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System transformation and social protection
 / [Alfred Pfaller] - [Electronic ed.] - Bonn, [2002 - 2] Bl. =3D 24 KB, Te=
xt
. - (Policy information / International Policy Analysis Unit)
&lt;br&gt;Electronic ed.: Bonn : FES Library, 2002
&lt;br&gt;&lt;br&gt;&lt;font size=3D-1&gt;&lt;i&gt;=A9 Friedrich-Ebert-Stif=
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System transformation and social protection
 / [Alfred Pfaller] - [Electronic ed.] - Bonn, [2002 - 2] Bl. =3D 24 KB, Te=
xt
. - (Policy information / International Policy Analysis Unit)
<br>Electronic ed.: Bonn : FES Library, 2002
<br><br><font size=3D"-1"><i>=A9 Friedrich-Ebert-Stiftung</i></font>
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<p>
</p><ul>

<p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/01172.ht=
m#E9E1">	Social Protection was Built into the Old System</a></font>

</p><p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/0117=
2.htm#E9E2">	Liberated Markets Need Political Intervention </a></font>

</p><p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/0117=
2.htm#E9E3">	The Limits to Taxation</a></font>

</p><p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/0117=
2.htm#E9E6">	The Logic of Insurance: Mobilizing Individual Self-interest</a=
></font>

</p><p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/0117=
2.htm#E9E7">	Insurance Cum Solidarity: the Health System</a></font>

</p><p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/0117=
2.htm#E9E8">	Tax-financed Redistribution</a></font>

</p><p><font size=3D"+1"><a href=3D"https://library.fes.de/fulltext/id/0117=
2.htm#E9E9">	Optimizing Outcomes Under Tight Resource Restrictions</a></fon=
t></p></ul>
<br><br>
<p>=20
</p><p align=3D"CENTER"><a href=3D"https://library.fes.de/fulltext/id/01172=
.htm#I0"><img src=3D"https://library.fes.de/images/digbib/d_oben.gif" width=
=3D"160" height=3D"15" border=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E2"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E1"></a></p><p align=3D"LEFT"><font size=3D"+1"> Social Protec=
tion was Built into the Old System</font><br><br>
</p><p>The centrally planned economies of the pre-1990 socialist world did =
not need formal welfare-state arrangements of social protection because =84=
social welfare" was woven into the central processes of production, distrib=
ution and income generation. All productive resources, including labor of v=
arious skills, were mobilized by the planning agencies of the government to=
 contribute to social production. In turn, participation in the production =
process entitled people to share in the consumption of the product  both wh=
ile they were still active producers and when they were no longer able to w=
ork, due to old age, illness, disability or child birth. The state-run econ=
omy produced what the planners considered as desirable for current individu=
al and collective =84consumption" (including military build-up) and for fut=
ure economic growth. And it was the state planners who decided on the distr=
ibution of consumption rights =96 by determining money incomes and prices. =
Goods and services considered as essential were made available at very low =
prices or even for free. Education was accessible to everyone who qualified=
  with regard to age, aptitude and to some extent political loyalty. Simila=
rly, access to medical services was completely independent of individual pu=
rchasing power. Basic housing was provided for a token.=20
</p><p>Typically, access to many social services such as day care for child=
ren or recreation as well as to consumer goods was organized through the fi=
rm or institution that people worked for. Firms could be generous in these =
respects because their financial capacity did not depend on the balance of =
production costs and sales revenues but on allotments by the government for=
 the purpose of workers=92 salaries and =84welfare". Part of the =84social"=
 task assigned to the firm was the employment of people to a large extent i=
ndependently of productive needs. In this way, unemployment was practically=
 not allowed to materialize, everybody willing and able to work was  kept i=
n the job-based distribution system of individual and collective consumptio=
n rights.
</p><p>=20
</p><p>=20
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E1"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_prev.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Previous Item"></a>
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/d_oben.gif" width=3D"160" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E3"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E2"></a></p><p align=3D"LEFT"><font size=3D"+1"> Liberated Mar=
kets Need Political Intervention </font><br><br>
</p><p>With the transition to a market economy, consumption rights have to =
be earned in the market, subject to the price formation process determined =
by supply and demand (including the fluctuations of aggregate demand due to=
 changes in the balance of savings and investment as well as the shifts in =
demand and supply structures). The unmitigated market process carries sever=
al risks for people=92s standard of living and basic life chances:
</p><ul>
<p></p><li> There is no guarantee that people who have no other productive =
asset but their ability to work will earn =96 for themselves and their depe=
ndents =96 an income that is somehow in line with the nation=92s per capita=
 income. There is the real danger that at times they will not find a job at=
 all or that the jobs available offer a salary very much below the national=
 average.=20
</li></ul>
<p>  Those who are not able to work can either consume to the extent that t=
hey have accumulated or inherited wealth that yields returns or can be turn=
ed into cash; or, they depend on income support by the larger community (at=
 state or local level), the family or some charitable person or organisatio=
n.
</p><ul>
<p></p><li> Certain goods and services that are essential for human well-be=
ing, such as shelter and medical treatment, or that are decisive for life-t=
ime income chances, such as higher education,  will  not  be available  to =
those whose income cannot pay for the costs of those goods and services.
</li></ul>
<p>In other words: the market carries the risk of significant social exclus=
ion. But society can decide politically not to tolerate exclusion, i.e. to =
secure for every citizen a standard of living that is not too far below the=
 national average =96 which, in turn, depends on the productive capacity of=
 the national economy. In this case, arrangements are required to correct e=
x post the results of the market process and perhaps to intervene ex ante i=
n the market process so as to make it produce as few =84casualties" as poss=
ible. Without some sort of welfare state, significant segments of the popul=
ation run a substantial risk of having to live in outright misery or even n=
ot to live long at all.
</p><p>Under the central planning regime, <u>most</u> allocation of economi=
c resources was subject to political decision-making (as opposed to decentr=
alized decision-making by buyers and sellers in the market). Thus, the deci=
sion to avoid large-scale economic exclusion could be integrated easily, li=
ke any other collective goal (such as the quest of military might), into th=
e overall economic planning process. In the market economy, most of the res=
ources to be dedicated to collective goals have to be extracted from the =
=84private sector", although state enterprises might generate some market i=
ncome for the =84caretaker of the collective will". That is to say, politic=
al command, which ideally represents the will of the citizens=92 majority, =
has to overrule individual spending (or saving) preferences. This political=
 command can oblige citizens and residents to pay a certain part of their i=
ncome directly as taxes to the government or as contributions to special fu=
nds such as a collective pension system or a health insurance.
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E2"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_prev.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Previous Item"></a>
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/d_oben.gif" width=3D"160" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E4"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E3"></a></p><p align=3D"LEFT"><font size=3D"+1"> The Limits to=
 Taxation</font><br><br>
</p><p>The new method of securing collectively desired patterns of resource=
 allocation (in our case: avoidance of exclusion) by means of taxation give=
s rise to a general problem. In the political arena, people might well supp=
ort decisions in favor of welfare-state arrangements that protect them agai=
nst poverty or outright misery in various contingencies of life. But at the=
 same time they might resist and resent the necessary taxation. They might =
assume a free-rider position, trying to avoid taxes, but at the same time c=
laiming the benefits of the system whenever the need arises. We should expe=
ct such free riding to become a generalized phenomenon, as the state is not=
 readily perceived as the collective agency of the citizens for the citizen=
s, but rather as an unloved disciplinary agent, suspected, in addition, of =
being wasteful or even corrupt. Moreover, the very practice of successful t=
ax avoidance creates and reinforces a culture of =84legitimate" cheating (w=
ith those who do not being regarded as fools).=20
</p><p>Explicit taxation (rather than implicit resource allocation by centr=
al planners) also raises overtly the issue of the distribution of the tax l=
oad. People might support the magnitude of tax-financed government spending=
 but resent the particular tax which is levied on their income, assets or c=
onsumption. One such group of tax =84resenters" and avoiders even has the e=
ndorsement of an influential school of economics: business people. =84Exces=
sive" taxation of businesses is said to harm national prosperity on two gro=
unds:
</p><ul>
<p></p><li>It stifles entrepreneurial initiative, the very engine of wealth=
-creation, and
<p></p></li><li> it diminishes the national economy=92s competitiveness, ma=
king it more difficult (a) to sell national products in internationally con=
tested markets and (b) to attract foreign investment.
</li></ul>
<p>If, in addition, the relatively low administrative capacity of the trans=
formed state apparatus in transition countries is taken into account, it be=
comes clear that there are economic limits to a welfare-state system of soc=
ial protection even if the citizens of transition countries and their elect=
ed representatives opt for it politically. We should expect a strong tensio=
n between the politically articulated desire for protection and the politic=
al system=92s ability to mobilize the necessary resources.=20

</p><p align=3D"CENTER"><a href=3D"https://library.fes.de/fulltext/id/01172=
.htm#E9E3"><img src=3D"https://library.fes.de/images/digbib/d_prev.gif" wid=
th=3D"105" height=3D"15" border=3D"0" alt=3D"Previous Item"></a>
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/d_oben.gif" width=3D"160" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E6"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E6"></a></p><p align=3D"LEFT"><font size=3D"+1"> The Logic of =
Insurance: Mobilizing Individual Self-interest</font><br><br>
</p><p>In view of the new limits to collective action that result from the =
limits to taxation, solutions to the various needs for social protection sh=
ould=20
</p><ul>
<p></p><li> be designed so as to rely as much as possible on individual inc=
entives to make provisions for the risks of life;
<p></p></li><li> give priority to the most pressing needs for protection an=
d for avoiding exclusion, leaving other goals =96 that might be politically=
 popular as well =96 unattended;
<p></p></li><li> avoid hinderingbusiness incentives to invest and employ pe=
ople, thus reducing the need for welfare-state income support.=20
</li></ul>
<p>In order to extend the limits to tax-financed protection, a clear link s=
hould be established, wherever possible, between a person=92s payment into =
a protection scheme and his/her entitlement to the scheme=92s benefits. Thi=
s applies to people who do earn a taxable income in the market, most common=
ly =96 but not exclusively =96 as employees. For this group, the relationsh=
ip between payments and benefits is most readily established for old age  p=
ensions and for income support during temporary unemployment. But it can be=
 done as well for income support during times of illness. It would be a mat=
ter of establishing =96 public or adequately controlled private =96 insuran=
ce systems which offer the corresponding benefits in relation to the contri=
butions paid. Contributors themselves have an incentive to pay in order to =
maintain their claims.=20
</p><p>However, it is important that cheaper ways to reap the benefits are =
excluded. Moreover, in order to avoid a taxation-of-labor effect, which wou=
ld harm employment in times of labor abundance, it would be best if contrib=
utions were paid not by employers, but exclusively by the prospective benef=
iciaries =96 as  is the case with an ordinary private insurance. But, emplo=
yers could be instrumental in pooling risks and collecting contributions, t=
hus reducing =84dead-weight" transaction costs.=20
</p><p>A certain complication is posed by the continuing cash-flow needs of=
 pay-as-you-go pension systems, on which the current generation of pensione=
rs depends. This is one strong reason for compulsory membership, which, in =
turn, re-introduces to some extent the problem of tax resistance (especiall=
y if the benefits of the system are not valued highly in comparison with al=
ternative ways of providing for old age).
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E6"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_prev.gif" width=3D"105" height=3D"15"=
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<a href=3D"https://library.fes.de/fulltext/id/01172.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/d_oben.gif" width=3D"160" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E8"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E7"></a></p><p align=3D"LEFT"><font size=3D"+1"> Insurance Cum=
 Solidarity: the Health System</font><br><br>
</p><p>Not all elements of social protection can follow the pure logic of i=
nsurance. Take provision for medical treatment in the case of illness: defi=
ning benefits in relation to contributions would exclude those who earn too=
 little to pay for the costs of adequate protection (disregarding =84non-es=
sential" benefits such as private rooms in hospitals, aesthetic surgery etc=
. as well as extremely expensive treatments with verylimited health benefit=
s). If the restoration and maintenance of good health in accordance with th=
e possibilities of medical art and technology is not to become a privilege =
of the well-to-do =96 which would be a gross violation of social justice wh=
en defined as absence of social exclusion =96 health insurance must charge =
contributions in relation to <u>in</u><u>come</u> while handing out benefit=
s in relation to <u>need</u>. Such a system is immanently unattractive for =
those whose households have above average incomes per person because they h=
ave to subsidize the health services for their poorer compatriots with thei=
r relatively high contributions. For them, private insurances with strictly=
 cost-related contributions would be more advantageous. Therefore, opting o=
ut of the public system with its income-related (rather than level-of-benef=
it-related) contributions would have to be precluded for them. If they pay =
their contributions but still prefer to buy medical treatment in the free m=
arket no harm would be done. But, of course, this would raise the problem o=
f tax resistance by those who do not really benefit from the system to whic=
h they have to contribute.=20
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E7"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_prev.gif" width=3D"105" height=3D"15"=
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<a href=3D"https://library.fes.de/fulltext/id/01172.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/d_oben.gif" width=3D"160" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E9"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_next.gif" width=3D"105" height=3D"15"=
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<a name=3D"E9E8"></a></p><p align=3D"LEFT"><font size=3D"+1"> Tax-financed =
Redistribution</font><br><br>
</p><p>There are parts of welfare-state protection for which no individual =
self-interest can be mobilized via appropriate financing methods. They incl=
ude all sorts of income support =96 in cash and kind =96 for the poor who d=
o not earn an adequate market income and who did not have the chance of mak=
ing provisions in earlier times.=20
</p><p>In the highly developed welfare-states of the western industrialized=
 world, these types of pure redistribution schemes have traditionally claim=
ed only a small part (seven to ten percent) of the overall welfare-state bi=
ll. Lately, however, this percentage has been increasing. The reason is tha=
t the market economy has been producing more =84casualties" than it used to=
 in the hey-days of welfare capitalism. A larger part of the labor force ha=
s found itself unable to earn a decent wage income, either due to protracte=
d unemployment (for which the first tier of unemployment insurance no longe=
r provides) or due to very low wages for many jobs.=20
</p><p>In the transition countries, the problem of insufficient wage income=
 during working-age has much larger proportions. For the transition shock h=
as led to large-scale destruction of jobs as protected former markets vanis=
hed and large parts of the production structure proved unable to survive in=
 contested markets, or as companies, in order to survive, took to large-sca=
le labor-shedding. On the other hand, in quite a few transition countries, =
the problem has not yet unfolded to its full magnitude because large state =
enterprises have continued their old labor-hoarding practice precisely in o=
rder to avoid even more unemployment. In this respect, remnants of the old =
socialist welfare-state system have been kept alive.
</p><p>Income support for those unable to provide for themselves over the l=
ife-cycle cannot be financed by contributions in the same way protection ag=
ainst the contingencies of life is. It must rely on taxes, to which the abo=
ve mentioned limitations apply. The same holds, to a significant extent, fo=
r education. If it is =96 above a certain base level =96 not to become a pr=
ivilege of the well-to-do, it has to be financed by all citizens, those wit=
h children and those without. This, in turn, makes it a =84natural" candida=
te for tax-based financing, even though the well-to-do could, in addition, =
be asked to pay for their share of education.=20
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#E9E8"><img src=3D"h=
ttps://library.fes.de/images/digbib/d_prev.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Previous Item"></a>
<a href=3D"https://library.fes.de/fulltext/id/01172.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/d_oben.gif" width=3D"160" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a name=3D"E9E9"></a></p><p align=3D"LEFT"><font size=3D"+1"> Optimizing Ou=
tcomes Under Tight Resource Restrictions</font><br><br>
</p><p>Part of the overall welfare-state package corresponds to the logic o=
f insurance. Its financing is relatively unproblematic. This part caters to=
 those who cannot be considered =84casualties" of the market economy, i.e. =
those who earn a =84decent", albeit modest, income in the market. But we al=
so have =96 varying significantly from country to country =96 a need for re=
latively large sums of tax-financed redistribution, for both income support=
 and public goods like education. And we have states with relatively low ta=
xation capacity. This combination of challenges and constraints would sugge=
st the following strategy:
</p><ul>
<p></p><li> Organize the insurance part, which caters to the protection nee=
ds of the employed and reasonably well remunerated members of society (incl=
uding their families), in a way that does not absorb precious tax revenues.=
 Establish a firm sense of =84ownership" for the protection which is being =
bought by individual contributions. At the same time, implant the idea of s=
ocial contributions as <u>part</u> of the wage rather than something grante=
d in addition to the wage. Otherwise a conflict is bound to emerge between =
social protection (which raises labor costs) and employment (which should b=
e by far the most important source of income).=20
<p></p></li><li> Do not hand out public goods to those who can pay for them=
. This applies, for instance, to education. But make sure, at the same time=
, that those who cannot pay have equal access. Avoid a second-tier, lower-q=
uality supply for the less well-to-do.
<p></p></li><li> Preclude the possibility that the well-to-do opt out of th=
e public health system, at least as far as contributions are concerned.
<p></p></li><li> Give priority in re-distributive tax spending to those ite=
ms which imply the biggest effect in lifting poor citizen=92s and their chi=
ldren=92s standard of living. In pratice, it might be better to offer =84es=
sentials" as public goods rather than top up low incomes with public transf=
ers so as to enable every citizen to buy these essentials in the market. Th=
is overrules private spending preferences, which offends liberal sentiment =
but also protects children=92s rights and limits self-destructive irrespons=
ibility. Perhaps more importantly for transition countries, it saves the hi=
gh administrative costs of pervasive and repeated means-testing. =84Essenti=
als" should include high-standard health services and the full range of edu=
cation. Low-cost housing and free (or low-cost) public meals could come nex=
t in line.
</li></ul>
<p align=3D"RIGHT"><i> Alfred Pfaller </i>

</p><p align=3D"center"><br><br></p><hr width=3D"80%"><br>
<p>Friedrich-Ebert-Stiftung, 5310 Bonn, fax: 0228 / 883 625, e-mail: Pfalle=
rA@fes.de
</p><p><br><br>


<!-- START END -->
</p><hr>
<font size=3D"-2">
=A9 <a href=3D"mailto:wwwadm@www.fes.de">Friedrich Ebert Stiftung</a>
| <a href=3D"https://library.fes.de/fulltext/id/support.html">technical sup=
port</a> | net edition=20
<a href=3D"mailto:walter.wimmer@fes.de">fes-library</a> | Februar 2002
</font></td></tr></tbody></table>
<!-- END END -->

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