State action to facilitate market dynamics

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by Hans Dembowski

World Bank Report on work, social protection and taxes

The title of the World Bank’s recently published World Development Report 2019 is “The changing nature of work”. Its demands include a new social contract, universal social protection and more government revenues. A somewhat surprising focus is on early childhood.

To some extent, the new World Development Report (WDR) is an intellectual hybrid. In regard to the business activities of companies and individual persons, it is basically in favour of permitting whatever these actors deem profitable. In this sense, the WDR is market-orthodox. In regard to social protection and equal opportunities, however, it wants governments to rise to fundamental challenges. In this sense, it is statist. Given that responsibilities it assigns to public agencies are quite comprehensive, I'd say its agenda is actually more centre-left than centre-right.

The authors admit that worries about work opportunities eroding to an extent that would cause long-term mass unemployment, are legitimate, but they believe them to be overblown. Their expectation is that while simple jobs will disappear, more intellectually demanding ones will keep emerging. To what extent that will hold true remains to see. What is clear is that technological progress is changing labour market demand as well as labour relations.

Simple and repetitive jobs will increasingly be done by robots and artificial intelligence. At the same time, the experts from the World Bank expect job opportunities to increase for people with advanced cognitive skills, socio-behavioural skills and skill combinations. Literacy and numeracy will become absolutely indispensable. Accordingly, building human capital is essential. If masses of people are not to be left behind, the WDR argues, governments must ensure that everybody gets a chance in life. The implications are that:

  • maternal and infant health must be guaranteed (including issues such as healthy nutrition, appropriate sanitation and adequate health care),
  • preschool education is important, and
  • schooling must be of high quality.

Concerning labour relations, the WDR points out that the digital economy will be marked by more short-term employment and freelancing than is typical of conventional manufacturing. Moreover, people will have to keep upgrading their skills and knowledge in order to able to do paid work. Lifelong job security with a single company will increasingly become rarer. At the same time, the authors warn that superstar companies are becoming ever more powerful and, given their multinational nature and cross-border activities, harder to regulate. The upside is that these superstar companies are drivers of growth.

In view of reduced job security, however, the WDR demands that social protection must improve, especially for all those people do not benefit from the kinds of protection that go along with formal employment in many countries. The report insists that at least a minimum level of social protection must become available to everyone, regardless of their employment situation. Minimum basic incomes and universal health coverage are considered appropriate. In an interesting twist, the WDR points out that this approach is also what is needed to improve the lot of billions of people who are toiling away in the informal sector. Their share amounts to 50 % in Latin America and even 70 % in Africa, the World Bank data indicate.

According to the WDR, the established social-protection model of advanced economies has run its course. It is to fund social-protection systems with payroll taxes, with the services then being provided to all people who contributed money. The problem with this model is not only that it bypasses the informal sector. It also does not fit the increasingly flexible labour relations in the digital economy. The WDR assesses these issues competently. Its message is that governments should aim to create universal protection systems, paying special attention to the poor and progressively expanding coverage to their entire nations.

To improve social services, make them universally available and boost early-childhood development, governments will obviously have to spend more money. The WDR argues that they will be able to do so if they improve both tax legislation and tax enforcement. In D+C/E+Z, we dealt with this issue extensively earlier this year.

According to the World Bank scholars, all kinds of taxes should be considered, including value added taxes, income taxes and property taxes. They also point out that the expenditures needed for the kind of programmes they propose would not exceed what many governments spend on fuel subsidies. International coordination of tax policies would make sense, according to the WDR, especially because the digital economy is making it easier for corporations to avoid taxation.

The WDR largely shies away from tackling the fact that social protection and equal opportunities depend on the distribution of incomes. Accordingly, it does not explicitly promote progressive taxation that would put a greater burden on the well off. There are obvious political reasons, however, why World Bank scholars would avoid this politically controversial issue. Obviously however, any kind of tax funded government action to avoid poverty and boost opportunities of disadvantaged communities ultimately amounts to redistribution. The reason is that the target groups concerned otherwise lack the means they need to improve the fate.



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