{
  "title": "Worldwide Crisis in the Welfare State: What next in the Context of Globalization? Address by Michel Camdessus",
  "publication": "IMF News, October 15, 1998",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp101598",
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  "summary": "Given at a seminar organized by Observatoire Chrétien des Réalités Economiques, Paris, France",
  "publishDate": "1998-10-15",
  "sections": [
    {
      "heading": "Context and framing",
      "content": "- Publication: Address by Michel Camdessus, Managing Director of the International Monetary Fund.\n- Event: Seminar organized by Observatoire Chrétien des Réalités Economiques, Paris, France, October 15, 1998.\n- Internal reference: 98/23. As prepared for delivery. (Delivered in French)\n- Core tension identified: coexistence of the welfare state (large public social spending) and globalization (rising cross-border trade and capital mobility), both facing crises of different natures."
    },
    {
      "heading": "Benefits from welfare states",
      "content": "- Definition and scale:\n  - Welfare states typically have government expenditure at about half of their GDP; in some countries it has risen as high as 60 percent of GDP.\n  - At the beginning of the twentieth century, public spending in these countries was around 10–15 percent of national income; now in many it is around 50 percent or more.\n- Social achievements noted:\n  - Reduced costs and risks associated with illness, illiteracy, old age, poverty, and unemployment.\n  - Increased literacy and education levels.\n  - Reduced infant mortality and longer life expectancy.\n  - Reduced trauma and despair associated with unemployment."
    },
    {
      "heading": "Costs of the welfare state",
      "content": "- Fiscal and economic costs:\n  - Taxes and borrowing finance the welfare state; tax burdens have increased enormously over the century.\n  - Tax levels cited: around 45 percent of GDP in France and in Italy; taxes as high as 50 percent of GDP or even more in some countries.\n  - Historical reference: Paul Leroy-Beaulieu considered taxes above 12 percent of national income “exorbitant” at the beginning of the century.\n  - Main revenue sources: personal income taxes, value-added taxes, and social security taxes.\n  - IMF staff analysis: a particularly heavy share of revenue increase has fallen on labor income, and less skilled, lower paid labor in particular.\n- Labor market distortions:\n  - High social security taxes raise the cost of labor and create a \"wedge\" between employer labor cost and worker wages, discouraging employment and encouraging capital substitution and hidden-economy activities.\n  - Unemployment compensation and employment protection may reduce incentives to seek work.\n  - Employment protection legislation, high social security taxes, and excessively high minimum wages can raise costs of employment.\n- Public debt:\n  - Example: public debt has risen over the decades to almost 60 percent of GDP in France; in some countries debt has exceeded 100 percent of GDP.\n  - High debt diverts resources to servicing and complicates monetary policy.\n- Social segmentation:\n  - Two-tier outcome in some welfare states: \"insiders\" with generous job-related benefits and \"outsiders\" excluded from the labor force with few opportunities to re-enter.\n  - High youth unemployment and social alienation among younger people are highlighted."
    },
    {
      "heading": "Future trends and pressures",
      "content": "- Two irresistible forces:\n  - Demographic change: aging populations raise pension and health care costs.\n    - Life expectancy: at the beginning of the twentieth century about 50; in just 100 years it has risen to about 70-75 (even higher in Japan).\n    - Longer retirement increases years in retirement relative to working years; pay-as-you-go pension schemes imply more pensioners supported by fewer workers.\n  - Globalization: lower trade barriers and increased capital mobility create competitive pressures and \"tax competition.\"\n    - Globalization reduces capacity to sustain benefit and tax levels superior to competing countries unless productivity differences justify them.\n    - Tax competition example: in France and Italy, the level of taxation is now about 12–13 percentage points of GDP above that in the United States and Japan.\n- Fiscal sustainability concern:\n  - Anticipated rising pension and health costs make current tax and entitlement structures difficult to sustain under globalized tax competition and demographic trends."
    },
    {
      "heading": "Policy responses and reforms recommended",
      "content": "- General orientation:\n  - Reform, not dismantling: preserve social objectives while improving efficiency and individual responsibility through incentives.\n  - Reforms can reduce welfare-state costs without fundamentally changing government's social role.\n- Pensions:\n  - Reform options:\n    - Increase the retirement age.\n    - Reduce or eliminate early retirement without commensurate benefit reduction.\n    - Reduce pension size via less generous indexation mechanisms.\n    - Promote individual saving and privately run pension programs to supplement state pensions.\n  - Timing and fiscal impact:\n    - IMF analysis: a 10-year delay in addressing pension reform would permanently increase the contribution rate to pensions by about 1 percent of GDP.\n    - A 30-year delay would raise it by 5 percent of GDP.\n    - Illustration: in France and Italy, unfunded gaps could disappear if mandatory retirement age were raised to 67, subject to many assumptions.\n- Health and education:\n  - Options to reduce costs and improve efficiency:\n    - Introduce or increase patient charges.\n    - Develop standards to discourage unnecessary surgeries and very expensive technological choices.\n    - Use generic pharmaceuticals.\n    - Modernize hospital networks.\n    - Introduce modern technology and teaching methods; shift some higher education costs to the private sector.\n  - Not a call for wholesale privatization but for greater scope for private provision and cost-sharing where appropriate.\n- Labor market and unemployment:\n  - Make labor markets more flexible.\n  - Keep employment protection legislation and minimum wage laws under review to avoid counterproductive distortions.\n  - Strengthen incentives and opportunities (training, activation) for benefit recipients to re-enter the workforce.\n- Fiscal policy quality:\n  - Emphasis on improving the quality of fiscal adjustment and ensuring social safety nets, education, and health are included in program design supported by IMF financing."
    },
    {
      "heading": "Specific observations on France",
      "content": "- Structural features:\n  - Pension system remains one of the most generous in the industrial world despite early-1990s reforms.\n  - Unemployment scheme and health care costs are described as generous and rising.\n- Intergenerational equity:\n  - IMF staff analysis suggests the tax burden on today’s young people will, over their lifetimes, be “more than half as large again as the tax burden on today’s middle-aged.”\n- Long-term outlook:\n  - Without substantial adjustments, revenue and expenditure levels would be unsustainable and could undermine future prosperity."
    },
    {
      "heading": "Implications for developing and transition economies",
      "content": "- Different contexts:\n  - Developing countries: tight resource constraints, poverty, rapid population growth; social protection systems rudimentary and in infancy.\n  - Transition economies: need safety nets compatible with market mechanisms and revenue-raising.\n  - Some higher-income Asian countries already face aging.\n- Design principles: two keywords — equity and cost.\n  - Equity principles from an IMF conference on equity:\n    - Sound macroeconomic policies are essential for promoting equity and growth in the medium to long term.\n    - Equity is multidimensional: opportunity, wealth, consumption, employment availability.\n    - Priority on improving prospects of the least fortunate through better access to education, health services, credit, and justice.\n    - Social safety nets should be cost-effective and well-targeted.\n    - Equity must be decided through societal consultation; it is not rigid.\n- IMF role:\n  - Social protection and equity increasingly important in IMF policy dialogue and supported programs.\n  - Commitment to pressing quality of fiscal adjustment reinforced by external evaluation of ESAF.\n  - IMF staff active in seeking ways to preserve social achievements while improving efficiency."
    },
    {
      "heading": "Conclusion",
      "content": "- Survival of the welfare state requires important reforms to coexist with market economies and globalization under tax competition.\n- Appropriate reforms can reduce unproductive spending, improve tax system quality, preserve social objectives, and enable economies to withstand globalization pressures.\n- For lower-income emerging economies, as living standards rise, social protection standards may converge toward those of industrial countries.\n\nInternational Monetary Fund — Address by Michel Camdessus, October 15, 1998 (98/23).\n\n---\n\n\n References\n\n- France and the IMF\n- Italy and the IMF\n- Japan and the IMF\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp101598"
    }
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    "Published: October 15, 1998",
    "Publication: Address by Michel Camdessus, Managing Director of the International Monetary Fund.",
    "Event: Seminar organized by Observatoire Chrétien des Réalités Economiques, Paris, France, October 15, 1998.",
    "Internal reference: 98/23. As prepared for delivery. (Delivered in French)",
    "Core tension identified: coexistence of the welfare state (large public social spending) and globalization (rising cross-border trade and capital mobility), both facing crises of different natures.",
    "Definition and scale:",
    "Social achievements noted:",
    "Fiscal and economic costs:",
    "Labor market distortions:",
    "Public debt:",
    "Social segmentation:",
    "Two irresistible forces:",
    "Fiscal sustainability concern:",
    "General orientation:",
    "Pensions:",
    "Health and education:",
    "Labor market and unemployment:",
    "Fiscal policy quality:",
    "Structural features:",
    "Intergenerational equity:",
    "Long-term outlook:",
    "Different contexts:",
    "Design principles: two keywords — equity and cost.",
    "IMF role:",
    "Survival of the welfare state requires important reforms to coexist with market economies and globalization under tax competition.",
    "Appropriate reforms can reduce unproductive spending, improve tax system quality, preserve social objectives, and enable economies to withstand globalization pressures.",
    "For lower-income emerging economies, as living standards rise, social protection standards may converge toward those of industrial countries.",
    "[France and the IMF](http://www.imf.org/external/country/FRA/index.htm)",
    "[Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)",
    "[Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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