Challenges democratic governments face: How to renew the social contract

The success of Western-style democracy after World War II was based on national social contracts: citizens paid taxes, and the state provided the conditions for steady economic progress, along with secure jobs, a social safety net, and redistributive policies that narrowed the income gap between owners and workers. Although the degree of redistribution and the availability of secure jobs varied among countries, the vast majority of citizens bought into the arrangement.

In recent decades, however, globalisation has eroded the post-war social contract by weakening the nation-state. Increased global trade and financial flows have contributed to prosperity, but have also created losers. Income inequality has widened in many countries, and the concentration of wealth at the very top no longer seems tolerable. Moreover, the 2008 global financial crisis dented public confidence in steady economic progress.

Democratic governments now face two main challenges in trying to revive their countries' social contracts. They must ensure a strong and efficient safety net by adapting social and labour-market policies to the new world of work. And they must take concrete steps toward providing global public goods - such as tackling climate change - by securing domestic support for international cooperation.

That will not be easy. Economic disruption, along with concerns related to migration and refugees, has helped to bring neo-nationalist populists to power in several countries. US President Donald Trump's contempt for global rules and multilateral institutions, for example, is compounding other national governments' difficulties in making progress on economic and security matters.

Although unemployment has generally decreased, new technologies and increasing competition from China have created a strong feeling of insecurity in advanced economies. True, the digital economy holds great promise. But it, too, is disruptive and is changing the nature of work - by making jobs less secure and increasing the need for continuous learning. This is also true for emerging countries.

Governments' first priority, then, must be to update their social and labour-market policies to reflect these digital shifts. In particular, social benefits must become fully portable and "owned" by workers, rather than being linked to a specific job.

Some advocate renewing the social contract through a universal basic income (UBI) paid by the state to every adult citizen. Advocates often do not specify clearly the size of the UBI they have in mind and what exactly it should replace, but schemes to provide it to all citizens, even the well-to-do, are simply unaffordable. In the United States, for example, a $1,000 per month UBI would cost as much as the entire federal budget.

A better option would be a generous negative income tax, or "guaranteed basic income" (GBI). Unlike a UBI, a GBI could be more affordable, and it would give people below a certain income level an incentive to work while having a redistributive effect.

In addition, employees could have individual digital accounts in which they earn points over time to spend on retraining and further education. Such a scheme already exists in France, and could be extended to include unemployment insurance, personal leave, and even retirement benefits. The French think tank Terra Nova, for example, envisages a comprehensive points system that would allow citizens to choose a package of social benefits suited to their individual circumstances.

A system like this would require safeguards to protect individual privacy and prevent personal information being used for political purposes. And although individual choice is a key attraction of such a system, some protection against imprudence is also desirable. But with these caveats, a points system with fully portable benefits would fit the new world of work - and could become a cornerstone of a renewed social contract.

The second priority for societies is to include elements in renewed social contracts that facilitate the provision of global public goods and prevent "beggar-thy-neighbour" policies, which produce short-term domestic benefits by harming others, and invite retaliation. Although most policies have primarily domestic effects, globalisation has reached a stage where some outcomes can be achieved only through international cooperation.

These global public goods can be of the "weakest-link" type: non-compliance by one or a few countries could undermine global efforts to address a problem that affects all. Examples include preparing for epidemics, preventing nuclear proliferation, and avoiding a race to the bottom on national tax rates. Other public goods are "additive." Effective climate protection, for example, depends on the sum of all countries' efforts to reduce carbon dioxide emissions.

Providing global public goods is a huge challenge, because there can of course be no social contract between citizens and a non-existing global authority. But the adequate provision of global public goods requires that national governments be held accountable for the extent and success of their international cooperation in delivering such goods.

We are seeing the beginnings of such a link between the domestic and the global with climate protection. In the recent European Parliament election, millions of citizens voted for Green parties that have made combating global warming their top priority. Leaders such as French President Emmanuel Macron have committed themselves nationally to cooperating internationally to tackle climate change. This suggests that cooperation on providing a global public good can become part of a national social contract.

The difficulty of building a new social contract based on these two pillars should not be underestimated. Taxpayers may balk at the cost of providing comprehensive and flexible social policies for the digital age. And expecting citizens to demand that their governments cooperate more internationally may sound naive, given the apparent rise of neo-nationalism.

But a renewed social contract that responds to the new nature of work and globalisation is essential to reduce current widespread insecurity and anger, and ensuring the future of democracy. In that regard, the support of young voters around the world for political programmes incorporating both pillars provides a strong reason for hope.

Kemal Dervis, former Minister of Economic Affairs of Turkey and former Administrator for the United Nations Development Programme (UNDP), is Senior Fellow at the Brookings Institution. Caroline Conroy is a senior research analyst at the Brookings Institution.

Copyright: Project Syndicate, 2019.

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