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Conundrum of Welfare State

By Vaibhav Parakh

A welfare state, as opposed to a socialist state, endeavors to secure ‘welfare’ of its population by affording direct state intervention in policy decisions regarding social security, education, medical care, and transfer payments.

It does not limit itself by conforming to the fundamental principle of a sovereign state which through its machinery, seeks to provide justice, affirmative action, the rule of law and a laundry list of ‘public good’. Contrasting to a socialist state which functions on the premise of ‘utilitarian approach’, a welfare state does not direct or control all the production units.

A welfare state often monopolizes specific sectors contrary to the classical liberal state, which contents itself with the creation of peaceful conditions by abolishing conventional inequalities.

Welfare State or Unfair State?

But the ‘welfare state’, while bridging the gap between the ‘haves’ and ‘have-nots’, plunges itself into a ‘secure welfare’, often redirecting the course of wealth the other way. Quite similar to the phenomenon of ‘Tragedies of the Common’, constituents of the population want to take as much as they can from their neighbor. This triggers a nationwide extortion of benefits that they are not entitled to. Although the benefits come out of their taxes, they seem to be taking back more than they give to the society.

The utopian world, as idealized by Sir Thomas More, is a testament to the burgeoning gap between the ideal and reality and how this gap has not been bridged, even with the turn of the century. At the root of it lies the economic fundamentalism that drives states and international organizations to pursue policies that benefit the elite, prioritizing their vested interests over the needs of the masses. Relying on the concept of moral hazard, it begs to explain the activities undertaken by private entrepreneurs. Their sole objective was to maximize profits despite the possibility of enormous losses. These risky activities were undertaken on the premise of disbursement of funds by the international organizations to bail them out. Owing to studies on the Asian Crisis, the concept of white elephants gain prominence where the state would rally behind such entrepreneurs.

The Greek Illusion

According to political theorists, modern Greece is a melting pot of economic disaster.

According to political theorists, modern Greece is a melting pot of economic disaster. It has been described as an economic bomb which went off in 2015 when it defaulted on its IMF (International Monetary Fund) loan repayment. Therefore, Greece serves as a precautionary tale for years to come.

The WW-II had a crippling effect on Greece, especially in terms of human casualties. It wasn’t until 1974 that Greece was successful in establishing itself as a liberal democracy. Seven years down the line, it became a member of the European Community (EC) and consequently, adopted the euro as its national currency in 2002. During the period these developments were taking place, public debt stood at the tune of 28% of the GDP; budget deficit at a meager 3% of the GDP, and the unemployment rate stood at 2-3%. In 1981, the Socialist Party of Andreas Papandreou (PASOK) was at the helm of political affairs; reigning in the destiny of Greece to an economic turmoil three decades later.

Welfare State

The economic turmoil of Greece | Photo Courtesy: Chris Janjic via Flickr

The economic crisis as a well-founded feature of the welfare state isn’t unwarranted but has deep ideological roots. In the case of Greece, it was well rooted in the events that transpired after the World War II.

Impediments in the Name of Welfare

Post-1945, all the European nations vied to create a welfare society by adopting an egalitarian approach to the creation, distribution and subsequent allocation of wealth. However, the welfare policies formed by PASOK were a complete disaster on the economic front. They succeeded in the formation of a welfare state having an overbearing presence in the economic activities. The state practically intruded and arbitrarily intervened in private economic affairs. To top it all, the continuing political legacy built upon the defunct policies offered no respite but only welfare populism and cronyism.

According to the statistics[1] published by the World Bank, Greece ranked 109th out of 183 countries in ease of doing business. Greece doesn’t fare well in either starting a business, employing workers, or protecting investors with 140th, 147th, and 154th ranks respectively. Unsurprisingly, it does acquire the 43rd rank in ease of closing a business.

Crippled Recovery

The macroeconomic adjustment programmes (MAP), formulated by the Troika (International Monetary Fund, European Central Bank, European Commission) blew the lid on the social security measures ushering in waves of reforms. These broadly consisted of fiscal reforms to generate savings; structural reforms to generate growth and competitiveness such as privatization of public assets and deregulation of the labor market. It also brought in banking reforms calling for banking recapitalisation and resolution mechanism.

The three decades that the Greek public had enjoyed resulted in a debt accumulation of 177% of the GDP in 2014. Subsequently, the GDP came down to about 27%, unemployment rose above 25%, and youth unemployment rate breached 60%.

The very welfare schemes aiding the public now came to be akin to an albatross hanging around the neck.

Exclusion of social policies was declared a political suicide thereby, evolving into fundamental rights for all the citizens of Greece.

In the case of Greece, wealth wasn’t created but borrowed. With the inclusion in the EU, credit became cheap and plentiful with a stabilized euro. In 1980, the public debt stood at 28% of the GDP enlarging to 89% by 1990. By 2014, it had compounded to 140% of the GDP. Exclusion of social policies was declared a political suicide thereby, evolving into fundamental rights for all the citizens of Greece.

A Bleak Future

The sorry state of Greece was a consequence of the inefficient Greek government mired in corruption and welfarist interventions. After the two bailout packages announced in 2014, the ECB imposed capital controls on the Greek banks hindering the quotidian banking activities. People were only allowed to withdraw fifty euros, constraining their finances. Moreover, Germany and other plutocratic nations ensured that the bailout packages rescued their banks and not the Greek economy itself.

Welfare State

The sorry state of Greece was a consequence of the inefficient Greek government mired in corruption and welfarist interventions | Photo Courtesy: Sarah Eskandarpour via Unsplash

To add to the misery, IMF disclosed that the shutdown of Greek banks and imposition of capital controls had taken a heavy toll on the banking system and the economy. This led to further deterioration in debt sustainability. According to an IMF study, Greek debt would now peak at close to 200 percent of the economic output in the next two years, compared to a previously forecast high of 177%. Even by 2022, the debt would stand at 170% of GDP, compared to an estimate of 142%. Gross financing needs would rise to above 15% of GDP threshold deemed safe and continue rising in the long term.

An Institutional Crisis

It would require a basic understanding of economics to ascertain the fact that with decreases in household spending due to capital controls, economic growth cannot be spurred in the private industry. And this would inevitably result in an economic doom for a considerable time.

It is not only a testament of how through banks and not tanks, the sovereignty of a nation can be compromised but it’s the economic slavery that is pointed out to. Such crises act as a retelling of how the welfare state failed to secure the welfare of its subjects despite all efforts.

Vaibhav Parakh is currently a third year B.A.(Hons) Philosophy, Politics and Economics student at Amity School of Economics, Amity University.


[1] Data.worldbank.org, data set belonging to 2014-15

Featured Image Credits: Oneterry Aka Terry Kearney via Flickr

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