A key observation from the ongoing global economic recession is that countries once thought to be highly financially stable are now teetering on the edge of long-term ruin.
While it is now widely accepted that the decisions of a major investment banks precipitated the crisis, they are not the ones who appear to be paying for it; the bailouts to bankers have now accompanied by massive spending cuts on public safety nets, ranging from hospital services to retirement pensions. Some international financial gurus have called for a new Marshall Plan—not just to provide a temporary infusion of aid to suffering countries, but to rethink aid strategies to prepare for the next crisis. Can we create a “safety net” that spans across borders to help countries caught in international market turmoil, just as we have domestic safety nets?
Several independent observers—ranging from the International Labor Organization (ILO) to Gorik Ooms, a former director at Doctors Without Borders—have proposed a global “social protection” fund. The idea is straightforward: just as most countries have created domestic safety nets, to help their citizens weather sudden unemployment or disability or a natural disaster, we should create an international equivalent since so much of our international trade occurs across borders and generates the market conditions for disasters like the 2007 stock market crash.
Unlike a standard form of international aid, the new proposals call for a true mimic of domestic safety nets: just as we pay taxes into a central pool to fund rainy-day safety nets domestically, similarly we would have countries pay into a global fund according to their ability to pay, and withdraw according to their need. So everyone contributes to a global slush fund, and everyone is eligible to withdraw (e.g., so when Greece, which most people would think of as a first world country, experiences a crisis, it also has the ability to withdraw; similarly, as rapidly-developing countries become wealthier, they will have to contribute more and withdraw less).
This week, the ILO announced some details of their plan and drew support from UN officials. There are some obvious issues with these proposals, the first of which is political—will rich countries participate? It appears that, given the history of similar proposals such as the Global Fund for AIDS, TB and Malaria, some European countries are likely to sign on early in limited form, and there will be protracted resistance but ultimately some buy-in from the United States. The perpetual-commitment aspect of this will be particularly challenging politically.
But there are also some technical questions that need to be answered. Who will administer the fund? Again, the Global Fund for HIV/TB/Malaria offers one possible avenue, using a panel body of experts to direct money, though it has not been without flaws.
What will be the measure of ability to pay and need for funds? And how much will be needed? There are numerous metrics ranging from simple avoidable mortality rates to complex poverty and development indexes that have been debated in the literature for years. The ILO set a goal of a $60 billion fund, based on some prior models that estimated what people needed for some basic goods and services from a safety net—e.g., what would be needed in countries that currently can’t provide basic food, housing and healthcare. These models are, of course, rough estimates. Ability to pay could be estimated through gross national income—but whether to do this per capita or in total will be a big issue for China and India, since they have large populations and many mouths to feed, but also a large capital base.
Indeed, the middle income countries will perhaps pose the greatest challenge for such social protection initiatives. India and China both have great need and great ability—they’re just not always using that ability to meet their need. The idea of a global social protection fund would be to facilitate inter-country transfers to target those countries most in need of new capital, i.e., those countries that don’t have enough for anyone. So what to do with India and China and similar middle-income nations with high inequality? One proposal from David Woodward is to build-in an incentive mechanism. If we are to plot the data comparing income on the x-axis to various measures of need like avoidable mortality on the y-axis, we see a gentle curve downwards as countries become richer. But India and China are above the curve, because they haven’t used their capital effectively to tackle domestic inequalities; they have high need for their income level. So we could transfer just the money that a country would need according to the curve—i.e., what we expect the average country at a given income level to need. Then India and China, both above the curve of need for their income level, will have incentive to get more funding as they lower their need towards the average need for a given income level. And countries who are doing better than average, e.g., Cameroon, will get rewarded for making their limited funds go farther. This will ultimately produce a “race toward the bottom” of need for income, a better race than the race to the bottom of wage levels.
The next steps, of course, are to determine how to finance such an initiative during an economic recession—a political period characterized by great interest in such efforts, given the acute needs being seen around the world now as social safety nets are being slashed—but also a time when donors are least likely to commit to new spending, even if that spending has a multiplier effect in terms of stimulating the economy. Indeed, the austerity in Europe has been shown to reduce employment and limit economic growth, rather than stimulating it (by the IMF, no less…does anyone still read Keynes)?