Welfare does not bankrupt but will prosper Malaysia

ONE of the most wicked economic satirist of the 18th century, Bernard Mandeville cynically proclaimed, “It was generally admitted that unless the poor were poor, they will not do an honest day’s toil without asking for exorbitant wages.

To make the society happy it is requisite that great numbers should be ignorant as well as poor.”

Mandeville made clear his displeasure with an economic hierarchy that accepted poverty as necessary to safeguard “social order”, dismissing charity as hypocrisy of priests and noblemen wanting to maintain status quo. His great paradox that “private vices bring about public benefits” was echoed by his junior of half a century, Adam Smith.

Similarly, Smith posited that true virtuous self-interest results in an unintended invincible cooperation, which produces greater economic good.

Is the answer to humankind’s economic queries truly within the power of collective selfish incentives? A revisit to the origins of economic superpowers of today can invalidate this claim.

How did West Europe, America and Japan emerge as significantly superior economies to the rest of the world?

In 1820, the average income in Western Europe was roughly 90% of that of Africa today. Huge poverty and wealth gaps between nations today virtually did not exist prior to the 19th century. Everyone started on the same footing.

Since the beginning of time, human population only reached 15 million 5,000 years ago.

We hit our first billion mark in 1804, and our second more than a century later in 1927. In the 19th and 20th centuries, the world witnessed tremendous economic and human development taking place in Europe and North America.

Poverty was reduced in those regions dramatically. Since then, human population skyrocketed to 3 billion in the span of only 40 years to 1960, already reaching seven billion by 2012.

Healthcare, agriculture, food technology and better mode of production paved way to the industrial revolution.

For the first time ever, world food production was at a surplus; one person was able to produce food for thousands of other people.

Britain assumed leading position in modern economic growth, given its relative ability to rupture existing structures and undergo necessary gender, familial and social mobility.

Growth and technology diffused outwards to other receptive regions like Japan, which was undergoing the Meiji restoration, and North America, from waves of outward migration from Europe.

At the same time, vast regional differences and inequalities surfaced. Modern economic growth was not tasted by many parts the world; thereon emerged dichotomous terminologies we are familiar with today, such as “the east”, “the west”, “third world” and “first world”.

Underdevelopment and poverty was no longer something humans could just wait to naturally climb out of.

Poverty became relative; it needed combating and attention because great superpowers were accelerating at their self-driven pace, unintentionally or not “trampling” on the poor. Private vices alone will result in grave imbalances.

Only then did earlier works in economic philosophy re-emerged with complex theories and models for the solution to man’s economic problems, picking up from where Smith and Marx left off.

Jeffrey Sachs in the End of Poverty (2005) saw that eradication of extreme poverty by the year 2025 is possible, as per the Millennium Development Goals (MDGs), given properly planned development aid.

Sachs argued that through increasing anti-malarial bed nets in Sub-Saharan Africa, promoting debt cancellation by richer nations to the world’s poorest economies, adequate funding for clinical economics and tripling development aids, the world can be free of extreme poverty.

The World Bank defines extreme poverty as living below one dollar and 25 cents per day, at purchasing power parity. But Sachs views the extremely poor as those stuck in a rut and unable to even begin climbing the ladder of development out of poverty without aid.

If we believe in the capability of “private vices” to establish this great invincible cooperative force to achieve economic prosperity; does this mean we see welfare and redistribution as dead? Does it mean we are apathetic towards extreme poverty and economic deprivations of fellow human beings? Where do we draw the line?

Demystifying Welfare

A welfare state sees its government play a huge role in the provision of goods and services to ensure social and economic well-being of its citizens. It aims to reduce economic insecurity that is produced by nature or the market. The concept rests upon major normative themes like ‘rights’, ‘needs’ ‘equality’, and ‘justice’.

In view of organized Islamic living, the Islamic worldview too puts the fulfilment of basic needs of all human beings as one of its primary objectives. Nejatollah Siddiqui in his ‘Role of State in the Economy’ proposes that the burden of fulfilling needs rest on the Islamic state; it is a fardh kifayah, which is an essential duty that must be performed.

Garfinkel and Smeeding at Columbia in 2010 found that all wealthy nations are in principal welfare states; they are “primarily capitalist economies with large selective doses of socialism”. Welfare can take the form of direct transfers or on-behalf payments to service providers, like education and healthcare.

Transfers can be cash or coupon handouts, disability and unemployment benefits, which we do not have in Malaysia, family assistance, and poor relief.

Statistically, welfare states can be defined as countries devoting at least 20% to social transfers like Nordic countries, Austria and the Netherlands. On the other hand, countries like the United States and poorer Third World countries spend less in social safety nets and human investments.

Malaysia spends only 4.1% on Education (ranking her 101st) and 4.4% on Healthcare (ranking her 156th in the world). Not coincidentally, Malaysia also ranks among the highest in income-disparity gap in Asia between the rich and poor.

Using the Nordic example, higher social transfers of the welfare state have resulted in less poverty, less inequality, and longer life expectancy with statistically no net cost in terms of GDP, economic growth or even budget deficits.

But according to welfare expert Peter H. Lindert, the burden of proof lies on those who claim that welfare states strangle productivity and growth. Antagonists need to prove why, in reality, large welfare states end up with higher growth rates.

Welfare Will Not Bankrupt Malaysia

When approaching the subject of financing welfare programmes, we can never avoid Scandinavia. It is always thought that they run a terrific social democratic welfare state, but at the expense of its people. The myth is that citizens, especially the rich and hardworking, are really bullied to pay heavy income taxes. The reality is not as disheartening.

In the 1980s, corporations and property incomes in Sweden rarely pay top statutory rates because of deductibles and loopholes.

In fact in the 1990s, Sweden and some other European countries simplified their tax systems which effectively lower tax rates at the high income brackets.

The OECD experience since 1980 exhibits no sign of negative econometric impacts on GDP and national product from higher taxes having to finance larger transfers and welfare payments.

It is actually sin taxes that are highest. Tobacco and alcohol are demerit goods because its total costs to society that arise from its consumption (higher healthcare bills from second hand smokers) outweigh the private costs to smokers who purchase them. Consumption in general is also taxed via the Value Added Tax (VAT); the more financially able one is to consume, the more one ought to be taxed.

The Nordic model also taxes lower income groups. While those earning below RM3,000 (which form the majority) are not taxed in Malaysia, even the average Nordic toilet janitor does. At first glance this seems cruel, but labour supply is less sensitive to tax than say, capital supply; people are less likely and less able to change or run away from jobs because of tax as much as investment monies and consumption could. By making everyone pay labour income tax, even those in favour of receiving government welfare too are made to contribute at least a little to the welfare they enjoy.

Welfare Will Not Hinder Progress, Rather Catalyze It

It is time we cease looking at welfare as populist, a game of pity or even something to be grateful to the government for. It is a perfectly feasible economic programme in its own merit and even growth-accretive. Keynes explained that the welfare state is not just absolute support for the poor. Welfare is actually part of a package of policy instruments to keep the market economy on track and prevent relapses of economic crises. Welfare spending also stimulates demand when private investment and expenditure dry up in times of dampened economic growth.

The Columbia University study showed that large welfare state budgets enrich nations rather than impoverish them. First, all modern rich nations have large welfare states.

Second, he found that these states grow faster economically in periods after large welfare programmes compared to periods before them.

Third, they found strong evidence that public education and public health have led to enormous gains in productivity and economic well-being. The study drew a 125 years historical timeline for rich nations and found a correlation between social spending and growth rates.

It is empirically proven that higher growth rates are registered in states during its large welfare era as opposed to its pre-large welfare era.

How so? For one thing, a welfare state is more inclusive; it generates economic producers wven out of its economically-handicapped citizens, by ensuring the bottom income earners are placed onto the ladder of development.

If welfare programs are tax-financed, it is revealed that social spending can only have a net positive effect on GDP because the leakage out of the economy in the form of tax is re-injected into the economy at targeted productive uses.

Denison, Barro, Lucas, Hicks and many others agree that there is overwhelming empirical evidence that public education promotes productivity and growth.

In fact, even many other social transfer programs raise GDP per capita. America sees shortened life expectancy, ranking 19th of 20 rich nations, and GDP gone wasted as they refuse to spend for health care.

Scientific evidence over a similar 125-year period also suggests public health measures have large social benefits and promote productivity and growth. Unsurprisingly, Finland is the second-happiest country on earth (the US not even in top 10), with lower infant mortality rate, better school scores, and a far lower poverty rate than the US.

Furthermore, various studies also found that the richer a country is, the more its citizens can attribute their incomes to welfare transfers, as exhibited by Europe and Australia, because high-budget welfare states feature a tax mix that is more pro-growth than the tax mixes of low-budget Japan and Switzerland.

These high-budget states also have more efficient health care, better support for childcare, women’s careers, and other features that more than mitigate any negative incentives effects on transfer recipients.

Transfer payments have a direct impact on economic growth by generating private consumption. But the BR1M that we have witnessed is myopic and too little to make a sustainable impact to income.

Public provision of education up to tertiary level too will also produce Malaysians who can acquire better skills and jobs, and thus stronger consuming power.

Both productivity and private consumption will contribute directly to domestic components of GDP growth. Unfortunately we still hear Malaysians rejecting public university offers from sheer inability to pay even the already subsidized tuition fees.

Such are only some of reasons why Malaysia needs to embark on a serious welfare plan. When designed properly to extract most from less elastic sources to more elastic sources, we can inch closer to ensuring basic comfortable living standards for every Malaysian, and more importantly for them to have the means to ensure that for themselves. A bigger welfare budget is really crucial to enhance the means to achieve a respectable minimum standard of living for many low-income Malaysians.

Welfare Will Not Make Us Lazy

Aside from welfare straining government’s coffers or cannibalizing growth, welfare opponents also worry about disincentive effects of tax-financed welfare programs. One other major argument against welfare is how it will make recipients lazy. I argue otherwise. Inheriting a bloated trust fund from your grandfather makes you lazy. Free education and free healthcare do not.

That 77% of labor force are only SPM-qualified and below, sluggish wage growth due to lack of skills and qualification, relatively higher graduate unemployment compared to overall employment, and low insurance penetration for access to quality healthcare, only manifest how poor Malaysians are not too far off from those “stuck in a rut” as illustrated by Jeff Sachs.

Though not necessarily dying of Malaria, their economic helplessness relative to other Malaysians enjoying a heftier share of Malaysia’s growth can be likened to it. Siddiqui proposed that the standard of need fulfilment of an individual should depend on the average of the standard of living of the society that the individual lives in.

This needs fulfilment include food, clothing, shelter, medical care and education. In richer states, it should also include transportation, care taking and attendance.

In the case of Malaysia, bigger welfare programs in education and health for example, will help raise the purchasing power for the average lower middle class Malaysians who are very much left behind in the curve of development. They may not be statistically considered poor, but it is increasingly harder for them to be that much better off than their parents.

The path of social mobility for the “just above poor” group gets more blurred. Targeted and productive welfare is very necessary to demystify that social mobility path for them and get them started on the path of self-development.

Justifying Welfare for a Country as Rich as Malaysia

The most interesting case yet, for a bigger welfare program in Malaysia, is that the government budget is also significantly financed by non-tax sources.

Indirect taxes (excise duties, sales tax) and non-tax revenues (investment income, permits, licensing) combined, contribute about as large as direct taxes to the government’s 2012 revenue.

Out of indirect tax, individual income tax is the least, at about 11.4 percent. The rest are due to petroleum income and corporate taxes.

What does this mean? First, given government revenue sources are status quo with our wealth of oil and natural resources, welfare programs need not even mean we have to start paying more personal income taxes. Second, there is much room still for welfare programs to positively contribute to employment empowerment, education and socio-economic well being of vulnerable Malaysians without necessarily resulting in laze, complacency or over-dependency.

In fact, over-dependency is only prevalent amongst selected groups who have been enjoying selective treatments by the government, rather than amongst the truly needy groups. While BR1M sings its own praises about how many Rakyat will benefit from it, there’s a saying that “We should measure welfare's success by how many people leave welfare, not by how many are added.”

Not Just Any Welfare, But Tactical Welfare for Economic Justice

My thesis is that welfare states, when successfully undertaken emulating as much as possible the successes of the social democratic model, is more inclusive to all citizens.

Given our current circumstances, it is the best way to promote better productivity in situations of depressed wages, skills and productivity.

To allegation that welfare will produce lazy citizens such as in the British case, can be dispelled by the relative success of the Nordic model.

Bearing in mind the need to historically scrutinize data and on-the-ground experiences when studying success stories of other nations, we recognize that arriving at a conclusion is not as simple as it seems.

A large welfare programme in no way suggests redistributive intervention where the free market works fine without significant externalities, including fair international trade.

Given our relative size, dependencies and advantages on a global scale, it is pivotal for Malaysia to endeavour a larger welfare budget which will ultimately enrich Malaysia, rather than impoverish it.

We dream of a world where grave imbalances cease to exist, where the most vulnerable groups within society are put where they can start making more of themselves.

That world would see government intervention as introduced at the start of this address.

In that good world, the government corrects externalities and directs resources to where separately functioning private incentives will not, in an ultimate goal of ensuring net positive social outcomes inclusively for Malaysia to yield exponential dividends to reap from.

“Power has only one duty - to secure the social welfare of the People” - Benjamin Disraeli

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* Anas Alam Faizli holds a doctorate in Business Administration. He is a construction and an oil and gas professional, a concerned Malaysian and is the author of Rich Malaysia, Poor Malaysians and tweets at @aafaizli‎