Wednesday, November 16, 2011

What the Story of the Four Little PIGS Tells Us about the Welfare State

I often hear that the European debt crisis is an example of the evils of government spending and the welfare state.  However, something shared by at least three of these little PIGS (I don't know about Portugal) is that all had fairly rough transitions to democracy and retain some powerful clientelist features.  A recent Economist article reminded me of these features, which to be completely honest, I've been waiting for an excuse to blog about.

Italy, especially, has been used for a comparative case of a remarkably poorly functioning public sector and state spending that bears the form of rents more than it does characteristic welfare state features (Greece is probably an even starker example of this, but for various reasons, it is less frequently used for comparisons).  In all three of these countries, and perhaps Portugal, state spending serves largely to create political support for the existing regime and to support the legitimacy of the state.  These features largely date from the transition to democracy from their autocratic regimes, it was necessary to win over powerful constituencies that otherwise posed significant threats to the democratic transition.  While this was likely a necessary aspect of their transition, unfortunately none of these states managed to unwind these features while they had the freedom to do so.

It is undeniable that state spending used for clientelistic purposes is extremely damaging, the situation in Europe only confirms this.  However, it is a huge stretch to generalize from these cases to the idea that all state spending is unsustainable or a negative risk.  The main lesson to be drawn is that most mature democracies don't look anything like this, in most democracies most state spending is widely shared with its skewness being towards the poor generally, not towards specific privileged groups.  Attempts to say that all state spending leads to clientelism or to buying support from beneficiaries runs aground on the fact that benefits in states such as France, Germany, or Sweden are widely shared while other states, like Greece or Italy, have far more of their spending going to privileged groups and in particular highly paid and pensioned public employees.

The lesson here is about particularism and clientelism vs the welfare state, not one about spending vs. austerity.  Particularistic spending and benefits tends to lead towards imbalances and a higher possibility of economic stagnation (Spain certainly took off for a while despite these problems, if the crisis had been delayed for another decade or two things may have been very different), broad based policy and spending tends to be far more effective.

On top of this, of course, are the usual labor and business rigidities that plague Europe.  But this is shared across Europe, what is different in the experiences has a lot to do with the relative maturity of the democracies, their ability to rely on broad based legitimacy for their governments as opposed to particularistic interest groups, and the method they use to disburse state spending, broad based benefits vs. jobs.

This theme is worth developing further, I see it brought up far too much despite being a variable that occurs a lot in the political science literature regarding Italy especially.

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