Bridging the Great Divide

By: Wouter Van Ginneken
Asian Week, July 28, 2000

Perhaps the main social question of the 21st century is the high and fast increasing level of inequality between incomes from capital and labor. A minority of "haves" in industrialized and developing countries seem to derive ever-increasing profits in the stock market and in global economic ventures, while the world's large majority is employed in insecure jobs earning stagnant or slowly rising incomes. Global capital markets can contribute to economic development, but they become socially and economically questionable when they do not contribute to the prosperity of all. A host of United Nations Summits during the 1990s have highlighted the global shortfalls in the provision of social protection, health and education. The question is how the full provision of these basic services can be financed at the global level. 

The first step is to improve the quality of social policy-making and the efficiency of social investments, such as on social protection, health and education. Governments in most, and particularly in poor, developing countries have little leeway to conduct their own economic and social policy-making. They are severely hemmed in by conditions imposed by the International Monetary Fund and the World Bank. In addition, they are often dependent on the changing priorities and pet projects of aid donors. 

There is also a great need to improve democratic and transparent structures in developing countries, so that governments are more closely monitored by their own people. The emergence of new civil society movements can also help governments become more accountable. From the international side, social policy monitoring should focus on a limited number of internationally accepted social objectives, such as the achievement of universal primary education by the year 2015. International financial support for realizing these objectives should be provided within the context of a well-designed multilateral monitoring and evaluation system. 

Second, there is the need for a more sustained and predictable basis for financing social investments. It is estimated that access to basic social services for all the world's people could be ensured by an additional $30 billion-$40 billion per year over the next 10 to15 years. Part of this could be (and is already) financed by better targeted donor contributions, debt relief and the restructuring of national government budgets. However, there is also a structural need for an effective taxation of capital incomes at the global level. Since capital incomes and Internet trade are so elusive, the process of globalization favors taxes where the location of the tax base is readily identifiable, such as levies on consumption, immovable property or labor income. 

The result of recent tax reforms has therefore been that labor income (including social security contributions) is taxed more heavily than capital income, with negative consequences for employment creation. The coordination of taxation policies is a sensitive national issue, as exemplified by the recent European Union-United Kingdom rift on a possible European withholding tax on bond interest payments. Perhaps the best way forward is to set in motion a multilateral process, either in a new World Tax Authority or within the context of the World Trade Organization that already has considerable experience with multilateral treaties. 

A third step would be the conclusion of a new global social contract between governments, civil society and the private sector, which would be based on mutual interests. Some of the ground rules of such a contract already exist in the U.N. Covenant on Economic, Social and Cultural rights, supplemented by other rights such as those laid down in the International Labor Organization's Declaration on Fundamental Rights at Work. Another part of the contract would consist of a promise by the international community to co-finance the achievement of some of the specific social objectives mentioned before. 

Attaining these objectives would contribute to stronger social cohesion between people and nations, and would lay the foundation for greater global prosperity. This would be of obvious interest to the private sector which would also play an important part in this world-wide contract. It would promise to abide by these ground rules and provide constructive help in the realization of an efficient and equitable international tax system. Groups from civil society, such as trade unions, would guarantee that the contract would be monitored democratically, and they would ensure that all people would benefit and participate in the process of global social and economic development. To give the contract more teeth, it could stipulate, for example, that families who for financial reasons cannot send their children to primary school, can claim financial assistance from an international fund to do so. 

At the dawn of the new millennium, it is time to think long-term. One appropriate goal is certainly the global social contract. There are great opportunities for making a quantum jump in social and economic development. We have the knowledge and the means to do it. 

Wouter van Ginneken is senior economist for the International Labor Organization, based in Geneva.


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