The Links Between Economic Growth and Social Cohesion

by Winton Bates

Don Gray
Senior Manager
Income Maintenance Policy
Social Policy Agency

Winton Bates, an Australian economics consultant (and formerly an advisor to the New Zealand Treasury), attempts in this report commissioned by the New Zealand Business Roundtable to look at whether recent economic policy in New Zealand has damaged or promoted social cohesion. In a nutshell, Bates argues that:

• social cohesion is about access to opportunities, high levels of personal security, and a generally accepted willingness to commit voluntarily to constitutional processes;
• a strong economy – and in particular economic growth – promotes all of these things;
• government activities which do not focus on promoting growth – and especially those which revolve around redistributing wealth rather than generating wealth – undermine social cohesion by limiting access to opportunities etc; and
• therefore social cohesion is best served by maintaining the emphasis on economic performance and efficiency and reducing the involvement of government.

A Definition

Despite a chapter entitled "What is 'social cohesion'?" Bates does not satisfactorily define social cohesion – rather, he hints at it. The closest he comes to a definition is quoting Jim Bolger's 1994 State of the Nation address:

… what is social cohesion[?] To me it means the maintenance of a society where everyone has the opportunity to achieve through individual effort, or, if unavoidable circumstances prevent this, the individual still feels a positive sense of belonging and is able to contribute to the best of his or her ability.

In place of a definition Bates describes three "dimensions" of social cohesion: "widespread opportunities", "a high degree of personal security", and "voluntary commitment to constitutional processes".

Bates does touch on some interesting aspects of social development or interaction. He usefully challenges the notion that social cohesion is about going back to things as they once were. The "good old day" were not that good for many. The author lists gender and racial discrimination, class and tribal divisions and family feuds. Interestingly he does not look at the plight of the poor when observing the weakness of past societies. He suggests that the concept of social cohesion should be looked at from a national rather than a local perspective. He argues that too strong a community focus threatens cohesion between communities.

Absolute or Relative

In his second chapter, Bates argues that economic growth promotes widespread opportunities for those within a society. He suggests that attention should focus on the absolute position of the poorest, rather than their relative share of income. Pursuing a more equal distribution of income as the only objective could obscure a fall in the position of all, and this would hit the most vulnerable the hardest. However, I would suggest that this does not mean that analysis should be solely based on measuring absolute positions.

It is worth considering that there could be a point at which actual but minimal improvements in absolute standards of living for the lowest income decile may not be enough for people in that decile to consider that they were sharing fairly in substantial levels of economic growth. That dissatisfaction could lead to some of the poorest people justifying anti-social behaviour (e.g. by engaging in property crime) which reduces personal security and which displays disregard for the rule of law. This is especially likely where those within the lowest decile have made considerable efforts to improve their position by "legitimate" means, but perceive themselves as even worse off in relative terms.

So, while he argues for focusing on absolute, there is a strong case for having an eye on both absolute and relative gains resulting from economic growth.

Economic Growth and Increased Opportunities

Bates examines the growth records of a number of developing countries. Statistics from countries as diverse as Yugoslavia, Colombia and Korea are used to provide evidence that economic growth has reduced poverty through employment growth and higher wages. However, Bates goes further, observing that economic growth has led to both an increase in opportunities and a reduction in inequality in many economies without strong government involvement in income redistribution.

He points on the one hand to poor social statistics (murder, teenage pregnancy etc.) in the USA and Sweden – where there is government redistribution of income – and on the other hand to improvements in social indicators (life expectancy, infant mortality etc.) in East Asia – where there is growth without such redistribution. However, Bates fails to convince me of his case against government redistribution by relying on juxtapositioning of observations such as these. This is not to deny that the advances made in the East Asian economies have lead to greater opportunity, nor the serious social problems in Western society, however, their treatment here does not provide me with any clearer understanding of the causal connections between government policies and redistribution of income.

More might have been made of significant New Zealand findings about growth in participation rates in New Zealand since 1991, which have accompanied economic growth. Similarly, Bates makes reference to the findings that since 1980 25% of the lowest income quintile had moved out of that group within one year. This is very significant and supports the suggestion that, given the right opportunities, people can move to improve their position. Concerns about relative income differentials are less serious where there is such mobility.

An Under-Class?

Bates considers the issue of the development of an under-class, where a subculture of poverty leads to the self-perpetuation of anti-social behaviours. He pursues this issue narrowly by focusing on long-term unemployment. Bates suggests that one might expect long-term unemployed people to be debilitated and reluctant to seek work. If this was the case then the rate of decline in long-term unemployment would be much slower than the rate of decline in overall unemployment.

However examples from Australia, France, West Germany, and the US are cited where this has not been the case – rather there has been a relatively constant relationship between the ratio of long-term and general unemployment. But what does this say abut the development of an under-class? The assumption that the long-term unemployed are a homogeneous group can be challenged.

I would suggest that the long-term unemployed comprise several distinct groups: a) those with obsolete skills; b) those with skills for which there is reduced demand; c) those with no previous work experience or skills. For the first two groups the issue is not socialisation into work routines, but maintaining marketability. For the third group – which might include school leavers and those entering the labour market after a parental break – the main issues may be education and socialisation. A fourth group might be those with more serious barriers to confront, from health problems to drug or alcohol dependency.

I am not convinced by the evidence presented by Bates that a fall in long-term unemployment can be taken to mean that there is unlikely to be an underclass developing. More analysis is needed to determine the extent to which any initial fall in long-term unemployment will endure and the extent to which employability will be sustained. There are also other aspects of the development of "alternative groupings", subcultures or under-classes which Bates could well consider in assessing the impact on social cohesion. To the extent that some of these groups operate in the informal economy (such as those involved in drugs, or gangs engaged in property crime) the opportunities which derive from strong GDP growth are likely to be less relevant. However, the threat to personal security, or to constitutional processes, is clear.

Too Much Democracy?

Bates argues that growth enables investment in education, which gives rise to demands for democracy. Democratic processes reduce tensions by facilitating peaceful resolution of social and other conflicts. However, such resolutions can reduce economic efficiency. At the same time, democracies can permit the rise of "distributional coalitions" which further reduce efficiency, by intervening (via coercion) in the distribution of resources in favour of particular groups or interests. This can undermine democracy itself (the collapse of the relatively prosperous democracies of Argentina and Uruguay of the 1930s are given as examples).

Reforming governments (those which reduce government intervention in the market) "re-balance" things in a way which protects both growth and democratic processes, according to Bates. However, the greater the existing redistribution towards the median voter, the slower the reform process will be. Further on Bates discusses the role of political credibility in promoting economic reform. He quotes Roger Douglas, who advocated "ten principles of successful structural reforms". Among them: "speed is essential", "spell out objectives and intentions publicly in advance" and "trust, respect and inform the electorate". Given his observations abut re-balancing democracy and the need for political credibility, it is a shame that Bates does not analyse the fall in public regard for the political process which accompanied the reforms since 1984.

When Bates suggests that democratic processes, if left without some corrective elements, can be detrimental to economic growth, and that this in turn can undermine social cohesion, I see a parallel argument. That is that economic growth might inhibit social cohesion if it fails to provide a distribution of wealth which is seen to be fair, sustainable and adequately rewarding of effort.

Common Cultural Underpinnings

Bates argues that there are some common cultural underpinnings which explain some of the linkages between economic growth and social cohesion. The Protestant work ethic and the Confucian virtues of hard work and thrift are important to different cultures. Both reinforce economic growth.

Cultures which have a "high need for achievement" are also ones where economic activity is likely to do well. Family relationships from feudal times to the modern day are explained as being both part of the prevailing social model, and facilitators or inhibitors of economic growth. Finally, Bates suggests that transaction costs are reduced where people deal with others like themselves. Here trust is a component of both economic growth and of social cohesion. He argues that international trade broadens that trust, in a manner which ultimately provides greater opportunities for all. This is the notion of "cosmopolitan ethics in trade".

It is here that Bates comes closest to helping me get some grip on social cohesion. Perhaps I was looking for a stronger emphasis on notions such as social connectedness and social capital, as promoted by R.D. Putnam, who argues that the focus on individual opportunity can be misplaced where it is at the cost of community development. Putnam suggests that societies become wealthy because they are "civic" (i.e. cohesive), not the other way around .

Implications for New Zealand?

Bates argues that the free-market reforms since 1984 have provided greater opportunities for more New Zealanders, and that this has promoted social cohesion. To the extent that social cohesion was threatened by the growth of the State up until then, the reforms represent a re-balancing, but they need to continue.

To the extent that the Government remains heavily involved in redistribution (albeit far less than in 1984) it is still inhibiting social cohesion by limiting growth. It is doing so by coercion (Bates does not address any research or polls which support the notion that some people are happy to pay their taxes, provided they know that there will be services available for them when they need them). It is also diverting the focus away from creating wealth, towards a debate abut who is entitled to what.

His analysis that the welfare state has raised expectations which it can now not deliver oversimplifies the situation. There are significant issues of growth in dependency which New Zealand and other Western nations face. However, these need to be set alongside the public good benefits which supporters of the (perhaps even minimal) welfare state would point to as having accrued from the redistributive policies of successive generations of governments. Bates neither acknowledges these benefits, nor raises a strong argument to counter them.

Bates concludes by acknowledging, despite his strong argument against the State's role in redistribution, there is indeed a role in the provision of "a basic safety net" as a "last resort". Perhaps my disappointment in his report is best exemplified by my observation that Bates started by not adequately defining "social cohesion"; and he does not even try to enter the vexed issue of what "basic" might mean, or what the "last resort" might be.