Brookings had an excellent blog series last month on going the last mile to end extreme poverty. The posts were adapted from a book of the same name which was just released. I was most struck by Raj Desai’s article on the role that welfare programs played in ending extreme poverty in today’s high income countries. As he pointed out, when the US, UK, and Germany adopted major welfare programs in the late 1800s and early 1900s, they had the same GDP per capita (in real terms) as India, Indonesia and China do today. Welfare subsequently played a major role in eliminating extreme poverty in these countries. So why haven’t today’s middle income countries done the same?
His answer is worth quoting at length.
The earliest social protection programs in Western Europe were of the contributory variety—financed out of taxes on wages—as a way of preventing social conflict. Otto von Bismarck’s pension, sickness insurance, and worker compensation programs were, after all, created to pre-empt a Social Democratic victory in Germany. These systems, combined with the political changes taking place in the continent, would lead to dramatic expansions in social protection in later decades. Even as industrialization initially caused poverty, it also created rising wages for workers. Eventually, organized working classes formed a strong alliance with the fast-growing, urban middle class. This political coalition sought policies that would protect itself from economic cycles—especially after the economic turmoil of the 1920s and 1930s—that would eventually result in the postwar welfare system. Indeed, the durability of these welfare programs may be attributed to the participation of the middle class, which shaped program design: welfare programs provided universal coverage so that the middle class itself was not excluded from benefits.
Many of today’s developing countries have followed a very different path. Labor tends to be less organized and have weaker relative bargaining strength. Much of the labor force remains in the informal sector and is left out of any contributory schemes, which tend to have limited scope. Social protection is more reliant on a fragmented system consisting of a large number of non-contributory programs financed out of general revenues. More importantly, the preferences of both governments and donors are mainly for programs that target particular sub-populations to achieve cost efficiency.
Consequently, an opposite political dynamic appears to be playing out in developing countries. Instead of middle class “buy-in” resulting in broader and more comprehensive programs, targeted and fragmented programs are inhibiting median-voter support for social protection and leading to middle-class exit. The consequences are familiar to designers of targeted social protection—their vulnerability to shifts in political winds, their susceptibility to abuse or capture by elites, and their occasional failure to outlive the aid programs that may finance them. The overall result is that the demand for comprehensive welfare programs in middle-income countries remains weak.