfare state had become less efficient at redistributing wealth and mitigating the impact of growing disparities in incomes. Tax reforms – aimed at addressing the challenge of competitiveness - had for instance made the tax system less progressive - and less redistributive as a result.

The greatest crisis in a lifetime - which we have just experienced - has put our systems of social protection under even stronger pressure. As fiscal consolidation takes hold, some might be tempted to question the very existence of a strong, wide-ranging and sophisticated system of social protection and support because of its cost for the public purse. In some European countries, a dramatic downsizing of the welfare state is already happening.   

This is / this would be a major mistake and a setback for social progress!  And as the economic and especially the jobs crises persist, weakening – if not dismantling – the welfare state would hit the most vulnerable hardest. At the OECD we believe that social inclusiveness and growth can and should go hand-in-hand.

But to make the preservation of a strong welfare state compatible with the constraints of fiscal consolidation and with the imperative of competitiveness, we need to make it work better; we have to make it more efficient; we need to make it more cost-effective.

To achieve this objective, we need to address the structural and longer-term challenges that the welfare state is facing.

Ageing is one of the most important. Fertility rates are declining and elderly life expectancy is increasing quickly. Long-term care costs [i.e. care aimed at improving the functional and health outcomes of frail, the chronically ill and the physically disabled old people] are expected to at least double by 2050. Simultaneously, the size of the working-age population - aged 20-64 - will reach a peak in several G20 countries around 2015. It will then decline by more than 10 per cent by 2050, in a number of cases, making the financing of social protection more difficult.

In this context, in order to achieve a sustainable financing of our social protection systems, we will need longer working lives, a reform of public pension schemes and an increase in private pension saving, while targeting care to those with the highest needs.

In emerging economies the situation differs, but remains challenging. As they become ever more industrialized and urbanized, part of the responsibility for social welfare will shift from families and firms to the public purse. This will imply a pressure to widen insurance programmes, notably for health care, pensions, unemployment and long-term care. The expansion of these social programmes will need to be adequately funded, making the case for governments to address the issue of informality more forcefully.

But ensuring adequate financing of the welfare state is only one component of the equation. We also need to make it more cost-effective, in other words, to achieve better value for money.

Take for instance the health sector: its sustainability poses an important challenge to the modern welfare state, since its costs represent an ever-rising share of countries’ GDP: public spending on health in OECD countries might go from 6.3% of GDP in 2010 to 10% in 2060, or even 14% if no policy action is taken to curb the expenditure growth. In other words, countries, at least most OECD countries, are living above their means when it comes to health expenditures.  

Hence the need for structural reforms to make this sector more cost-effective. There are encouraging developments in this respect: The crisis has indeed been a catalyst for far-reaching reforms in the health sector. Ireland merged different health units, Greece did so for health insurance funds, and Portugal adopted hospital restructurings. Spain adopted a central procurement agency for efficient purchase of medical products, and encouraged the use of generics. The impact was considerable: total health expenses in OECD countries actually decreased in 2010-2011.

Yet, additional reforms will be warranted if governments are to tackle new pathologies such as the spread of chronic diseases and risk factors like diabetes and obesity– while improving polypathological patients’ treatment and care.

In sum, governments are faced with the difficult equation of:

i) On the one hand, meeting increasing welfare needs and social demands induced both by cyclical factors – the crisis – but also by structural trends – notably ageing and welcome but costly progress in health technologies;

ii) While at the same time containing the cost of the welfare state to achieve fiscal consolidation and enhancing competitiveness in a globalized world. 

As I said, we can “square the circle” - so-to-speak - by reforming the financing of the welfare state while at the same time making it more effective. But let us not fool ourselves: to ensure genuine sustainability of our social protection systems over the long-term, we will need to re-ignite growth and kick-start job creation. This is why governments should prioritize and combine policy actions in an effective manner, using targeted measures – training, activation policies, and even hiring subsidies where appropriate – to raise employment rates.

What people need today, while they are still grappling with the consequences of the crisis, is the following triptych: Jobs, Equality and Trust. An effective welfare state is one pivotal element to achieve these objectives. So yes, definitely let’s make it work better, let’s make it stronger!