Despite common beliefs regarding the damaging side effects of income redistribution, equity and efficiency can coexist. Institutional stability depends on the consensus established between the government and the population. A relatively egalitarian distribution of resources is conducive to political stability and economic development. By contrast, long-term economic development can be undermined by skewed wealth distribution. Equity and efficiency may be compatible under a growth-oriented government, but not so under a government that focuses on its short-term survival strategies. A welfare system becomes efficient if the short-term political goals do not undermine the long-run goals of economic development. The cases of China and Malaysia are further compared and analyzed in this theoretical framework.
It has become apparent in recent years that fast-track economic reform in China has generated an immediate urgency to create a safety-valve mechanism to cope with public stress or frustration resulting from massive unemployment, rapidly aging population, and widening gap between the rich and poor in social stratification. The attempts made to establish a social security system aim at ensuring social order and stability in China.
China is now in such a critical transition that the social organizational structure upon which the traditional social protection system has been based is falling apart, whereas a new social organizational structure has yet to take place to meet the needs for a new social security system. As Dreze and Sen (1991) point out, the Chinese government's success during the pre-reform period in enhancing the quality of life was associated with inefficiencies and constraints in the economy and "a sever neglect of the market." In the reform period, "there is evidence that there has been some set-back in the sharp decline of mortality rates and related features of the quality of life ... and that this may be connected with some withdrawal from public provisioning" (Dreze and Sen, 1991: p. 30). As the market plays an increasingly important role at the cost of central control and as traditional social protection breaks down, a new integrative mechanism is required for continued success of its economic reform.
Socio-economic theories consider the welfare state a response to both industrialization and democratization (Wilensky, 1975; Flora, 1981; Pierson, 1991). Both processes alter fundamental social structures and create the necessity for a mechanism to integrate the society. The primary role of the welfare state is to build the necessary social cohesion for sustained economic development. To secure the participation of all socioeconomic classes in the productive process, the government needs to integrate the population. To that extent, the two functions of the welfare state--resource redistribution and social cohesion--are complimentary rather than antithetical.
Before we explore China's efforts to establish a modern welfare state, we should understand why and how welfare programs intervene in the redistribution of resources and whether they can result in desired policy outcomes. In that regard, this paper deals with a broader issue than other papers in this collection. What we are concerned about are not only social security policies but also various kinds of welfare transfer. The second section of this essay discusses the political and social rationale for social security and welfare systems. The third section examines the consequences of wealth redistribution on economic growth. The fourth section analyses the difference between welfare programs that have short-run political consequences and those that have long-run effects on economic growth. The fifth section summarizes the Malaysian experience with social welfare reforms and their implications for China. The sixth section focuses on the emergence of a new social security and welfare system in China.
The Raison d'Etre of the Welfare State: An Overview
Social security and welfare transfers are only some of the many mechanisms for redistributing resources. The welfare state as an institutional framework is at the core of the interaction between economic growth and economic equity, which reflects social justice as well (Baldassari and Piga, 1996: pp. 257-258). (2) Normatively, the system per se of social security can be considered a public good. The market would not provide the appropriate level of social security for public consumption because of the problems involving overlapping generation incentives. In this connection, it is also assumed that the market will fail to achieve socially optional income distribution (Dilnot, 1989: p. 5). Governments can adopt a variety of actions to reduce poverty and disparity. In this perspective, a government is seen as the provider of a public good to correct market failures. In this essay, we focus on the incentive of the government to provide this public good as a means of promoting a cause upon which its tenure of office is pivoted.
The welfare state as an institutional framework was initially established to build up consensus within the population by way of redistributing resources. It remains a formidable task to define the term "welfare state," although welfare programs have been in existence since the nineteenth century. A variety of elaborate programs by government and non-profit organizations fall under this category. In its narrowest definition, the phrase "welfare state" denotes specific policies and services provided by the state, which usually exclude educational and military expenditures as well as public investments. (3) In a broader sense, "welfare state" refers to either a specific type of polity, a form of the state or a certain type of society (Pierson, 1991: p. 7). Despite the popular view that welfare payments mainly assist the poor, these payments are only a small portion of government transfers. Thus, in many cases the term "social security spending" is preferred to "welfare state" so that the role of social security in maintaining a minimum income level can be delineated (Pampel and Williamson, 1988: p. 16). (4)
The core of the western welfare state has been political and social security, as well as equality. In the modern welfare state, social security has been associated with the expansion of social rights and comprehensive social citizenship. Both elements are associated with social inclusion and policies. The social welfare state distributes either direct funds or services in-kind to secure the working class from such contingencies as involuntary unemployment, sickness and injuries, maternal leaves, and old age retirement.
The basic assumption of this study is that governments use welfare state programs to integrate segments of the population into social citizenship. Thus, under the present theoretical framework, the most critical function of the welfare state would be to protect the political system against disruptive changes. Political instability is often the outcome of an unequal distribution of economic and political power within the society. As welfare institutions intervene and alter the original allocation of resources in the society, governments are able to mitigate social grievances and to promote political stability, interfering with the efficient but often socially unacceptable distribution of income in the market (Scully, 1991: p. 200).
We can distinguish three primary goals of welfare programs: redistribution, efficiency and social cohesion in the society. Redistribution targets the promotion of equality or social justice. It is presumed that the state intervenes in the process of redistributing resources. Ironically, the quest for social security originates in the liberal arguments for individual freedom and limited action by the state. However, it is only the state that can provide social security and welfare programs, as the state is equipped with institutional mechanisms in modern society to deal with the demands for entitlements. States have the ultimate authority and power to ensure redistribution. (5)
The problems for the welfare expenditures arise from the supply-side. For instance, who is going to bear the costs? At what point do these costs produce net benefit to the society? Does the welfare state lead to moral hazard and free riding? In answering all these questions, what remains critical, however, is that the welfare state must be based upon a socially defined conception of what amount of welfare is optimal based upon social consensus (Offe, 1994:pp. 87-90).
Finally, the goal of efficiency becomes pertinent, because of market imperfections (e.g., adverse selection and externalities), while social unity (i.e., consensus building) is one of the primary objectives of the welfare state for social integration. This aspect of the welfare state remains secondary in the literature, although it deserves further exploration as a source of positive externalities of government intervention.
Even though inefficiencies may arise from the price discrimination process (redistribution includes different prices to different segments of the population and may create disincentives), there is no substantive trade-off between redistribution and the other goals of the welfare state (Goodin and Le Grand, 1987). The debate of equity (redistribution of resources to reduce inequalities of wealth) vs. efficiency (maximum production given available resources) remains an important issue for economic theory, since Kuznets (1955) and Kaldor (1956) reintroduced the topic in the mid-1950s. (6) For any modern industrialized state, the relationship of economic efficiency and social equity touches upon the nature of political and economic institutions.
Institutional political stability depends on the consensus established between the government and the population (North and Weingast, 1989; North, 1990). A relatively egalitarian distribution of resources is conducive to political stability and economic development. By contrast, income inequality can be erosive to the stability of the political regime. Sustained economic development can be undermined by a severely unequal …