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Social Surplus, the State and Public Welfare

3 June 2013 04:31 am - 0     - {{hitsCtrl.values.hits}}

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Modern states have the prerogative to extract a major part of the social surplus from economically active citizens and use it for purposes that are supposed to benefit the wider population. With increasing productivity due to technological advancement, improvement of health and nutritional status of the population, increasing life expectancy and the development of human resources through education and training, the state has been able to extract a large share of the increasing social surplus produced by the adult population. The surplus so extracted is used for diverse purposes the mix of which depends on the nature of the state and its public policies.

Mature welfare states usually impose higher rates of taxation on personal and corporate income and maintain a higher level of social spending across a range of areas such as education and training, research and development, health, public transport, public housing, social protection and public safety. This naturally reduces private spending by citizens in many areas. For instance, publicly financed health services provided to citizens either directly or through social insurance systems eliminate or reduce out of pocket expenses on medical treatment.

Well functioning public transport systems reduce the use of private transport, cutting transport costs to citizens and reducing negative effects of private transport such as environmental pollution, road accidents and traffic congestion. When the social surplus extracted from the citizens is used to provide social protection to vulnerable segments of the population such as children, the unemployed, the disable and the elderly, the burden of supporting these groups does not fall entirely on their families. When such social protection systems do not exist, the use of limited family resources to support vulnerable members of families often leads to shared poverty result in inadequate satisfaction of basic needs such as food and shelter.



In addition to meeting the welfare needs of a population, modern states are also expected to play a leading role in economic development. In fact, modern states often derive much of their legitimacy from their development function; this is particularly so in developing countries where political parties seek public support in the name of development. What role the governments play in development varies widely depending on a whole range of factors such as the nature of the governance system, development policies they pursue, levels of development of countries and the characteristics of the ruling elite.

As is well known, the relative balance between the state and the market has varied widely in both time and space. Before the introduction of neo-liberal economic reforms over the last few decades, the state played a highly significant role in many countries across the world, not just in the socialist world.
These countries by and large fitted into what has been widely described as the state-led development model. Sri Lanka followed this model from the mid 1950’s to the late 1970’s, until economic liberalization policies were introduced in 1977. With the liberalisation of the economy, the market or the private sector began to play an increasingly significant role in both domestic as well as external economic relations of the country.

 The virtual state monopolies in imports, retail trade, banking, insurance, public transport, health, industries, etc. came to an end, paving the way for private entrepreneurs to play a leading role in these and other areas. Yet, the rhetoric of development has remained closely intertwined with national politics, creating the impression that the political elite is still in firm control over the economy. However, the truth is that most of the goods and services are produced by private entrepreneurs, both large and small. In other words, the country’s wealth is generated and distributed mostly by the market. The role of the post- liberalisation state in Sri Lanka has remained highly significant partly due to the national security threat posed by the LTTE  led separatist movement and partly due to the fact that a majority of the population has looked up to the state for relief of various sorts such as subsidies, employment and income support.

In an attempt to live up to these expectations, the state has gathered financial resources from various sources including all forms of taxation. Yet, these resources are not adequate to meet outstanding and new obligations. Hence, the wide gap between popular expectations and the states’ ability to fulfill them. The result in a persisting deficit in both welfare and development functions of the states.



The vast public debts, both domestic and foreign, limit governments’ ability to borrow money. Persisting budget deficit prevents higher public investments either for welfare or development. Given the generally low levels of income of the vast majority of the gainfully employed people, the state cannot either remove subsidies or impose higher taxes on income or consumption. On the other hand, inadequate public investments in the social sectors significantly reduce the quality and adequacy of publicly provided services, encouraging well to do citizens to rely on private services and compelling lower income groups to incur considerable out of pocket expenses. This pattern is clearly evident today in health, education and transport services.

The above out of pocket expenses impose a severe burden on many families today. It is one of the main reasons for exodus of labour from the country. The families left behind use private remittances from abroad to meet various needs including these out of pocket expenses. The remittances also help the government to avert a balance of payment crisis by largely bridging into country’s widening trade gap.Persisting welfare deficit as evident from low quality and inadequate public services, the lack of or inadequate social protection for vulnerable groups, etc. encourages citizens to look for private solutions to their problems.

" The families left behind use private remittances from abroad to meet various needs including these out of pocket expenses. The remittances also help the government to avert a balance of payment crisis by largely bridging into country’s widening trade gap. "

Instead of agitating for better and adequate public services, they either turn to the market or leave the country. The private expenditure they incur for private services become income for private firms or individual citizens providing private services such as private medical practitioners, owners of private schools and private tuition masters. Such earnings gradually circulate in the market and do not become part of the social surplus controlled by the state. In other words, such private expenditures incurred by citizens do not contribute to any improvement of public services. So, the vicious circle continues.

In spite of the obvious welfare deficit, citizens do not seem to be very keen to agitate for a larger role for the state. This appears to be at least partly due to the fact that the legitimacy of political regimes and the trust in political institutions have been severely eroded due to poor governance characterized by abuse of power, the lack of transparency and accountability, widespread corruption, politicization of public institutions, etc. Under such circumstances, citizens cannot expect prudent use of the social surplus extracted by the state. While experience elsewhere shows that private solutions to common problem faced by citizens are not optimal or desirable citizens tend to be pragmatic when they realise that the state fails to offer collective solutions. In social domestic countries like Sweden, there is overwhelming public support for higher rates of taxation. Citizens there know that social surplus extracted by the state is not misused by political elites and their retinue but rationally allocated and invested to maximize current public welfare and future prospects of the country. We do not conduct surveys in this country to find out what people feel about taxes, public expenditure and misuse of public funds but it would not be surprising if a majority of people do not want the government to impose higher taxes as they do not have any control over how public funds are used in this country.
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