Contemporary Economic Issues

This chapter deals with economic incentives and welfare-state arrangements in OECD countries. It also offers some lessons for would-be welfare states. The welfare-state arrangements differ, of course, among OECD countries. In particular, there is wide variation in the extent to which countries rely on four basic institutions — the state, the firm, the family and the market. Countries also differ in their reliance on (i) a common safety net in the form of flat-rate benefits tied to specific contingencies; (ii) means-tested benefits for low income groups; and (iii) income protection, i.e., benefits that are positively linked to previous income. Another distinction is between corporatist welfare states, where benefits are tied to labour contracts, and universal welfare states in which benefits are conditioned on residence or citizenship. This distinction is in reality blurred, however, by recent tendencies in corporatist welfare states to extend coverage to individuals who have very weak attachment to the labour market, and in universal welfare states to tie benefits to previous or contemporary work under the slogan ‘workfare’ rather than ‘welfare’.

The field of income distribution theory has probably received more attention during the past five years than it had received during the previous 15–20 years. These developments were mostly motivated by the urgent need to move beyond representative-agent models and the development of new tools allowing tractable equilibrium modelling of heterogeneity between agents, but probably also by the dramatic recent development of income inequality both in developed and developing countries.

Increasing globalization is a fact of life. Dramatic reductions in transportation and communication costs, and colossal increases in capital flows, are knitting together the world economy as never before. Although some of the recent trends are not dramatically different from the past,² there are some new patterns, such as the marked rise in manufacturing exports by a group of developing countries in East Asia. Should other developing countries, particularly those in Africa, go against the grain of this globalization, or should they work towards complementing it? While resisting global trends is most likely a futile activity, the issue of complementary policies is important because, in our view, closer integration of the world economy poses significant tradeoffs — while it holds out the prospect of higher growth it also carries dangers of increasing inequality in the short to medium run, particularly because of the interaction of globalization and new technology with existing skill and educational inequalities.

The debate over the extent of chronic malnutrition in developing countries, which began after the Second World War, has been conducted largely between investigators associated with the FAO, WHO, and the World Bank (FAWOB) on the one hand and critics who believe that their estimates of the extent of malnutrition are too high.

The notion that labour migration will take place in the presence of a wage differential and that in the absence of a wage differential migration will not take place lies at the heart of research on labour migration. However, this notion does not capture the soul of labour migration. There is a strong implicit assumption that the wage differential is exogenous to the individual migrant. Yet migration, as a form of investment in human capital, can change the differential substantially. Furthermore, other variables also impinge on labour migration, indeed migration can well take place in the absence of a wage differential. Return migration is subject to similar considerations. When some of the returns to migration are realized upon return migration, return may take place in spite of the wage differential between abroad and home being positive. An example of this is a higher purchasing power of savings accruing from work abroad at home than abroad. Since consumption requires time, it is not possible to leave abroad for home an instant prior to the termination of life in order to enjoy a very large consumption in a very short time spell. Hence the optimal duration of stay abroad can be shown to be shorter than the duration of working life (Stark, Helmenstein and Yegorov, 1997).

Many roads lead to the interest in agricultural development, and it is only natural that we find differences among economists in their analyses and more so in perspectives, emphasis and conclusions about the process and its outcome. To provide a perspective for our discussion, it is useful to list the central issues related to agricultural growth:

The political transformation in South Africa is a political marvel. One reason why this was accomplished is that potential conflict areas were diffused by pre-emptive steps taken before democratic elections. In terms of land distribution, mechanisms were set in place allowing for land transfers from state and predominantly white-owned commercial farms to small-scale black farmers. These steps are required to alleviate the extreme skewedness of land access, reflected by the fact that the white minority owns about 87 per cent of South Africa’s agricultural land. The new government has proposed various resettlement models to achieve land transfers to previously disenfranchised black farmers, ranging from private ownership to group resettlement (LAPC, 1993).

Traditional socialist agriculture was characterized by dual structure: commercial production concentrated in large-scale collective and state farms cultivating thousands of hectares with hundreds of employees (Medvedev, 1987; Cochrane, 1989), and subsistence-oriented individual farming in small household plots of less than half a hectare based on part-time family labour (Waedekin, 1973, 1990). In most of the region, including the republics of the former Soviet Union and Albania, all agricultural land was owned by the state. In the rest of East-Central Europe (ECE) however, cooperative or collective land ownership emerged in addition to state property as individual land-owners began joining cooperative farms, and private land continued to exist in various forms. Yet even land that was formally registered as individually owned was managed and cultivated by large-scale collectives and cooperatives. Transition to individual land ownership and restructuring of the large-scale ‘socialized’ farm enterprises is therefore one of the main characteristics of agricultural transformation in the ECE countries and the former Soviet Union (FSU). The present chapter describes the ongoing changes in land tenure relations and farm organization in the former socialist countries as of early 1996.

The World Bank (1994, p. 4) points out that despite rapid growth in infrastructure provisions, especially in telephones and power, performance has been disappointing. Resources have been mis-allocated with too much to new investment, particularly those with low priority, and too little to maintenance, especially in terms of road and power station maintenance. There has been massive waste and inefficiency with most power systems operating at between 18 per cent and 44 per cent of best-practice stations in terms of fuel per kilowatt hour with transmission and distribution losses two to four times as great (p. 5).

The purpose of this chapter is to discuss the effect of political pressure on economic regulation. In particular, we compare indirect regulation by prices to direct, administrative control of quantities. This is Martin Weitzman’s (1974) comparison. However, while Weitzman contrasts controls where information is incomplete, we analyze the consequences of political influence. As a concrete example, we consider an industry employing a factor with external effects — negative or positive. (Drawing water from a shared source may create negative externalities and using reclaimed sewage for irrigation may have positive effects.) The government is attempting to regulate utilization of the factor and the producers react, trying to modify the implemented policy. The ensuing political equilibrium varies with the nature of the externalities and means of control.