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ISBN 1-84544-084-6
ISSN 0306-8293
Volume 32 Number 1/2 2005
International Journal of
Social Economics 30 years of IJSE: Festschrift in honour of Professor John O’Brien: part 3 Guest Editor: Barrie Pettman
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International Journal of
ISSN 0306-8293
Social Economics
Volume 32 Number 1/2 2005
30 years of IJSE: Festschrift in honour of Professor John O’Brien: part 3 Guest Editor Barrie Pettman
Access this journal online _________________________
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Editorial advisory board __________________________
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M.L. Weitzman vs J.M. Buchanan: a comparison between share economy and constitutional economy Umberto Romani and Giovanni Tondini ____________________________
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Rural development in China: industry policy, regionalism, integration and scale Colin G. Brown, Scott A. Waldron and John W. Longworth ____________
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Major issues relating to end-of-life care: ethical, legal and medical from a historical perspective Robert F. Rizzo ________________________________________________
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Neglected dimensions of development: inequality, conflict and aid Rukmani Gounder______________________________________________
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On the theory of post-Communist economic transition to market Vladimer Papava ______________________________________________
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CONTENTS
CONTENTS continued
Socio-economic factors determining adult literacy in developing countries Krishna Mazumdar ____________________________________________
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Financial support systems: the student experience in England and France Susan Curtis and Rita Klapper ___________________________________
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Distribution of income and the structure of economy and society A.H.G.M. Spithoven ____________________________________________
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A socio-economic framework of interpretation and analysis Pieter Keizer __________________________________________________
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Book review______________________________________
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Note from the publisher ___________________________
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IJSE 32,1/2
EDITORIAL ADVISORY BOARD Professor Leslie Armour Department of Philosophy, University of Ottawa, Canada Dr Josef Barat Minister of Transportation, Sa˜o Paulo, Brazil
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Professor Y.S. Brenner Department of Economics, University of Utrecht, The Netherlands Professor Tan Chwee-huat Faculty of Business Administration, National University of Singapore Dr Floreal H. Forni Centro de Estudios e Investigaciones Laborales del CONICET, Buenos Aires, Argentina Professor Patrick McNutt Indecon Consultants, Dublin and Institute for Financial Management, University of Wales, Bangor, UK Dr Daniel O’Neil Department of Political Science, The University of Arizona, USA
International Journal of Social Economics Vol. 32 No. 1/2, 2005 p. 4 # Emerald Group Publishing Limited 0306-8293
Professor Doktor Manfred Prisching Karl-Franzens-University, Graz, Austria Professor Stylianos A. Sarantides University of Piraeus, Greece Professor K.K. Seo College of Business Administration, University of Hawaii at Manoa Professor Udo E. Simonis WZB Science Centre, Berlin, Germany Professor Clem Tisdell University of Queensland, Australia Dr Matti Viren University of Turku, Finland Professor Jimmy Weinblatt Department of Economics, Ben Gurion University, Israel Professor Zhang Wenxian Fudan University, Shanghai, China Professor Laszlo Zsolnai Director, Business Ethics Centre, Budapest University of Economic Sciences, Hungary
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Weitzman M.L. Weitzman vs J.M. Buchanan vsM.L. J.M. Buchanan
A comparison between share economy and constitutional economy Umberto Romani and Giovanni Tondini
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Department of Economics, University of Verona, Verona, Italy Abstract Purpose – The aim of this article is to analyze and compare the share economy and the constitutional economy approaches. The fact that numerous world-class multinationals have chosen to offer stock options to managers and bonus share incentives to employees denotes a realization that any improvement in the performance of an economy affected by several constraints, as is the case in the European economy, can only be achieved by assigning greater responsibility to managers and employees. Design/methodology/approach – The paper underlines the positive and negative aspects of both approaches with a critical analysis of the theories. The authors’ interest in M.L. Weizman’s model of the share economy stems from this basic reflection, despite the model’s excessive reliance in the capacity of the state to resolve the problems at hand using ordinary legislative instruments. J.M. Buchanan’s extremely interesting and indeed fundamental considerations concerning the pressures exerted on institutions by particular or individual interests are virtually overlooked. Findings – The weakness of the share economy approach can be effectively contrasted by integrating it with the constitutional economy approach. A substantial difference between Weitzman’s and Buchanan’s schemes stems from the reliance, exhibited by the former, on the institutions governing the contracts between individual players. Originality/value – The paper focuses on the analogies between Weitzman’s and Buchanan’s positions in order to set up a unifying framework for the analysis of workforce and other production inputs of the economical system. Keywords Economic theory, Social economics Paper type Conceptual paper
1. Introduction The structural problems of capitalist economies have rekindled interest in the debate on the different managerial theories of the firm, whether in the public or private sector. One such model is the share economy, in which workers play an active role in company management (Brunetta, 2002). The fact that numerous world-class multinationals have chosen to offer stock options to managers and bonus share issues to employees denotes a realization of the fact that any improvement in the performance of an economy, burdened with constraints and other problems as in the case of the European economy, can only be achieved by giving greater responsibility to managers and employees. Our interest in M.L. Weizman’s model of the share economy stems from this basic reflection, despite the model’s excessive faith in the capacity of the state to resolve the problems in hand using ordinary legislative instruments. J.M. Buchanan’s extremely Although the paper is an effort of both authors, G. Tondini wrote sections 1, 2, 4, 7, while U. Romani wrote sections 3, 5, 6, 7.
International Journal of Social Economics Vol. 32 No. 1/2, 2005 pp. 5-16 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510575603
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interesting and indeed fundamental considerations concerning the pressures exerted on institutions by particular or individual interests are virtually overlooked. A comparison of Weitzman’s and Buchanan’s approaches is thus essential, although at a theoretical level it is limited to the concept of the state and its characteristics. We believe such considerations are of use in counteracting the phenomenon of Euro-sclerosis, a form of immobilism involving the fossilization of structures and institutions (Pennacchi, 2002). 2. M.L. Weitzman’s share economy and the concept of the state In Weitzman’s view market economies have long been afflicted with unemployment and stagnating production. Following Keynesian prescriptions, governments have learned to counteract recessions with expansionary monetary and fiscal policies. Although this approach enjoyed a certain degree of success after the Second World War, particularly from 1945-1965, in the two subsequent decades the link between unemployment and inflation became progressively stronger. In the mid-1980s, phases of acute unemployment alternated with phases of high inflation, but often the two phenomena emerged together (Weitzman, 1985, pp. 1-2). Weitzman (1984, p. 55) describes the peculiarities of Keynesian policies as follows: In its place the Keynesian revolution preached the positive gospel of the mixed economy where, in the words of the US Employment Act of 1946, it is the continuing responsibility of the federal government to . . . promote maximum employment, production and purchasing power and to maintain conditions under which there will be offered useful employment opportunities . . . or those able, willing and seeking to work. The balanced budget was replaced by compensatory or functional finance the avowed use of government expenditures and taxes to raise aggregate demand whenever required to promote full employment and growth, purposely increasing the deficit if necessary. Activist monetary policy (primarily open market operations by the central bank to determine the stock of money and, ultimately, interest rates) evolved into a widely accepted policy tool for achieving macroeconomic goals. The relevant debate became not whether the government should participate in economic affairs, but rather how government can participate most effectively.
Weitzman attributes deteriorating economic results to expectations that Keynesian policies and other welfare measures will be adopted to support the unemployed and the firms floundering in the staggering economy. The rather disagreeable term “stagflation” was coined by Samuelson (1974) to describe the equally disagreeable combination of stagnation and unemployment. A forceful enunciation of the centrality of fighting stagflation can be found in Meade (1978, 1982) and Okun (1977). Stagflation is a particularly difficult malaise to cure, because, in the author’s view, the macroeconomic remedy for one symptom aggravates the other. The fundamental way to reduce unemployment and accelerate growth is by applying expansionary fiscal and monetary policies, but the overheating which ensues appears to reinforce an uncontrollable inflationary impulse. Conversely, the cure for inflation consists of recessionary policies that lead to mass unemployment, slow growth, low productivity, budget deficits, credit crises and balance of payments deficits. Weitzman (1984, pp. 69-70) describes traditional anti-inflationary policies thus: [. . .] Index everything. This approach attempts to live with inflation rather than trying to fight it. If wages, pensions, and most other contracts are fully indexed to the cost of living so as to
guarantee real purchasing power, the argument goes, the public will not care so much about inflation and the government can concentrate on improving real economic performance. To some extent we have already moved in this direction by having cost-of-living-adjustment clauses in about half of major union contracts and in most social security benefit payments. One drawback is that it is impossible to index everything. Another is that indexing tends to accelerate inflation, not control it, so that if the inflation per se is bothersome this will only exacerbate the problem. [. . .] Synchronize collective bargaining. In the United States and Canada, wage setting is relatively decentralized and unsynchronized. [. . .] Some observers in the United States, therefore, suggest legislation to make our own wage-setting process more synchronized and more frequent. The problem with this approach is that it is a two-edged sword. More responsive nominal wages are desirable in deflationary periods, but undesirable during inflationary upswings. [. . .] Tax-based incomes policy (TIP). This would offer tax incentives to firms and workers to keep prices and wages low. TIP is really just a form of wage-price control where the penalty system is more flexible. Essentially the same norm-setting dilemmas and bureaucratic problems are involved – if anything, it is more complicated to administer TIP than wage-price controls because the exact degree of compliance must now be monitored. (One-sided TIP programs aimed at controlling wages alone are considerably easier to administer, but even they are unwieldy when it gets down to practical details, besides being widely perceived as having an anti-labor bias). Despite the drawbacks, some form of TIP is arguably the best of current batch of alternatives.
In Weitzman’s words, the result is an “economic policy cycle” in which mixed economies swing from one extreme of economic policy to the other, polarizing the electorate and preventing society from effectively tackling the underlying problems. From whatever perspective, the direct and indirect costs of stagflation are immense: The principal economic problems of our day have at their core not macro but profoundly micro behaviors, institutions and policies. The war against stagflation cannot be won at the lofty antiseptic plane of pure macroeconomic management. Instead, it must be fought out in the muddy trenches of fundamental micropolitic reform (Weitzman, 1984, pp. 2-3).
Weitzman’s proposed solution (for a very similar model to Weitzman’s, particularly in terms of full employment, see Agathotopia by Meade (1989)) consists in the transition from a “wage-based economy”, with equilibrium in the demand for and supply of labor, an economy which is therefore incapable of absorbing unemployed manpower after a shock, to a “share economy”, in which the demand for labor exceeds the supply of labor even in periods of adjustment or during minor crises. This would also entail the transition from traditional labor contracts to more unusual contracts, whereby wages are allocated as a share of the firm’s average revenue per worker. This form of irregular contract would boost overall employment given that as the level of employment increases, revenue grows more than the total cost of labor (average revenue per worker) (Weitzman, 1985, pp. 3-4): [. . .] The wage standard is not any kind of universal, inevitable consequence of divine forces, natural laws, or even human nature. It is merely one particular, and rather arbitrary, short-term mechanism for dividing the national product pie among the different groups and classes that contribute to its making. The long-run tendencies of income distribution under capitalism do involve deep issues of political economy, perhaps even system-free, tamper-resistant laws. But the selection of a particular disbursement formula to pay claimants is purely the human choice of an institutional arrangement. As human beings
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guided by the forces of history have made the wage system, so can they, if they wish, unmake it and put in its place something better (Weitzman, 1984, p. 146).
The transition from a capitalist economy to a share economy is advocated for the following reasons:
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[. . .] Too many (workers) are left unemployed through no fault of their own. Many jobs are unpleasant and often, it seems, unnecessarily so. Working conditions are frequently demeaning and the workplace is commonly a crowded, noisy, dirty, or otherwise distasteful environment. Permeating the entire system is the grimly accepted fact that, when all is said and done, the employer really doesn’t care about the employee (Weitzman, 1984, p. 119). [. . .] Those who clamor for an industrial policy to improve capitalism need look no further than a change in the way workers of large industrial corporations are compensated. Just let labor be paid on a share system – and turn loose the dogs of competition. That simple change will unleash more powerful forces for economic prosperity and social progress than are to be found in the wildest visions of national planners or cultural revolutionarie (Weitzman, 1984, p. 146).
3. J.M. Buchanan’s constitutional economy model and the issue of the state Unlike the previous model, Buchanan’s model focuses on the top of the hierarchical pyramid of regulations, namely the constitution. The author aims to outline, albeit in rather general terms, the conditions (costs and benefits) which make it advantageous for individuals to enter a political community governed by a constitution, or conversely induce them to remain part of an existing community. Furthermore, Buchanan’s constitutional model strives to provide a system with which to analyze at any time whether a legal system is the result of free consent between citizens (Buchanan, 1989, pp. 23-4, 1998, p. 30). This approach identifies two distinct stages in the political decision-making process: in the first constitutional (or rather constituent) stage the rules or norms to be applied in the second, operative stage, are unanimously agreed; and in the second, routine legislation stage concrete choices of immediate relevance for individual players are made (Buchanan, 1989, pp. 25-6). Direct and indirect taxes and public spending are among the constitutional choices required to establish the rules in the constitutional model. This implies that such decisions are reached in conditions of uncertainty, in which no individual is aware of the impact of such choices on his/her own personal interests. This is precisely the factor that assures the impartiality of such choices, and excludes from the model strategic behavior based on identifiable private interests (Buchanan, 1989, p. 27): Buchanan’s constitutional model does not aim to explain from a historical perspective how the constitutional pact was reached, but rather to offer the basis for evaluating the existing system from a regulatory standpoint. Buchanan’s objective was to devise a model that enables us to quantify to what extent the existing order is, even today, the result of free choice between citizens (Da Empoli, 1989, p. 24).
The constitutional contract is thus an agreement freely negotiated by a group of individuals willing to forego part of their individual autonomy or private interests in order to form a community with common interests. Since the individual is oriented towards the satisfaction of his/her personal interests, a community will continue to
exist so long as the advantages to be had from foregoing personal objectives (general interests) are superior to the advantages of achieving those interests. The following passage is essential to further our understanding of what the author means by constitution or constitutional contract: [. . .] The inclusive constitutional contract embodies elements that may appear in alternative combinations or mixes. The terms must include, first of all, some statement of limits on the behavior of any person with respect to the positions of other persons in the community. This element was referred to earlier in this chapter as the disarmament contract. As they enter genuine society from anarchy, persons lay down their arms; they accept rules governing their own behavior in exchange for the like acceptance of such rules on the part of others. Secondly, the basic contract must define the positive rights of possession or domain over stocks of goods, or more generally, over resource endowments capable of producing final goods. These endowments include human capacities (the rights to one’s own person which have been widely discussed in the theory of property), as well as non-human factors, including domain over territory (Buchanan, 1975, pp. 71-2).
Buchanan’s (1975, p. 1) assertions on politics and society in his introduction to The Limits of Liberty are emblematic: [. . .] In these introductory sentences, I have by implication expressed my disagreement with those who retain a Platonic faith that there is truth in politics, remaining only to be discovered and, once discovered, capable of being explained to reasonable men. We live together because social organization provides the efficient means of achieving our individual objectives and not because society offer us a means of arriving at some transcendental common bliss. Politics is a process of compromising our differences, and we differ as to desired collective objectives just as we do over baskets of ordinary consumption goods. In a truth-judgement conception of politics, there might be some merit in an attempt to lay down precepts for the good society. Some professional search for quasi-objective standards might be legitimate. In sharp contrast, when we view politics as process, as means through which group differences are reconciled, any attempt to lay down standards becomes effort largely wasted at best and pernicious at worst, even for the man who qualifies himself as expert.
In the constitution, in addition to the rights of individuals, the separation of the activities of the state into two categories is essential: the “protective state” supervises the enforcement of the constitutional contract, both at a decision-making level and its implementation by individual citizens; the “productive state” comprises the organs responsible for carrying out the public activities set forth in the constitution, including state enterprises (Buchanan, 1989, pp. 29-30). As far as politics and votes are concerned, we should bear in mind that: individual players are almost exclusively oriented towards achieving personal interests (they are not “rational fools”, but rather pursue personal aims mingled with passion, fear and sentiment); politicians strive almost exclusively for re-election, aiming to obtain the highest possible number of votes, thereby furthering the political causes of their supporters; the phenomenon of logrolling between representatives standing for reelection exists, namely reciprocal support to secure the approval of political projects as a result of pressure from lobbies and special-interest groups (Buchanan, 1998, pp. 17-18). On the issue of pressure groups, particular interests and constituent choices, Buchanan affirms that:
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[. . .] In large political units the institutional manifestation of the active promotion of economic interest is the pressure group. The reason for the very existence of such groups lies in their ability to promote and to further, through the political-choice process, the particular functional interests represented. The emergence of such groups to positions of dominant importance during the last half century has been one of the most significant developments in the American political scene. This fact, which can no longer be hidden from view or considered as an aberration to orderly political process, has understandably weakened the predominance of the traditional model of democratic choice-making institutions. In the face of observable pressure-group activity with its demonstrable results on the outcome of specific issues presented and debated in legislative assemblies, the behavioral premise that calls for the legislator to follow a selfless pursuit of the public interest or the general welfare as something independent of and apart from private economic interest is severely threatened. Empirical reality contains implications about human behavior that scholars with strongly held ethical ideals find difficult to accept. In recent years the role of the pressure or special-interest group in democratic political process has come to be more widely accepted as inevitable, if not desirable (Buchanan and Tullock, 1974, pp. 283-4).
4. A comparison Weitzman’s model appears conceptually fragile for three motives: (1) The attractiveness of lower unemployment induces us to assume that an even higher inflation rate is possible, so that the economy will tend towards higher inflation (Nardi Spiller, 1990, p. 166). (2) The awareness of a permanent state of full employment could, according to political and sociological theories of inflation, lead to the dissolution of consensus, thereby strengthening the working classes and inducing them to make substantial wage claims (Nardi Spiller, 1990, p. 166; Phelps Brown, 1975). (3) The capacity of the share economy to withstand supply shocks depends on the duration of the shocks themselves. Weitzman’s claim that workers will in any case be absorbed by firms appears to be a remote possibility, since it broaches complex issues such as the skill and mobility of the workforce, as well as the real needs of the labor absorbing firms. (Nardi Spiller, 1990, p. 168; Weitzman, 1984, p. 113). Finally, in our opinion, an additional element of fragility in Weitzman’s model is the excessive faith in the constitutional contract between citizens (in terms of routine legislation), which almost totally overlooks (with the exception of a fleeting reference) the significance of complex issues such as the influence of particular interests on general interests, which can only be limited at a constitutional level. We find evidence of this in his work (Weitzman, 1985), in a survey of the principal issues faced by major corporations (the author makes numerous references to the example of General Motors), in which considerable emphasis is placed on a desired change in the payment of production factors, and of labor in particular, achieved thanks to the combined efforts of corporations and trade unions. (Weitzman (1985, pp. 4-5, 12-20, 31-33, 46-8, 84-5, 99-104, 111-16, 125-6) and also asserted in the final part of the work (Weitzman, 1985, p. 135)). A substantial difference between Weitzman’s and Buchanan’s models thus emerges: faith in the institutions governing the contract between individual players.
In his analysis of the political framework, Buchanan firmly hopes for a “constitutional revolution”, namely a new social contract, a new constitution. In his view, modern constitutions no longer reflect free consent, and he considers it extremely dangerous for individuals to be aware that deliberate deviation from the contract is no longer punished with severity and certainty (the coercive-punitive system). Furthermore since institutions are formed by individuals, it is necessary to establish the rights and duties of the members of the community to avoid anarchy or dictatorship by a restricted group (bureaucrats or politicians), given the non-existence of the “natural harmony” in which Hobbes believed (Brennan and Buchanan, 1991, pp. 89-91). We should also bear in mind that in the absence of precise fixed rules, raising revenues (through levies and taxes etc.) and their subsequent allocation may give rise to sub-optimal or non-optimal Pareto states. This is due to the fact that in a representative democracy with logrolling in several elections, resources are spread over numerous projects, so that as a result public spending is non Pareto-optimal or sub Pareto-optimal, contrary to the wishes of the very citizens who pressurized the representatives during elections (Buchanan, 1998, pp. 353-400). Finally we should note some interesting analogies between the thought of the two economists: both strongly advocate approaches centered on the individual, and both are critical of Keynes and Keynesian prescriptions, although Buchanan, unlike Weitzman, is more against the use made by politicians of Keynesian prescriptions in public spending rather than against Keynes himself. This is evident in all his works, and particularly in The Calculus of Consent (Buchanan and Tullock, 1998), the Reasons of Rules (Buchanan and Brennan, 1991), Democracy in Deficit (Buchanan et al., 1978) and The Consequences of Mr Keynes (Buchanan and Wagner, 1977). 5. Beyond the comparison by the light of new approaches of economics Since the 1970s scholarly debate in economics has centered on two aspects of the state: the protective or regulatory state, and the productive or managerial state. The most significant aspect for our survey is an analysis of the state as a regulator, in view of the copious treatment of the managerial state and its numerous failures. A regulatory state is one whose main purpose is to regulate the activity of individual citizens, with the aim of setting the conditions for such activities to function effectively. The regulatory state is also responsible for assessing the efficacy of any measures taken, as well as for preventing any undesired side-effects in the various social spheres (La Spina and Majone, 2000, p. 23). The regulatory state governs society, favoring the external enactment of regulations within a certain vision of public interest and collective well-being, eschewing direct management or the creation of new fields of activity (La Spina and Majone, 2000, p. 27). Selznick (1985) defines “regulation” as prolonged and focused control exercised by a public authority or agency over an activity with a certain social standing within the community. Stigler (1971), a key proponent of the positivist theory or theory of economic regulation draws on Bernstein’s (1955) theory whereby regulatory agencies are “captured” by producers. According to Stigler (capture theory or CT), political players maximize their utility. Their utility function is not described in detail, but it
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undoubtedly includes an attempt to win and maintain political power. To reach this goal, politicians need both money and votes, which can be supplied by the groups directly affected by government decisions. (La Spina and Majone, 2000, pp. 122-6). A model capable of representing the complexity of the political environment does not yet exist. However recent contributions to the positive theory of institutions (PTI), based on concepts and ideas derived from Buchanan’s thought, as well as from public choice, new institutionalism, and the new economics of organization are beginning to shed light on the “black box” which economists conjure up in their minds to depict the political and bureaucratic connections by means of which interests are translated into public policies (the latter is a reference to Moe (1987)). While CT assumes control to be a-problematic (regulatory institutions are assumed to be passive entities) a central component of the PTI is the theme of relations between politics and bureaucracy, namely establishing to what extent and with which tools politicians can steer and control the politics and administration of regulation. The PTI current examines relations between politics and bureaucracy (political control) as well as the delegation of power to regulators by politicians. The result (Fenno, 1959; Neustadt, 1960; Noll, 1971; Scher, 1960; Mayhew, 1974) is that normally politicians do not dedicate their scarce time and energy to the general control of policy. They prefer to intervene more rapidly and precisely, with less expense, to protect clients’ interests in specific areas or sectors. The result is a form of uncoordinated, fragmentary, ad hoc control (La Spina and Majone, 2000, pp. 132-3). Similarly, literature on the behavior of bureaucrats (Niskanen, 1971) and on the budgetary process has expressed misgivings over the suitability of the budget as an effective means of control, as well as the managerial ability of bureaucrats themselves. As early as 1964 Wildavsky underlined that budgeting is a decentralized and incremental process which generates automatic increases, taking bureaucracy further from the grasp of political control (Wildavsky, 1964). Another significant theoretical development in Europe was the application of agency theory to the study of bureaucratic discretion (the principal/agent theory), which departed from the information asymmetry between principal and agent (opportunistic behavior by the agent with complete and certain knowledge of the high cost to the principal of verifying the agent’s qualifications and performance) (Wood and Waterman, 1991; Yandle, 1987; Weingast and Moran, 1983; Moe, 1982, 1985; Kovacic, 1987; La Spina and Majone, 2000, pp. 134-7). It has in any case been proved that legislators, contrary to the above, find it more efficient, in view of their rigid time limits, to observe the performance of regulatory agencies indirectly, rather than by means of hearings or direct supervision. Generally speaking, legislators rely on the recipients of the program, lobbyists and interest groups to gain information on performance (McCubbins and Schwartz, 1984). We can derive two important lessons (La Spina and Majone, 2000, pp. 141-2) from recent work on the positive theory of institutions, which we feel it is right to expound here: (1) Political control of regulatory bureaucracies is possible, in so far as the delegation of significant policy-making power to expert agencies does not necessarily imply a loss of democratic responsibility. (2) The conventional form of control as “self-conscious supervision”, founded on authority, by previously designated individuals or departments entrusted with
the formal duty or right to investigate, to reprimand (in order to modify behavior) and in certain cases to punish or fine, is fairly inappropriate for such a highly technical or discretional activity such as regulation (Hood, 1991). Similarly direct monitoring is probably an inappropriate form of political control: it is costly, and most methods for imposing significant sanctions on bureaucrats lack credibility, since they entail high costs for the principals. Furthermore, it may be difficult to distinguish between compliance and defection (Brehm and Gates, 1994). Hence the negative conclusions concerning the possibility of observing and controlling bureaucratic discretion. A more appropriate form of control is what Hood (1991) defines as interpolable balance. Under this form of control, the starting point is the need to determine self-correcting mechanisms that are already present in the system, and an array of other complementary controls may also be contemplated, with some degree of overlapping, rather than assuming that control should be exercised exclusively from a fixed point within the system. The new institutional theories of regulation (in their normative and positive versions) demonstrate precisely that regulators can be subjected to observation and made politically answerable only by means of a combination of controls: . supervision by specialized parliamentary committees; . power to appoint restricted to the executive; . stringent procedures; . professional standards; . surveys of citizens’ dissatisfaction to overcome information asymmetries; . public participation; and . jurisdictional union. Institutional planning can thus offer powerful supplementary mechanisms for “helping” elected politicians to make their agents toe the line (Horn, 1995; McCubbins et al., 1987). When such a system functions adequately, no one controls independent authorities yet the authorities are kept “under control” (Moe, 1987).
6. Today There is no doubt that terrorist attack of 9/11 and, in general, all significant economic or other crises have increased the appeal of certain schools of economic thought, particularly the neo-Keynesian school. Indeed the last Nobel Prize was awarded to M. Spence, G. Akerlof and J. Stiglitz for their work on information asymmetries (Priori Friggi, 2002). The share economy theories were displaced by the appeal of Marxist theories with its irreconcilable conflict between labor and capital for a long time. After the decline of the Ford model of industrial practice and the Marxist model, in theoretical terms the share economy enjoyed a new centrality. Supporters of the model advocate its use exclusively where justified by economic logic, and after negotiation with labor unions (Brunetta, 2002).
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This would be a reasonable proposal, whether sympathized with or not, but for one element: regulations. Indeed the above negotiations are impossible, in our opinion, without clear and certain rules. The welfare state and social institutions were founded and established themselves to respond to issues such as, for example, unemployment, particularly following the Second World War. Today this link has been reversed: the issues of unemployment and poverty are no longer considered to have produced the solutions embodied by the welfare state, but rather it is now suggested that the latter and its egalitarian aspirations are responsible for today’s unemployment problem, with the same causes: excessive taxation, public sector interference, the power of trade unions and collective bargaining (Pennacchi, 2002). Stiglitz (1992) claims that in order for a government to be suited to resolving today’s problems, and hence truly democratic, it must incorporate principles of justice channeled through democratic institutions capable of uniformly representing all interests and values at stake. 7. Conclusions Despite criticism of the share economy on the grounds of its assertions and applications, there is no doubt about the originality and innovative potential of Weitzman’s model. We also wish to stress that stock options for executives and bonus issues for employees are inspired by Weitzman’s work even though they are defined the “third way”, as opposed to wage and benefit concepts which typify the capitalist and collectivist economies respectively. What we would like to see is an “ideal union” of Weitzman’s and Buchanan’s positions in the light of the new theoretical approaches presented above: by giving greater responsibility and higher remuneration to the workforce (and this could be extended to all the other factors of production in the economy) within a certain regulatory framework, it would be possible to arrive at an effective strategy consistent with changes in the social environment and the cyclical fluctuations which are typical in modern economic systems. To conclude our treatment, we believe this ideal union is none other than an example of how numerous economic theories could take on a different, and perhaps more significant, role if they provided a set of certain rules, with a greater awareness of the workings and possible changes in the socio-economic and environmental variables of all modern economies. References Bernstein, M. (1955), Regulating Business by Independent Commissions, Princeton University Press, Princeton, NJ. Brehm, J. and Gates, S. (1994), “When supervision fails to induce compliance”, Journal of Theoretical Politics, Vol. 6, July, pp. 323-43. Brennan, G. and Buchanan, J.M. (1991), Le Ragioni delle Regole, Villani, A. (Ed. and trans.), Franco Angeli Editore, Milano. Brunetta, R. (2002), “La share economy e` la vera terza via”, Ideazione.com, No. 67. Buchanan, J.M. (1975), The Limits of Liberty. Between Anarchy and Leviathan, The University of Chicago Press, Chicago, IL and London.
Buchanan, J.M. (1989), Stato, Mercato e Liberta`, Galli, E. (trans), Il Mulino, Bologna. Buchanan, J.M. (1998) in Antiseri, D. (Ed.), I Limiti della Liberta`. Tra Anarchia e Leviatano, de Mucci, R., Schraffl, I. and Plini, D. (trans.), Rusconi Editore, Milano. Buchanan, J.M. and Brennan, G. (1991), Reasons of Rules, Cambridge University Press, Cambridge. Buchanan, J.M. and Tullock, G. (1974), The Calculus of Consent. Logical Foundations of Constitutional Democracy, Ann Arbor Paperbacks, The University of Michigan Press, Dearborn, MI. Buchanan, J.M. and Tullock, G. (1998) in Martelli, P. (Ed.), Il Calcolo del Consenso. Fondamenti Logici della Democrazia Costituzionale, Riannetti, D. (trans.), Il Mulino, Bologna. Buchanan, J.M. and Wagner, R.E. (1977), Democracy in Deficit: The Political Legacy of Lord Keynes, Academic Press, New York, NY. Buchanan, J.M., Wagner, R. and Burton, J. (1978), The Consequences of Mr Keynes, Hobart Paper 78, Institute of Economic Affairs, London. da Empoli, D. (1989), “Introduction”, in Buchanan, J.M., Stato, Mercato e Liberta`, Galli E. (trans), Il Mulino, Bologna. Fenno, R.F. Jr (1959), The President’s Cabinet, Vintage Books, New York, NY. Hood, C. (1991), “Concepts of control over public bureaucracies: “comptrol” and interpolable balance”, in Kaufmann, F.X. (Ed.), The Public Sector, Berlin-New York, de Gruyter, New York, NY. Horn, M. (1995), The Political Economy of Public Administration, Cambridge University Press, Cambridge. Kovacic, W.E. (1987), “The Federal Trade Commission and congressional oversight of antitrust enforcement: a historical perspective”, in McKay, R.J., Miller, J.C. III and Yandle, B. (Eds), Public Choice and Regulation, Hoover Institution Press, Stanford, CA. la Spina, A. and Majone, G. (2000), Lo Stato Regolatore, Il Mulino, Bologna. McCubbins, M.D. and Schwartz, T. (1984), “Congressional oversight overlooked: police patrols vs fire alarms”, American Journal of Political Science, Vol. 28, February, pp. 165-9. McCubbins, M.D., Noll, R.G. and Weingast, B.R. (1987), “Administrative procedures as instruments of control”, Journal of Law, Economics and Organization, Vol. 3 No. 2, pp. 243-77. Mayhew, D.P. (1974), Congress: The Electoral Connection, Yale University Press, New Haven, CT. Meade, J.E. (1978), “The meaning of ‘internal balance’”, Economic Journal, Vol. 88, pp. 423-35. Meade, J.E. (1982), Stagflation, Vol. 1: Wage-fixing, Allen & Unwin, London. Meade, J.E. (1989), Agathotopia, Aberdeen University Press, Aberdeen. Moe, T. (1982), “Regulatory performance and presidential administration”, American Journal of Political Science, Vol. 26 No. 2, pp. 197-224. Moe, T. (1985), “Control and feedback in economic regulation: the case of the NLRB”, American Political Science Review, Vol. 79 No. 4, pp. 1094-116. Moe, T. (1987), “Interests, institutions and positive theory: the politics of the NLRB”, Studies in American Political Development, No. 2, pp. 236-99. Nardi Spiller, C. (1990), Struttura Produttiva e Dinamica dei Prezzi, CEDAM, Padova. Neustadt, R.E. (1960), Presidential Power, Wiley, New York, NY.
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Niskanen, W.A. Jr (1971), Bureaucracy and Representitive Government, Aldine-Atherton, Chicago, IL. Noll, R. (1971), Reforming Regulation, Brookings Institute, Washington, DC. Okun, A.M. (1977), “The great stagflation swamp”, Challenge, November-December, pp. 6-13. Pennacchi, L. (2002), “Il ruolo economico dello stato in un sistema globalizzato”, available at: www.babelonline.net/home/003/tema/pennacchi_il_ruolo.pdf Phelps Brown, H. (1975), “A non-monetarist view of the pay explosion”, The Three Bank Review, March. Priori Friggi, L. (2002), “L’economia dopo l’11 settembre: la ‘riscossa Keynesiana’”, Ideazione.com, No. 46. Samuelson, P.A. (1974), Worldwide Stagflation, The Collected Scientific Papers of Paul A. Samuelson, Vol. IV, MIT Press, Cambridge, MA, pp. 801-7. Scher, S. (1960), “Congressional committee members as independent agency overseers: a case study”, American Political Science Review, Vol. 54, December, pp. 911-20. Selznick, P. (1985), “Focusing organizational research on regulation”, in Noll, R.G. (Ed.), Regulatory Policy and the Social Sciences, University of California Press, Berkeley, CA. Stigler, G.J. (1971), “The theory of economic regulation”, Bell Journal of Economics and Management Science, Vol. 6 No. 2, pp. 3-21. Stiglitz, J.E. (1992), Il Ruolo Economico dello Stato, da Rin, M. (trans.), Il Mulino, Bologna. Weingast, B.R. and Moran, M.J. (1983), “Bureaucratic discretion or congressional control?”, Journal of Political Economy, Vol. 91 No. 5, pp. 765-800. Weitzman, M.L. (1984), The Share Economy: Conquering Stagflation, Harvard University Press, Cambridge, MA. Weitzman, M.L. (1985), L’Economia della Partecipazione. Sconfiggere la Stagflazione, Negro, N. (trans.), Laterza, Bari. Wildavsky, A. (1964), The Budgetary Process, Little Brown, Boston, MA. Wood, D.B. and Waterman, R.W. (1991), “The dynamics of political control of the bureaucracy”, American Political Science Review, Vol. 85 No. 3, pp. 801-28. Yandle, B. (1987), “Regulatory reform in the realm of the rent seekers”, in Mackay, R.J., Miller, J.C. III and Yandle, B. (Eds), Public Choice and Regulation, Hoover Institution Press, Stanford, CA.
The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister
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Rural development in China Industry policy, regionalism, integration and scale Colin G. Brown, Scott A. Waldron and John W. Longworth
Rural development in China 17
School of Natural and Rural Systems Management, The University of Queensland, St Lucia, Australia Abstract Purpose – The Chinese government has increasingly turned to industry policy as a means of promoting rural development. These industry policies have not necessarily led to an improvement in rural incomes nor to the achievement of other social and environmental goals. This paper examines ways of designing these policies to achieve better rural development outcomes. Design/methodology/approach – The approach adopts a detailed micro-level analysis of industry policy through the window of the cattle and beef industries. Intensive fieldwork and interviews are conducted with all segments of and participants in the industry in all major beef production and consumption regions. A series of normative analyses examines issues of integration, scale of development, regionalism and specialisation. Findings – Industry policy is a powerful mechanism by which to influence regional and rural development. Improving development outcomes requires that central and local government goals converge and that regions in inland China are well integrated with other regions and sectors of the economy. Large-scale development projects must be carefully designed to avoid displacing individual households from industry development. Originality/value – By crossing institutional, geographic and industry segment lines in a comprehensive manner, the research will aid Chinese decision makers concerned with rural development in the design of their industry development policies. Keywords China, Rural areas, Regional development, Agriculture, Animals Paper type Research paper
Introduction The Chinese Government has recently stepped up its campaign to “Develop the West”[1]. The desire to address poverty and widening gaps between both urban and rural areas and coastal and inland areas figured prominently in this push. Aside from the rhetoric that normally accompanies such campaigns, tangible measures have been undertaken to provide infrastructure and other macro-level support aimed at a more The paper is based on a major collaborative research project on the socio-economic implications of developments in the Chinese beef industry. The project was conducted between 1997 and 2001 and involved collaboration between researchers in the China Agricultural Economics Group at the University of Queensland, the Institute of Agricultural Economics within the Chinese Academy of Agricultural Sciences, the Rural Development Institute within the Chinese Academy of Social Sciences and the Chinese Ministry of Agriculture. The authors gratefully acknowledge the ideas and research of the other members of the Project team. The Project covered 15 of the major producing and consuming provinces and municipalities in China and involved interviews with individuals and organizations along the entire beef marketing and production chain as well as government officials. Further details of the Project can be found at http://www.nrsm.uq.edu. au/Nrsm/AgEcon/research/ChinaP/Chinamenu.htm
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conducive environment for regional investment. In addition, governments at all levels have pursued regional development through a variety of industry policies. Despite increasing levels of government support, however, the campaigns have been unable to attract the levels of investment and development sought in many rural areas. This article explores why these regional objectives are not always realised and what needs to be considered to achieve a more sustained development. It does so through an investigation of the push to develop the beef and cattle industry in China. The beef industry has been targeted by the central government to achieve various environmental, economic and social outcomes, especially to raise incomes of agricultural households in undeveloped rural areas[2]. The way in which the beef industry has been used to promote regional development, along with its credentials to do so are discussed initially. The paper then explores the extent of regionalism in beef industry development by examining regional specialisation, co-ordination and co-operation across regions and between central and local governments. Inland areas usually have the resources to develop sizable cattle herds based on household activities. Sustaining reasonable returns for households, however, may require access to markets and production systems that rely on integration across regions and across different parts of the marketing chain. Cross-regional markets tend to be poorly integrated, partly due to the localised nature of the industry and partly due to undeveloped market services. Rather than rely on market integration, vertical integration is commonly used to link the supply chain across regions. Large-scale, top-down agro-industrial projects and enterprises are a feature of this vertical integration. Their impact on development and entire rural communities in China, however, has met with mixed success.
Beef as an industry to promote rural development Beef represents one of the industries that have emerged only since the economic reforms of the late 1970s. Prior to this period, cattle[3] primarily were used for draught purposes with slaughter restricted to old and sick cattle, and the beef distributed only among Muslim communities. Since then, Governments and their agencies at all levels have vigorously encouraged, supported and participated in the raising of cattle for beef production and the slaughtering of cattle and processing and distribution of the beef. The development of a beef industry has been perceived as contributing to several important policy objectives. These include the national or macro level objectives of: saving grain by displacing the consumption of (grain-intensive) pig and chicken meat and by the efficient utilisation of crop straw residues; diversifying the source of animal proteins to Chinese consumers; improving China’s trade balance through import replacement and increased exports; and reducing air and water pollution through better crop residue utilisation. A central plank behind support of the beef cattle industry, however, has been to promote rural and regional development. In particular, the development of a beef industry has been seen as a way to diversify sources of rural and regional incomes and, in some regions, alleviating poverty among rural households. Not only has this involved measures aimed at cattle-raising and fattening households, but also measures designed to stimulate rural development through agro-industrialisation and employment generation.
Particular features of the beef industry suggest, at least a priori, that it may be well suited to promoting rural development. Cattle have long been part of Chinese agriculture if only for use as draught power. They are widely dispersed throughout China both in agricultural areas as well as in pastoral and semi-pastoral areas. Aspects of this widespread and changing distribution are discussed in the following section on regionalism. Raising or fattening cattle for beef production is an activity that many rural households can develop in conjunction with, or as an extension to, existing farm activities. Furthermore, the development of a beef industry opens many opportunities in associated activities for other rural households, thus facilitating rural and regional adjustment. Even though individual cattle-producing households are the foundation of the industry, impacts of industry and rural development extend to other participants in associated sectors. The emergence of a beef cattle industry has spawned a multitude of cattle dealers, slaughter households, offal dealers, beef dealers, and beef retailers and wholesalers. Many of the cattle dealers and slaughter households, in particular, started raising cattle in the 1980s and early 1990s. The revenue they received from the more favourable beef to feed grain prices of the time enabled them to branch out into cattle dealing, slaughtering and other more lucrative activities. Thus, beef industry development has helped to diversify the sources of incomes in many rural areas. The diversification can help build more robust rural communities that are more resilient to downturns or shocks in say the grains economy. Specialisation by agricultural households in cattle or other beef cattle related activities can also help promote efficiency in other farm activities and households. For instance, it may help small-crop households to consolidate and expand their land areas by sub-leasing land from households now engaged in non-land intensive activities such as cattle dealing (see Chen and Brown, 2001; Brown and Chen, 1999). Activities in the beef marketing chain, especially beyond cattle fattening, are often undertaken by members of the Hui minority nationality. Many Hui villages have organised themselves into specialised slaughter villages where numerous individual households in the village slaughter cattle and where some collective organisation of activities occurs. The beef industry is important in the development of many of these Hui communities. Any reform or modernisation of the beef industry needs to consider and involve members of the Hui community. The notion that development of the beef industry can contribute to rural development presumes that households have an incentive to engage in cattle production. Although cattle raising has the potential to increase farm household incomes, a thorough analysis of the relative returns and opportunity costs is required to assess the desirability of cattle compared with other farm and non-farm activities. The most rigorous analysis of the impact of cattle production systems on household incomes in China appears in Longworth et al. (2001, Chs 5-7). Tables I-III present only selected results from this analysis of relevance to this paper. Various cattle production systems are examined including unspecialised households that raise cattle as a sideline, and specialised households that fatten and trade cattle on a more commercial basis as well as commercial and household feedlots[4]. The analysis suggests that raising cattle to slaughter weight is an unprofitable venture under a wide range of assumptions for many of the poor households in agricultural regions that raise one or two head of cattle as a sideline to other farm activities (Table I). The unfavourable
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Table I. Economics of cattle production systems in China – unspecialised households
Source: Derived from Longworth et al. (2001, Chs 5-7)
2,254 54 1,870 1,348 384 1,678
1,406 405 1,635 1,312 2 229 678
5,565
7,765
4,331
12,096
Cropping (Rmb)
15,756 459 7,837 2,659 7,919
Total on-farm activities (Rmb)
4,025
4,025
Off-farm activities (Rmb)
20
Revenues Of which draught and manure value Costs Of which own feed Returns to labour, management and capital Returns to labour, management and capital (excluding value of own feed and draught and manure value)
Cattle (Rmb)
Other livestock (Rmb)
11,944
7,837
19,781
Total household (Rmb)
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returns are often masked by households not valuing, or fully valuing, their own produced feed (grain) that are fed to the cattle. The precise value derived from cattle activities depends on the circumstances of the households. Important non-cash items arise out of the cattle production including the value of the cattle for draught and the manure they produce (Table I). Although the analysis assigns generous values for these items, information obtained from households and other sources suggests that some households value these non-cash benefits at even higher levels. Other specific characteristics of households may also cause them to value the cattle more highly. Specialised cattle fattening households and small household feedlots fare better than the unspecialised households in cattle production and generate positive returns to labour, management and capital. Although these households use more feed than unspecialised households, their production systems convert the feed much more efficiently. Nevertheless, their returns depend on relative feed grain to beef price ratios. In particular, the analysis highlights the need for higher per kilogram liveweight prices for the finished cattle compared with the feeder cattle if these specialised cattle-raising households are to operate with commercial success. The under-valuation of own feed can mask the low or negative returns, especially for unspecialised households. Combined with the massive production-oriented support by Central and local government, this has led to the expansion of cattle and beef numbers observed in Table IV. However, where households have become aware of “hard budget constraints” of market-based valuations, the total number of cattle raised by unspecialised households has declined in recent years[5]. Furthermore, growth in the industry has been adversely affected where the government has wound back some of its production support. The low returns suggest that either cattle prices or the efficiency of these households need to rise if the beef cattle industry is to continue to promote rural development. The low returns come from the high proportion of beef sold in local wet markets. These low-value, localised markets will form the bulk of the Chinese beef market for many years. However, a degree of specialisation and co-ordination will be needed to generate the higher returns required to sustain a beef cattle industry and higher household incomes.
Rural development in China 21
Regionalism The use of cattle for draught led to their widespread distribution throughout China. With the development of a specialised beef cattle industry, the issue arises as to the optimal spatial organisation of activities in this new industry. The spatial organisation of industries is influenced by many factors. Much attention in China has focused on barriers to inter-regional trade that derive both from formal policies and from the
Returns to labour, management and capital
Cattle (Rmb)
Other livestock (Rmb)
Cropping (Rmb)
Total on-farm (Rmb)
6,088
2503
2106
5,480
Note: Based on draught cow and offspring, and fattening of 36 feeders in three lots of 120 days Source: Derived from Longworth et al. (2001, Chs 5-7)
Table II. Economics of cattle production systems in China – specialised households
Table III. Economics of cattle production systems in China – feedlots
Source: Derived from Longworth et al. (2001, Chs 5-7)
225 2127
354 269
Small-sized commercial (100 head capacity operating at 50 per cent utilisation) (Rmb)
275
261
Household feedlot (50 head capacity operating at 100 per cent utilisation) (Rmb)
22
Net profit per head turned off (base scenario) Net profit per head turned off (1996 scenario – 10 per cent higher feed prices and 20 per cent lower feeder and finished cattle prices)
Medium size commercial (900 head capacity operating at 55 per cent utilisation) (Rmb)
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Cattle
Beef
1986 (thousand)
1999 (thousand)
1986 (kt)
1999 (kt)
Anhui Hebei Henan Hubei Jiangsu Shaanxi Shandong Shanxi Central Plains
4,377 1,725 6,977 3,332 698 2,009 2,925 1,531 23,574
5,952 6,939 13,410 4,299 637 2,467 9,773 2,249 45,726
39 28 55 5 8 10 52 11 208
326 619 822 131 52 67 655 70 2,742
Heilongjiang Jilin Liaoning North-east
1,886 1,602 1,402 4,890
4,582 4,131 2,281 10,994
15 23 12 50
273 313 238 824
Chongqing Guangxi Guizhou Sichuan Yunnan South-west
0 5,955 5,101 9,602 7,564 28,222
1,606 7,707 6,428 9,721 8,187 33,649
0 13 9 45 17 84
89 40 64 214 126 533
Gansu Inner Mongolia Ningxia Qinghai Tibet Xinjiang Western Plains
3,068 4,056 273 5,445 5,138 3,095 21,075
3,327 3,797 555 3,782 5,276 3,705 20,442
20 51 2 36 37 50 196
72 178 30 61 83 206 630
Beijing Fujian Guangdong Hainan Hunan Jiangxi Shanghai Tianjin Zhejiang Other regions
100 1,210 5,379 0 3,647 2,679 68 68 758 13,909
136 1,146 4,168 1,384 4,939 3,747 60 188 406 16,174
2 4 25 0 8 5 0 62 5 111
24 20 45 18 130 52 1 25 9 324
China
91,670
126,985
649
5,053
Sources: SSB (1987); NBS (2000)
Rural development in China 23
Table IV. Cattle numbers and beef output by province and zone – 1986 and 1999
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activities of local governments (see, for example, Gilley, 2001). But do barriers to inter-regional trade and other activities of local governments impact on the spatial organisation of the beef industry in the way they are so widely reported to do for other industries? Brown et al. (2002) described the spatial distribution of the beef cattle industry according to a hierarchy of three levels of region. The first level makes the fundamental distinction between pastoral production systems (based on extensive grazing) and agricultural regions (based on intensive feeding and utilisation of farm household resources). The second level identifies beef cattle zones that have similar resource and factor endowments. These regions include the Central Plains and Northeast beef cattle zones in the agricultural areas and the South West and Western Plains beef cattle zones in the pastoral areas. Within these otherwise similarly endowed beef cattle zones arise a third level of regionalisation or “hot spots” of intensive beef cattle production. Table IV highlights the widespread distribution of cattle in China as well as the changing nature of that distribution. As mentioned, cattle have historically been located throughout China although the pastoral areas in North and West China in 1980 accounted for 25 per cent of the bovines and a disproportionately high 44 per cent of the beef produced. In 1999, although cattle numbers and beef production increased in the pastoral areas, their relative share of cattle numbers and beef production fell to 16 per cent and 12 per cent respectively. Most of the growth in cattle numbers and beef output has occurred in the agricultural areas of the Central Plains and the North East with the four provinces of Henan, Shandong, Hebei and Anhui alone accounting for 28 per cent of the cattle and 48 per cent of the beef in 1999. The various beef cattle zones have different production systems and resource endowments. Regions draw on these differences in the development of a beef cattle industry whether it be extensive pastoral resources in the Western Plains, grain in the North-east, abundant straw resources in the Central Plains or readily available supplies of green fodder in the South-east[6]. Despite highly variable resource endowments, many of the cost advantages cancel out across regions especially in localised, low-value, mass beef markets. Furthermore, the low value of local markets relative to transport costs and logistics limits the extent of inter-regional movements of cattle or beef to service these markets. As indicated in the previous section, however, returns from local beef markets and the derived demand for cattle may be insufficient to maintain resources in bovine and beef production. The extensive push for cattle and beef industry development has magnified the problem by increasing cattle and beef production beyond the limits of local demand in many areas. To sustain their cattle and beef industries, many surplus areas are under pressure to market into more distant areas with premium and niche markets. Compared with local beef markets and conventional production systems, the premium markets and niche systems require significantly more integration across parts of the marketing chain and across regions. Developments of this kind heighten the importance of beef market integration, which is the focus of the next section. This section, however, examines the influence that government-induced regionalism plays in guiding spatial activity in the beef cattle industry. The widespread concern typified in writings by Young (1997) and outlined in the article by Gilley (2001) is that local governments have erected regional trade barriers and that
this has hindered regional comparative advantage as well as rural development. Provincial self-sufficiency (particularly in grains) and local “commodity wars” (in wool, tea, etc.) have been the subject of considerable concern in the post-reform era (Longworth and Brown, 1995; Watson et al., 1989). Because of its more recent emergence, or because it does not have the profile of other staple agricultural commodities, direct barriers to the flow of either cattle or beef have been virtually non-existent. This is not to say that local governments have not influenced inter-regional flows of cattle and beef. Indeed, local governments exert a less overt but equally profound impact on the inter-regional flow of cattle and beef. Many local governments target the development of enterprises (abattoirs and feedlots)[7] in which they are the primary shareholder. In some areas, these enterprises are part of integrated county beef development projects. In contrast to private, profit-maximising and borderless companies, local government will locate enterprises and, wherever possible, source inputs from within their administrative borders. With few exceptions, localities (particularly counties) develop production-oriented plans, invest and coerce local industry participants with little regard for what is happening outside their borders. Such local government intervention can easily negate the benefits of specialisation and generate even larger excess capacity problems. Particular activities lend themselves to regional co-ordination and co-operation. For instance, in all but the most intensive prefectures, there are usually insufficient cattle to support more than one large abattoir, regional cattle saleyard or leather processing factory. Yet many prefectures contain several counties that operate similar and normally under-utilised facilities. Clustering of activities can be beneficial – regional saleyards, for instance, can attract dealers and cattle supplies from more distant areas and so support cattle slaughtering and beef- and offal-processing activities. However, too many facilities in neighbouring counties has led to destructive competition and the unviability of many facilities. There would appear to be a role for prefectures, in particular, to encourage some specialisation in counties – depending on skills, experiences and resources – and to facilitate co-ordination of activities between these county units. Such co-ordination will be of benefit to individual counties and the prefecture as a whole as catchment regions for supplies to these facilities extend beyond county borders. While the catchment regions also do not follow prefectural borders, prefectures are at least more consistent with the scale of operations, and prefectural administrations could be expected to have the wherewithal and motivation to facilitate such co-ordination. However, even in prefectures where fieldwork identified substantial benefits to all, inter-county co-ordination and co-operation were absent. Co-ordination and co-operation required at levels beyond the prefecture are even more problematic[8]. A major contributing factor to this lack of co-ordination and co-operation is the absence or underdevelopment of support mechanisms. Counties tend to be insular and have a poor knowledge of developments occurring outside their administrative borders. While other socio-political factors also explain the behaviour of local officials wanting to duplicate facilities in already crowded markets, the general lack of information flows or mechanisms to put differing regions in touch with each other for mutual benefit does not help. Thus a role exists for the Central, provincial and prefectural governments to facilitate such information flows.
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Some co-ordination arises within the existing General Food Company (GFC) network. Provincial GFCs in beef deficit regions may contact their counterparts in surplus regions to fill a particular order. In turn, the provincial GFC in the surplus region will source the beef through its network of county-level GFCs. Co-ordination through this channel, however, is limited and not without problems. First, there is an asymmetry of market and administrative power between the provincial- and county-level GFCs. The provincial level agency purchases from the county GFC at low prices and on-sells to the provincial GFC in the deficit region at inflated prices. Second, these channels and forms of co-ordination may have been appropriate in the planned-economy era when the GFC was the main slaughterer of cattle and distributor of beef. However, with the decline in importance of GFCs and a much more disaggregated slaughter and beef distribution sector, coordination and information flows through the GFC network now have a modest impact on industry integration. Third, the GFC network is primarily used to source beef from within the network to meet particular retail or wholesale orders. However, the co-ordination discussed above refers to activities in other parts of the beef marketing chain, rather than just beef distribution through the GFC network. For instance, it includes linking cattle marketing with cattle slaughtering, and cattle slaughtering with various forms of beef and by-product processing. Genuine industry integration requires a far more comprehensive set of facilitation measures including information flow and the registration of participants well beyond the GFC system. The central government, too, has influenced spatial activity of the cattle and beef industry in several ways unrelated to direct trade restrictions. As agents of the central government, local governments respond voluntarily to incentives to increase production volumes and to “agro-industrialise”, as well as responding to national-level policies or edicts on issues like breed selection and food safety[9]. One important aspect of central government intervention is the tendency to apply uniform policies throughout the country. For instance, selection criteria used to determine which counties participate in the Straw for Beef programme are notionally the same for all China[10]. Another example is that the more than 20 centrally approved cattle breed stations throughout China are stocked with remarkably similar breeds. Although the policies are uniform, the heterogeneous nature of the Chinese cattle and beef industries means that their impact is extremely uneven across regions. Thus, although the Straw for Beef programme has been implemented in all but two provinces or municipalities, its main effect has been in intensive areas of the Central Plains. Administrative convenience combined with a poor understanding of the diversity of the beef cattle industry partly explains the preference for simpler uniform policies. A more targeted approach is required in many areas of regional and industry development. For instance, the breeds kept on the stations need to be tailored to regions they service and complement rather than duplicate other stations. Integration Cases where local industries have outgrown local markets call for the integration of producers, processors and consumers in different regions. Accessing premium markets also raises integration issues not only because more-affluent consumers live in distant municipal areas, but also because servicing them requires specialised marketing and processing activities that may occur in different locations and involve specific inputs.
The different value segments of the market have different lengths of marketing chain, which impact on the integration between producers, processors and consumers. In low-value beef markets where product attributes are less important, the marketing chain is quite short, with many slaughter households integrated into small, family-operated retail outlets. Consumers in premium markets, however, are much more specific about their requirements. Many companies that have invested large amounts in establishing extensive facilities to fatten and slaughter cattle to service premium markets have faltered through their inability to tap into premium market distribution channels and to meet the specific requirements of consumers[11]. Improved integration between producers, processors and consumers can be achieved either through vertical integration or through better market services. Market services, designed to improve pricing accuracy and efficiency, such as grading schemes, market reporting, and quality assurance schemes, are non-existent or poorly developed in the Chinese beef sector. The lack of these marketing services not only reflects the relatively recent emergence of the industry, but also the poorly developed state of general market institutions in the Chinese economy. They are also broadly in line with the low-value nature of the beef market and the disaggregated nature of the sector. The cost of implementing a detailed, widespread and trusted objective grading scheme in the disaggregated mass beef market would be prohibitive and highly likely to exceed any price premiums or gains in consumer utility derived from more accurate product description. The situation applies even more in the case of a grading scheme for live cattle entering this low-value market given the heterogeneity of the cattle involved. It may be viable to implement a grading scheme specifically aimed at premium beef markets because of their advantage of higher premiums and a more concentrated sector with fewer participants. However, implementation of a grading scheme even for this sector would not be straightforward. Most processors that supply the premium sector seek to differentiate their product and so would prefer to develop their own system of product description rather than adopt a uniform, industry-wide grading system. However, as the premium market grows and more firms enter the industry touting their premium market credentials, pressure may grow for a government-backed, uniform, industry-wide product description or quality-assured grading system. Given the problems associated with establishing or upgrading market services, vertical integration has become the major mechanism of linking market segments and regions. In the mass beef market, slaughter households have expanded their operations into beef dealing, wholesaling and retailing. As the entire integrated operation involves members of the extended family, close acquaintances or ethnic groups, the linkages are strong. On the other hand, vertical integration in premium beef markets has been internalised within enterprise or project structures[12]. In the Chinese context, agro-industrialisation implies vertical integration up the marketing chain, further processing of agricultural commodities, and greater economies of scale[13]. The official push can be seen as a response to undeveloped marketing services (in the Chinese agriculture sector), and to align production activities more closely with consumer demands. One of the major problems in pursuing vertical integration through enterprise and project structures is that they are still largely production- or supply-driven. These
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large, vertically integrated enterprises or projects have developed the infrastructure and skills in cattle breeding, fattening and slaughtering as well as beef and offal processing. However, in virtually all cases the facilities were developed and operations commenced prior to premium markets being secured. Some projects have enlisted the assistance of established Chinese and overseas distribution companies in non-beef commodities[14]. Nevertheless, with a few notable exceptions – such as the Hua’an, Fucheng and Chundu Companies – downstream integration remains poor[15]. For example, vertically integrated beef companies in China tend only to be integrated with their immediate suppliers and customers. Access to and knowledge of premium markets is often more fundamental to the viability of these companies than access to raw material supplies. Consequently many of the beef development projects need to re-orient at least some of their supply-driven focus to a greater market orientation. Although vertical integration may be the only plausible option for integrating markets at the current stage of industry development, the process and workings of vertical integration could benefit from improved marketing services. Various types of market reporting could alert them to alternative suppliers and markets and improve their overall efficiency. As outlined in the previous section, cross-regional strategic alliances would also benefit vertically integrated enterprises. However, these alliances also require systems and institutions that can register and identify the interests, needs and strengths of potential partners. Scale of development One key issue for the Chinese Government to consider in its promotion of the beef cattle industry is the appropriate scale of development. For instance, within beef development projects, should it promote top-down development with the construction of large and centralised abattoirs, feedlots and related units or should it pursue a more bottom-up approach of encouraging small-scale household units? Notionally, flagship programmes like the Straw for Beef programme and the World Bank Development Project have been based on utilising the resources and promoting small-scale household production[16]. Many officials, however, channel these funds into industry modernisation by constructing “dragon head” large-scale feedlots, saleyards and abattoirs. The appropriate scale of development remains a contentious and unresolved issue among Chinese government officials. Many aspects of cattle production and slaughtering are suited to small-scale production. As argued earlier, returns for unspecialised households are low or masked by unrealistic subjective valuations placed on inputs, specialised (though still small-scale) fattening households can generate reasonable returns, especially in relation to some of the larger commercial feedlots (Table III). Furthermore, these households are more flexible than large feedlots and more able to cope with changes in beef/feed price ratios. The relative merits of small-scale production are even more pronounced for the low-value slaughter sector. GFC abattoirs operate at a competitive disadvantage to slaughter households in the mass beef market with a net loss of Rmb603 per head slaughtered compared with a net profit of Rmb232 per head slaughtered for slaughter households (Longworth et al., 2001, Boxes 9.5 and 9.6). Slaughter households operate at lower per beast slaughter costs, at higher levels of utilisation, at a scale where markets are easier to access, and are more integrated into other parts of the beef marketing chain[17].
Small-scale cattle dealers, beef dealers and offal dealers figure prominently in the beef cattle industry. One of the major rural development benefits associated with the small-scale production in the beef industry is that it has made the rural economy much more diverse. Compared to enterprises, rural communities and households are more able to adjust to changing conditions and are less reliant on single industries. In evaluating the benefits of small-scale development, attention needs to be focused on these wider benefits to the community and not just impacts within the beef cattle industry. Not all areas of the beef cattle industry are suited to small-scale production. Some by-product processing including leather production and medicinal by-products exhibit major economies of larger scale production. In the case of the leather industry, legislative restrictions and economies in waste treatment have promoted a massive adjustment towards larger scale enterprises. Economies in some specialised offal and by-product processing activities also arise in the access to capital to build such facilities. Premium markets warrant levels of quality assurance and hygienic processing that individual households cannot provide. Thus abattoirs rather than slaughter households will continue to supply premium markets. Nonetheless, Chinese abattoirs operate at a small scale relative to modern, advanced, Western abattoirs[18]. The modern Western mega-plants would find it extremely difficult in China to attract the number of cattle needed to operate these abattoirs at anywhere near capacity. Local regionalism, outlined above, along with transport and other infrastructure limits the size of catchment regions. The relatively small and highly fragmented nature of the premium market also limits the size of operations. Many small-scale, private-shareholding, integrated feedlot abattoirs – some of which slaughter only 10,000 head per annum – operate more successfully than their larger counterparts because they require relatively few premium market buyers to purchase all their products and services. As the scale extends beyond 10,000 head per annum, teams of buyers and specialised marketing skills and experience are required to access the crowded premium markets. Some of the more successful operations such as Hua’an are only middle ranking in size among Chinese abattoirs. Large operations face the problem of trying to access sufficient high-throughput customers in the premium market. If unable to do so, the large operations are crippled by high costs and low returns from being forced to sell a major proportion of their output in the low-value mass beef market. Economies, however, do arise in inspection, food safety and quality assurance. That is, it is infeasible and prohibitively expensive to have cattle inspected both ante- and post-mortem at every household slaughtering point. The introduction of designated slaughter points will help to centralise inspection procedures, unify them with tax collection procedures as well as facilitate some forms of beef distribution. Designated slaughter points also have the potential to achieve economies in the collection and utilisation of slaughter by-products. The promotion of these other marketing services may encourage utilisation by slaughter households of these designated slaughter points that were established by decree to ensure inspection and slaughter of cattle at hygienic facilities. Quality assurance schemes, such as “Green product” registration[19], or access to particular high value premium markets also require skills and information management normally the preserve of larger operations.
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Even where political or economic imperatives dictate larger-scale beef development projects, this does not necessarily exclude the involvement of small-scale entities. Examples exist of beef development projects with large-scale breeding programmes, feedlots, abattoir and processing operations that do involve individual households in the raising of calves and feeder cattle and, in some cases, the fattening of feeder cattle to slaughter weight. Furthermore, cattle-raising households can become vulnerable to the viability of the enterprises and to contract risks and enforcement systems. Integrating these different scales of production and making the most of the advantages of both will be crucial in promoting a diverse and robust rural economy as well as a modern and competitive industry. Concluding remarks In principle, using the beef industry as a means of promoting rural development in China has much merit. Cattle are raised by millions of poor small households throughout the country as a sideline to other farm activities. Furthermore, the beef cattle industry involves many other rural household activities from cattle dealing through household slaughtering. It has diversified the rural economy in regions seeking alternative sources of income and with few available development options. The other feature of beef cattle industry development is that potentially it has something to offer all rural regions in China whether they be the grain intensive plains of North East China, the agricultural intensive Central Plains, the hilly South West regions or the vast pastoral areas. Even though beef cattle industry growth in agricultural areas has outstripped that in the pastoral regions, the industry in the pastoral region has benefited from developments elsewhere. Specifically, beef industry developments in agricultural areas have facilitated various marketing channels which have allowed herders more options for the management of their fragile pastures and for the production of higher valued products[20]. Although all regions can participate in beef industry development, realising the benefits of that development requires regions to tailor their production and marketing systems to regional factor endowments and conditions. The factors mentioned above partly explain the major push by governments at all levels to develop a beef cattle industry. The push was backed by a range of production-oriented support measures by central and local governments. However, levels of government support will not continue indefinitely, and ultimately the role of the beef industry in promoting rural development will depend on the returns it can generate for households. Returns for cattle raised for beef were sound in the initial stages of industry development following a period when cattle were not available for slaughter and beef not widely available outside the Muslim community. But in a more mature stage of industry development, and when opportunity costs and real returns are taken into account, beef cattle generate little financial reward for unspecialised households. Thus, the beef industry has not become a major contributor to rural development in the way that some government officials anticipated. Nonetheless, in many areas, cattle and beef may be no worse than other “pillar” industries being used to promote rural development. That is, they may be a loss minimising option to development when other more drastic options such as wholesale transmigration are politically and socially undesirable. Under these circumstances, the
government should view any beef industry support from a social perspective rather than from an industry efficiency perspective. For instance, the involvement of smallholders in large-scale agro-industrial, beef development projects should be accorded the highest priority. Ultimately the beef industry must generate reasonable returns for cattle-raising and fattening households if it is to maintain an ongoing role in rural development. The low value of current mass beef markets cannot sustain relatively favourable returns, especially for the unspecialised households. Thus premium markets need to be developed and accessed while regions need to tailor their production and marketing systems. To do so requires a much greater level of integration across regions and across different parts of the marketing chain than that which currently exists. While various agro-industrial programmes have provided the capital for vertically integrated (production through processing) beef development projects, many of these ventures have faltered because of their inability to access premium markets. The primary role for the Chinese Government would seem to be in facilitating the smooth transition of the beef cattle industry to a more mature industry. Rather than supporting production directly, support should be directed at public-goods-oriented measures such as the provision of designated slaughter places at a price and with services that attract household slaughters to slaughter there and which, at the same time, improves the safety of the beef consumed. Pressures on the Chinese Government that have brought about campaigns and strategies like “Develop the West” are set to continue[21]. Industry policy can be a powerful tool in influencing regional development. However, the actions of local government may influence the regional impacts of industry policy in ways never intended by the central government. Furthermore, no amount of resources or support may be sufficient to promote regional development in inland China if these regions remain poorly integrated with other areas in China and with other parts of the Chinese economy. Finally, large-scale enterprises that displace individual household activities may not necessarily promote development in rural China. Modernising industries while promoting local development calls for the careful design of large-scale development projects. Notes 1. For details on the “Develop the West” programme from official sources see the web page of the Office of the Leading Group for Western Region Development of the State Council on: http://www.westchina.gov.cn/english/ 2. Detailed analyses of various aspects of cattle and beef industry development in China are outlined in a series of related books. Longworth et al. (2001) analysed the agribusiness and marketing systems for beef in China, while Brown et al. (2002) investigated the regional dimensions of the industry. Waldron et al. (2003) discussed the institutions that impact on cattle and beef industry development and the impact of this industry development on rural development. Some of the arguments presented in this paper draw on the detailed analyses reported in these books. 3. Although references in this article are made to cattle, they are not the only bovines in China that supply beef, draught power and other products. In 1999, of the 127 million bovines in China, 86.8 million were cattle, 4.7 million were dairy cattle, 23.5 million were water buffalo and 12 million were yak. In some elevated pastoral areas, yak are the main bovines while water buffalo predominate in the southern agricultural areas. Thus while “cattle” are
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5.
6. 7.
8. 9. 10.
11.
12. 13. 14.
15. 16. 17. 18.
referred to for convenience, the arguments advanced in the paper relate to broader bovine industry development. The analysis in Longworth et al. (2001) was based on detailed simulation models of household cattle producers – both unspecialised and specialised – and feedlots. Costs and revenues were attributed to various crop, cattle, other livestock and off-farm income generation activities to form synthetic budgets. At the core of the simulation models was a reconciliation of household production and the use of feed, labor, manure and other inputs, as well as household outputs. The models were designed to disentangle the opportunity costs of various intermediate inputs such as feed and manure. Data used to construct the models came from survey questionnaires and detailed interviews with cattle-raising households in regions throughout China. The information contained in the surveys and follow-up interviews was augmented by secondary information as well as information from knowledgeable, local animal husbandry officials. Full details of the model and analysis appear in Longworth et al. (2001, Chs 5-7). For instance, the number of unspecialised cattle households with fewer than four head of cattle in Pingdingshan Prefecture in the major cattle- and beef-producing province of Henan fell from 294,000 in 1995 to 243,000 in 1998, with the number of cattle raised by these households falling from 588,000 to 486,000 over the same period (Longworth et al., 2001, Tables 4.2 and 4.4). Brown et al. (2002, Ch. 3) set out in detail the different factor endowments in each of the beef cattle zones. The beef development companies normally involve some integrated cattle-fattening/ cattle-marketing/cattle-slaughtering/beef-processing/leather processing activities designed to pull the rest of the industry within the region along. The lack of this regional planning may seem ironic in a system that has evolved from a planned economy. However, it is a feature of much industry development in modern China. Brown et al. (2002, Section 5.1) describe the regional impacts that central government measures have had on the beef cattle industry. In practice, some regions in say the pastoral areas have no possibility of meeting the criteria, in which case the criteria are “relaxed” to ensure at least some counties in all regions are represented. For instance, refurbished abattoirs that sell 80 per cent of their beef into premium markets can generate profits of up to Rmb792 per head slaughtered (Longworth et al., 2001, Box 9.3). However, if they cannot access premium markets and are forced to sell all of their beef onto the mass market, then their net returns plummet to Rmb986 per head slaughtered. Much of the beef from many of these projects also finds its way onto mass beef markets. See Waldron et al. (2003, Ch. 10) for a discussion of the various models of agro-industrialisation in China. For instance, a newly established company in Sichuan has sought an alliance with an established domestic spirit company, Wuliangye, and a global beef producer and marketer, AFFCO, to improve the marketing and distribution side of its operation. Profiles of these companies can be found in Longworth et al. (2001, Appendix C). Details of these programs appear in Longworth et al. (2001, Section 2.4). For a detailed analysis of the costs of slaughtering in different types of works, see Longworth et al. (2001, Ch. 9). For instance, the latter have a capacity to slaughter around 2,500 head per day compared with the larger Longworth et al. (2001, Ch. 9) Chinese abattoirs that can only slaughter up to 400 head per day.
19. “Green product” registration has emerged from chemophobia-related concern by predominantly affluent urban consumers over food produced in intensive agricultural regions. 20. A more detailed discussion of the impact of beef industry development on herder incomes and rangeland degradation in the pastoral region appears in Brown et al. (2000). 21. To create employment and help resettle hundreds of thousands of residents in the Three Gorges Dam area, China will allocate Rmb1.1 billion (US$132 million) to develop animal husbandry. The plan is to increase cattle numbers by one million cattle and sheep numbers by four million. In addition, a Rmb100 million (US$12 million) meat processing plant built by China’s largest meat processing company, the Shuanghui Group (Three Gorges Probe.com, 2002). References Brown, C.G. and Chen, K. (1999), Land Reform, Household Specialisation and Rural Development in China, Agricultural and Natural Resource Economics Discussion Paper, No. 08/99, School of Natural and Rural Systems Management, The University of Queensland, St Lucia, available at: www.nrsm.uq.edu.au/agecon/Pub/pub/discussion/discussion.htm Brown, C.G., Longworth, J.W. and Waldron, S.A. (2002), Regionalisation and Integration in China: Lessons from the Transformation of the Beef Industry, Ashgate Publishing, Aldershot. Brown, C.G., Waldron, S.A. and Longworth, J.W. (2000), “China’s rangeland law and implications of the expansion of the beef cattle industry for sustainable development in pastoral areas”, The Japanese Journal of Rural Economics, Vol. 2, pp. 1-13. Chen, K. and Brown, C.G. (2001), “Addressing shortcomings in the household responsibility: empirical analysis of the two-farmland system in Shandong Province”, China Economic Review, Vol. 12 No. 4, pp. 20-32. Gilley, B. (2001), “Breaking barriers”, Far Eastern Economic Review, Vol. 164 No. 27, pp. 16-19. Longworth, J.W. and Brown, C.G. (1995), Agribusiness Reforms in China: The Case of Wool, CAB International, Wallingford. Longworth, J.W., Brown, C.G. and Waldron, S.A. (2001), Beef in China: Agribusiness Opportunities and Challenges, University of Queensland Press, St Lucia. Three Gorges Probe.com (2002), “China to invest heavily in agriculture in Three Gorges”, available at: www.threegorgesprobe.org/tgp/index.cfm?DSP ¼ content&ContentID ¼ 5468 Waldron, S.A., Brown, C.G. and Longworth, J.W. (2003), Rural Development in China: Insights from the Beef Industry, Ashgate Publishing, Aldershot. Watson, A., Findlay, C. and Du, Y. (1989), “Who won the wool war?”, The China Quarterly, Vol. 118, pp. 213-41. Young, A. (1997), The Razor’s Edge: Distortions and Incremental Reform in the People’s Republic of China, mimeo, University of Chicago, Chicago, IL.
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Major issues relating to end-of-life care Ethical, legal and medical from a historical perspective Robert F. Rizzo Canisius College, Buffalo, New York, USA Abstract Purpose – Ethical, legal and medical progress has been made in end-of-life care, addressing crucial issues in the application of principles to clinical cases. However, despite the progress, there are still unresolved issues concerning the scope and effectiveness of personal decision making and the proper use of last resort measures in terminal care. An analysis of the progress discloses both the advances and the problems still confronting patients and their families. From this perspective, one gains a better understanding of the reality of terminal care and areas that call for reform. Design/methodology/approach – A historical analysis reveals the interrelation between moral and legal reasoning and their differences. It also discloses developments in the moral and legal realms that recognize rights of the patient with regard to treatment decisions. A critique of ethical and legal reasoning and medical practice pin-points the salient problems. Findings – There are still problems in the application of legal and ethical principles to specific cases. These problems are complicated by poor physician-patient communication, the ineffective use of advance directives and the impact of the market economy on comprehensive palliative care. These call for reform to protect personal rights and dignity at the end of life. Originality/value – A historical approach, too often lacking, promotes insight into the complexities of end-of-life care. An analysis flowing from such a perspective pin-points not only the advances in ethical, legal and medical practice but also the flaws and inconsistencies that call for a more realistic approach in reasoning and practice. Keywords Medical care, United States of America, Human rights (law), Medical ethics, History Paper type Conceptual paper
International Journal of Social Economics Vol. 32 No. 1/2, 2005 pp. 34-59 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510575621
Introduction There has been much ethical and legal debate over the intrinsic differences between various approaches to end-of life. This debate has intensified as advances in medicine have increased longevity but also have prolonged the dying process through life-sustaining procedures. As the prospects of therapy diminish in a terminal condition, care becomes more palliative. Unlike therapeutic care, whose objectives are cure and recovery, palliative care focuses directly on comfort, pain relief, symptom control, and attention to the psychological and spiritual needs of the patient. However, even with the best of palliative care, there are still questions about the ultimate decisions leading to death. Is there a significant difference between passive euthanasia defined as the withholding or withdrawing of life-sustaining measures, active euthanasia (mercy killing) and assisted suicide? The relevant question is how the USA arrived at its present moral and legal positions on this question. An examination of moral and legal developments since the 1950s reveals the direction the nation has taken in its attempt to resolve ethical and legal issues. In order
to gain insight into the underlying ethical and legal principles and their interrelation, it is necessary to trace the unfolding of the moral tradition and its influence on both statutes and judicial rulings. Then follows a review of precedent-setting judicial decisions and laws on advance directives, examining their contributions and shortcomings. Finally, attention turns to unresolved issues and attempts to address them, particularly, those related to physician-patient communication and to advance directives. The hope is that an understanding of the developments will contribute to a clearer perspective on the progress and the unresolved issues. The present state of the law In the USA, the right of the competent individual to authorize the withholding or withdrawing of life-sustaining treatments in a terminal condition even at the risk of hastening death has broad moral and legal support. No medical, ethical or legal distinction is made between withholding life supports and withdrawing them. There is broad consensus on this point. Nevertheless, in some cases, it is psychologically more difficult to withdraw treatment in progress than never to start it. On the other hand, active euthanasia, whether requested by the patient or not, is regarded as murder under common law and statutes on the grounds that the malice of murder is established by the intent to kill without justification. To assist in suicide is regarded as a felony. The vast majority of states have criminalized assisted suicide, many through their statutes and others through their common law. Only Oregon has made it lawful through voter referendum. However, the Death with Dignity Act (US Congress, 1996) did not officially become law without a struggle against legal challenges (Lee v. Oregon, 1997) to the first referendum of 1994. In November 1997, a mail ballot officially enacted the Death with Dignity Act into law. The law’s provisions stipulate that an adult, at least 18 years old and a resident of Oregon, is suffering from a terminal disease diagnosed by the attending physician and a consulting physician and has made a voluntary informed consent for medication for ending his or her life. In opposition on the federal level, the Pain Relief Promotion Act of 1999 (US Congress, 1999) was introduced in the US Congress to amend the Controlled Substances Act (CSA) by rendering any State law authorizing or permitting assisted suicide “without force and effect” in implementation of CSA. It does not directly void Oregon’s law, but it prohibits physicians from prescribing lethal doses of substances controlled by CSA. With its passage, Attorney General John Ashcroft promulgated the rule, “Dispensing of controlled substances to assist suicide” in the Federal Register (2001, 66 FR 56607) on November 9, 2001. It states that: . . . assisting suicide is not a “legitimate medical purpose” within the meaning of 21 CFR 1306.04 (2001), and that prescribing, dispensing, or administering federally controlled substances to assist suicide violates the Controlled Substances Act.
Although physicians might still be able to prescribe lethal doses of substances not federally controlled, the American Medical Association (2000), which strongly opposes assisted suicide, supported its passage for several reasons. In addition to providing for training and education of law enforcement and health professionals on the proper use of controlled substances, protocols and evidence-based practices of palliative care, there is an explicit provision that recognizes the “doctrine or rule of double effect” in aggressive pain management. It protects physicians that use medically-controlled
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substances to relieve pain “even in cases where such efforts may unintentionally increase the risk of death” (American Medical Association, 2000). An examination of the rule and its relation to the US Supreme Court rulings will come later. However well intentioned, the law has the potential of raising not only constitutional problems relating to conflict of federal and state law, but also issues of its implementation. With its enforcement, will physicians be more concerned than ever of the watchful eye of the government and even staff members in their pain management? The question is whether the rule of double effect can be meaningfully applied in a litigious atmosphere, so characteristic of the society. Moral concepts and principles behind the law As the President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research (henceforth President’s Commission) concluded in 1983, laws, judicial opinions, regulations and medical policies should evaluate what is in the best interests of the patient by weighing the benefits and burdens of treatments in their impact on the overall condition or quality of life and not merely on biological existence as the only value. This conclusion was based on an understanding of the analyses of ethicists that, since the 1950s, have proposed such an approach to the ethical dilemmas of withholding and withdrawing treatment in terminal cases. The religious moral traditions have led the way to resolving some issues of withholding and withdrawing treatment in terminal cases, while rejecting assisted suicide and active euthanasia In the1950s, Gerald Kelly, a Roman Catholic moral theologian, addressed these issues in two articles. In “The duty of using artificial means of preserving life” (Kelly, 1950), he made a clear distinction between the overall condition of the patient and the specific effects of the disorder. The person with a diabetic or kidney disorder benefits from treatments to the extent that they enhance the quality of life encompassing physical, psychological and social dimensions. They do not merely prolong the dying. The progress of the disease is significantly halted or reversed so that the benefits to the total condition outweigh the risks and burdens of treatments. Kelly considered such means “ordinary” in the sense that they offer reasonable hope of benefit, not outweighed by excessive pain, suffering or other grave consequences including financial loss. Kelly (1951, p. 550) emphasized that in the evaluation of “extraordinary” the primary concern is the effect of treatment on the total well being of the person and not its isolated effect on a particular disorder or its routine use. He reiterated the crucial point stated in 1950 when he wrote that “it is one thing to use oxygen to bring a person through a crisis; it is another to use it merely to prolong life when hope of recovery is practically negligible” (Kelly, 1951, p. 214). In his opinion, the evaluation of “extraordinary” could also possibly apply to the use of insulin for a diabetic cancer patient or intravenous feeding in the final stages of a painful terminal condition. Focus should be on benefits to the total condition and not on the effects of a specific disorder. He also upheld the prerogatives of the next-of-kin in the event of the patient’s incompetence to make the decision in accordance with the individual’s wishes or best interests. Pope Pius XII (1958) substantially applied the basic moral concepts and principles of Kelly’s analysis in a speech to physicians and anesthesiologists. The Vatican’s
(1980) Declaration on Euthanasia restated the moral evaluation by noting that whether one employs the older terminology (“ordinary” and “extraordinary”) or discusses the means in terms of “proportionate” and “disproportionate, the moral evaluation is the same. It involves “studying the type of treatment to be used, its degree of complexity or risk, its cost and possibilities of using it, and comparing these elements with the result that can be expected, taking into account the state of the sick person and his or her physical and moral resources” (Vatican, 1980, pp. 294-6). In commenting on the “burden-benefit” assessment, McCormick (1985) stated that, in the total moral evaluation, the focus should be on the quality of life or of continued existence. He correctly noted that the President’s Commission agreed with this point in defining the patient’s best-interests in terms of relief of suffering, the preservation or restoration of functioning, and the quality as well as extent of life (President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research, 1983, p. 135). By the 1970s, this ethical evaluation of means and principles of obligations had grown into a wider consensus among prominent Jewish, Catholic and Protestant ethicists and in society at large (see President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research, 1983, pp. 60-90; Vanderpool, 1995; Weir, 1989). While they are opposed to active euthanasia and assisted suicide, they accept the moral validity of omission of “disproportionate” or “morally extraordinary means” in the proper circumstances of a terminal condition. Their definitions are primarily ethical in nature in terms of benefits and burdens to the patient and not technical or medical in the sense of standard practice or experimental. They would regard “extraordinary” or “disproportionate” treatment that, while it might remedy specific problems collateral to or caused by the disorder, leaves essentially the terminal condition unchanged. The dying process is merely prolonged. The moral position states its fundamental principles in terms of duties. It applies the principle that one is not obliged to use “extraordinary” or “disproportionate” means to preserve one’s life. It goes on to state that, in the event of the patient’s incompetence, the next-of-kin has a primary role in deciding in behalf of the patient in accordance with his or her wishes or best interests. The paramount concerns are the principles governing obligation to preserve life and the intention behind the commission or omission. These principles found their way into judicial rulings, but not always with the clarity one would wish. At this point, it is worth noting the recent statements of Pope John Paul II (2004) that have the potential of creating difficulty for Roman Catholic physicians and hospitals. In an address to Catholic medical associations, the Pope raised serious questions for Catholic hospitals, particularly those in the USA, that have honored advance directives in regard to cessation of artificial hydration and nutrition in a persistent vegetative state (PVS). He affirmed the moral obligation to provide artificial hydration and nutrition to patients in PVS without regard for the length of time in such a state. He made his fundamental point in this way: I should like particularly to underline how the administration of water and food, even when provided by artificial means, always represents a natural means of preserving life, not a medical act. Its use, furthermore, should be considered, in principle, ordinary and proportionate, and as such morally obligatory, insofar as and until it is seen to have attained
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its proper finality, which in the present case consists in providing nourishment to the patient and alleviation of his suffering (Pope John Paul II, 2004).
The moral obligation follows from several considerations, namely: the condition is not terminal; the care is minimal; death by starvation or dehydration is the only possible outcome of withdrawal; and death is the intended outcome. His conclusion is that withdrawal in this condition amounts to “true and proper euthanasia by omission”. This evaluation raises points of conflict with medical, ethical and legal developments that will be addressed. The statement that artificial hydration and artificial nutrition are not medical acts but natural means of preserving life does not agree with either the medical or legal view of their use. The question is how will the hospitals in the Catholic Hospital Association deal with these statements since up to now they have regarded such treatment as medical and have allowed removal in these cases, basing their decision on legal standards and laws. Other questions loom large. How does one know when the treatment becomes “disproportionate”? Will the quality of life in terms of burdens outweighing benefits be sacrificed in behalf of the mere extension of living in PVS? Unless there is clarification of the Pope’s statements in regard to both terminology and analysis, one can expect that Catholic hospitals in the USA will find themselves in a difficult position in complying with advance directives directing the removal of artificial hydration and nutrition in cases of PVS. An examination of prominent cases of patients in PVS, which have engaged the courts since the 1970s, will help to clarify the legal issues and developments and highlight the points of conflict between the analysis of the Pope and that of the US courts. Judicial rulings: positive and negative aspects Since the 1970s the courts have applied three standards in cases of withholding or withdrawing treatment in the best interests of the patient. The standards are: “clear and convincing evidence”, “substituted judgment”, and “best-interest”. The first is the easiest to apply and most favored by the courts. Whether known by verified oral or written statements, clear and convincing evidence of the adult patient’s wishes holds central place in the eyes of the court. It is regarded as the strict “subjective test”. In the absence of such evidence, the courts have resorted to substituted-judgment standard that relies on some subjective factors. This means that someone else makes the decision for the incompetent patient in light of personal knowledge of the patient’s values, beliefs, personality and life-style. The last standard is the best-interest standard, which the courts have used in cases where there is no clear and convincing evidence of the patient’s wishes or where there is no one who personally knows the patient and particularly where the patient is too young to have formed mature values, beliefs and personality. It has been called “the pure objective test” to distinguish it from the other two standards. The ruling of the New Jersey Court in the case of Karen Quinlan set the precedent for the application of these standards. The case of Karen Quinlan raised wide public interest in decisions relating to incompetent patients. In In re Quinlan (1976), the New Jersey Supreme Court established a legal precedent. It led the way by relying on ethical principles and definitions formed in the aforementioned moral tradition. The ruling stated that a competent patient has the constitutional right of privacy to make decisions in regard to treatment or non-treatment. It further applied the standard
of substituted judgment that in the absence of clear and convincing evidence of the person’s wishes allows the next-of-kin to make decisions by relying on personal knowledge of the individual’s personality, beliefs and values. It weighed the interests of the State to intervene against the right of the patient and the role of the next-of-kin in the decision-making. It concluded from medical testimony that, in view of Karen Quinlan’s irreversible unconscious condition in PVS, her prognosis was poor despite life supports. In this instance, the Court focused on the issue of removing the respirator. In light of the poor prognosis, it reasoned that the respirator was an “extraordinary” means of preserving her life. It was “extraordinary” in the ethical sense that it was more burdensome than beneficial. The State’s interests in intervening to preserve her in this condition were not compelling in light of her prognosis and could not outweigh the patient’s right to decide if competent, and in this case more importantly, the next-of-kin’s legal authority to substitute judgment for her. The weighing of the burdens and benefits of treatment implied the application of the best-interest standard in conjunction with substituted judgment. Subsequent decisions of the New Jersey Supreme Court have refined its understanding and application of the principles and standards of the Quinlan decision. However, it has been a difficult course that courts have not always followed with clarity of perception and interpretation. The New York Court of Appeals, the highest court in the state, revealed a deficient understanding of what constituted invasive medical treatment as morally extraordinary in the case of Anthony Storar (In re Storar, 1981). Storar was a mentally incompetent patient in a terminal condition (life expectancy of six months or less) from bladder cancer and in severe pain from the condition. The majority ruled that the transfusions should not be stopped at the request of the mother because courts have mandated such treatment in similar cases (e.g. a child of Jehovah’s Witness parents) and that the transfusions were tantamount to feeding. The minority opinion disputed the majority’s interpretation of what constitutes “extraordinary” treatment, concluding that the transfusions were merely prolonging the dying process. In doing so, the minority contributed to a more realistic application of the best-interest standard, which was not readily grasped in subsequent rulings of some state courts. In Barber v. Superior Court (1983), the California Court of Appeals of the Second District demonstrated a firmer grasp of the principles of the Quinlan decision than did the majority in the Storar decision. It held that physicians charged with murder for removing artificial hydration and nutrition from an irreversibly comatose patient at the request of the family were not guilty of the crime. It based the decision on the substituted judgment standard and on an analysis of benefits and burdens of the treatment on the patient, avoiding the use of such terms as “ordinary” and “extraordinary”. The benefit-burden analysis would become an important issue in subsequent rulings. In In re Conroy (1985), the New Jersey Supreme Court dealt with the case of an incompetent elderly patient. The Court elaborated on the principles and standards of the Quinlan ruling. It stated that clear and convincing evidence must be present to satisfy the “subjective test” that verifies the explicit wishes of the patient. Such a test best complies with the patient’s right of self-determination, which also includes the right of voluntary informed consent. This right is rooted in the common-law tradition. In this decision as in subsequent ones, the Court avoided the invoking of the constitutional right of privacy affirmed in the Quinlan ruling. Other courts have also
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preferred to use the common-law right of self-determination as the major principle for determining treatment or non-treatment. In addition to the subjective test, the Court referred to the substituted-judgment (“limited objective test”) and best-interest standards (“pure objective test”). However, the analysis of these standards fell short of clarity. Other rulings revealed the struggle the Court was having with basic concepts. The case that revealed some of the differences of interpretation among the justices of the New Jersey Supreme Court was that of Nancy Jobes, a patient in a PVS condition. While it favored, as do other courts, clear and convincing evidence of the patient’s wishes, it found Jobes’ prior statements to be “remote, general, spontaneous, and made in casual circumstances,” and therefore not constituting “clear proof of a patient’s intent” (In re Jobes, 1987, 108 NJ at 412). Unable to apply the subjective test, it relied on the “substituted-judgment doctrine” to be exercised by a family member who is the closest next-of-kin (In re Jobes, 1987, at 414-420). The preference for the next-of-kin is based on tradition recognized by many courts because such a person is in the best position to understand the patient’s wants and needs. In In re Jobes (1987, at 424), Justice Garibaldi, writing for the majority, affirmed that in such cases the Court preferred the substituted-judgment doctrine for patients in a PVS condition in the absence of clear and convincing evidence of their wishes. However, he left to future rulings the decision of what standard to use for those who never expressed mature views or has no family or close friend with the knowledge of their personality. Because of the special nature of PVS in terms of longevity and lack of pain perception, he excluded weighing both factors in applying the “objective test”. The objective test refers to what is in the best interests of the patient relating to the benefits and burdens of specific treatments. The exclusion of PVS from the best-interest approach stated in Conroy indicates the problems such cases presented to the courts as well as to the medical profession. Justices Handler and Pollock gave analyses that were both more insightful and consistent with the moral tradition underlying the legal concepts and principles of a number of decisions. They provided a realistic evaluation of the legal approaches (In re Jobes, 1987 at 428-453). Handler pinpointed the problems of applying the substituted-judgment/surrogate decision-maker standard. In substituting judgment for the patient, the next-of-kin may only be surmising or guessing. By itself the standard is not sufficient without an analysis of the benefits, risks and burdens of treatment for the patient. The objective approach that involves the best-interest standard is needed to put the application of substituted judgment on sure footing in cases where there is insufficient knowledge of the patient. Handler admitted that judicial disagreement concerning the factors to be weighed, for example, pain, loss of cognitive ability, bodily deterioration, makes its application difficult. However, he recommended that courts develop this approach for cases where the other standards cannot be applied. He made a very important observation in noting that often the best-interest evaluation is often part of the application of substituted judgment. This is what is meant by limited objective test in Conroy, which unfortunately the Court explained in a very limited way in that decision. In other words, when one asks what the patient would want if he or she were competent, one is consciously or unconsciously evaluating the benefits and burdens of treatment for the patient. Justice Pollock made the same point when he stated that the two approaches blend together because the patient’s wishes would generally embrace what is in his or
her objective best interests. Families would follow the same reasoning when they substitute judgment. Justice Pollock did not hesitate to conclude that in the case of Nancy Jobes the analysis of her best interests would have led to the same decision in the absence of evidence supporting substituted judgment. If some courts had applied this line of reasoning, they would have avoided straining to use the substituted-judgment standard when there was little or no knowledge of the patient’s values and thinking. Two earlier decisions in Superintendent of Belchertown State School v. Saikewicz (1977) and in In re Spring (1980) exemplified a rather imaginative use of the substituted-judgment standard in such cases. Other courts would have also transcended the rigid focus on the standard of clear and convincing evidence to include a more comprehensive approach to the best-interest standard in cases where the evidence of the patient’s explicit wishes were weak or absent. Examples of decisions that relied exclusively on clear and convincing evidence standard are the Missouri Supreme Court’s ruling, Cruzan by Cruzan v. Harmon (1988), and the New York Court of Appeals’ ruling, In re Westchester Country Medical Center on Behalf of O’Connor (1988). Critique of US Supreme Court’s Cruzan decision The US Supreme Court (Cruzan v. Director, Missouri Dept of Health, 1990, 110 S. Ct. at 2847-2855) upheld the Missouri ruling as constitutionally correct in refusing to permit the removal of the feeding tube from Nancy Cruzan, a 25-year old patient who had been in PVS for three years, when her parents petitioned the court for its removal. The Court recognized the prerogatives of the states under common law to apply substituted-judgment and best-interest standards in the absence of clear and convincing evidence. Nevertheless, Chief Justice Rehnquist based the constitutional validity of the Missouri Supreme Court’s ruling on three major points: the adult patient’s constitutional right to decide for or against treatment, the lack of clear and convincing evidence of the patient’s wishes and the State’s interests in the protection and preservation of life. He rejected any constitutional right residing in the next-of-kin to substitute judgment. He reasoned that when there is an issue of personal choice between life and death, the Due Process Clause embraces the State’s unqualified interest in preserving life without the need to judge the quality of the life. This interest entitles the State to protect against potential abuses in such critical situations as it weighs the interest in the preservation of life in relation to the constitutional rights of the patient. Hence, according to Rehnquist, the State is entitled to require the strictest standard of clear and convincing evidence. The majorities in the Missouri Supreme Court and in the US Supreme Court failed to consider the reality and tradition of personal decision making, its complexity, complications, surprises and the role of the family. In Cruzan, the US Supreme Court’s minority opinions by Justices Brennan (Cruzan v. Director, Missouri Dept of Health, 1990, at 2867-2876) and Stevens (Cruzan v. Director, Missouri Dept of Health, 1990, at 2878-2892) noted how various factors actually interrelate in practice. A comprehensive view of the reality of the process confirms that, in the absence of clear and convincing evidence, the next-of-kin has a vital role in making quality of life decisions by evaluating the benefits and burdens of treatment in the light of patient’s personal values. Clearly the rigid approach of the majority opinions would unduly restrict humane decision-making by forcing all concerned to the standard of clear and
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convincing-evidence. Such an approach is unrealistic in view of the fact that many competent adults fail to express clearly their explicit wishes regarding terminal care. Patients and families would become enslaved to medical technology regardless of the condition and effectiveness of treatment on quality of life. The case of Theresa (“Terri”) Schiavo is a warning of the problems that could ensue, at least in some jurisdictions, if one does not make one’s wishes on all matters perfectly clear. The Florida legislature and Governor Jeb Bush have stayed by special legislation the last court’s decision to allow the removal of artificial feeding and hydration by request of her husband. She has been in PVS for 13 years. Her parents disagree with her husband, insisting that she is not in PVS according to the testimony of other physicians. The decision has the potential of raising the constitutional issue of separation of powers since the court has the prerogative to decide the issue in such cases (Oransky, 2003). Apart from the dispute over her condition and issue of separation of powers, there is the attempt to block the decision of the proxy, who according to the state courts is correctly acting on her wishes. In amicus curiae memorandum (Bush, 2003) before the United States District Court, Middle District of Florida, Tampa Division, Governor Bush argues that the patient is not clinically dead and not in a terminal condition since she is in PVS, which is not defined as “terminal illness” in Florida statutes. Moreover, the removal of the tube will mean that she will starve to death before it can be ascertained whether she can be rehabilitated to drink and eat by mouth. He insists that in this case there is “the critical distinction between removing artificial life support and deliberately killing of a human being by starvation and dehydration” (Bush, 2003, p. 137). He accepts the fact that she has the fundamental liberty interest and privacy interests to authorize the removal of the tube as a medical intervention. However, he asserts that she has not lost the right to natural oral feeding, which is not a medical intervention, and that its removal would terminate her fundamental right to life without any evidence of her consent. In his opinion, the uncertainty of her condition as PVS and its degree leaves open the “chance of success” of limited rehabilitation to oral feeding. The obvious question is what is the probability of success after 13 years in this condition. An interesting question is how would Florida law deal with a patient’s request for terminal sedation after requesting the cessation of oral feeding. The use of such an option will be addressed later. Awareness of state laws in regard to these issues and particularly advance directives is important for anyone concerned about determining medical treatment, particularly when one is incompetent. The Schiavo case points up the need to clarify the scope of decision making and the principles that should be applied to cases in which the incompetent patient’s wishes are imprecise or disputed (Dresser, 2004). As the aforementioned Justices Handler and Pollock recommended, the courts should develop a more comprehensive approach to the best-interest standard that weighs such factors as pain, loss of cognitive ability and bodily deterioration. Such a standard is necessary in cases where the other standards of clear and convincing evidence and substituted judgment cannot be applied. Legislative progress since 1970s and 1980s Partnership for Caring (http://www.partnershipforcaring.org) is a 66-year-old organization that has offered a rich source of information and insight into the
present state of legislative progress made by the states in response to judicial rulings. It recently merged with Last Acts, which was started in 1997 by the Robert Wood Johnson Foundation to campaign and work for improvements in end-of-life care, to form Last Acts Partnership (www.lastactspartnership.org). All states and the District of Columbia have laws that recognize the use of advance directives. The courts have respected advance directives in both written and oral instructions given by the individual in the event of incapacity. But the states have passed laws that formally regulate their own advance directives. Since 1976, there are two types of advance directives: a “living will” and “a medical power of attorney”. According to the definition given by individual states in their legislation, the medical power of attorney also goes by the name of “health care proxy” or “durable power of attorney”. Many states have legislated both a living will that is a declaration of the person’s wishes and a health care proxy or durable power attorney for medical decisions. The states determine by law the conditions under which they go into effect and other specific requirements both in regard to their execution and scope. The Patient Self-determination Act, effective 1991 (Sections 4206 and 4751 of the Omnibus Budget Reconciliation Act of 1990 (US Congress, 1990) and enforced by the Code of Federal Regulations (2004, 42 CFR 403ff.), has encouraged the use of advance directives by requiring health care facilities that receive Medicaid and Medicare funds to inform through written policies each individual of the right to make an advance directive. The National Conference of Commissioners on Uniform State Laws (1987) pinpointed the problems of living wills of the 1970s and 1980s and made recommendations that many states later followed. During that period, many laws defined “terminal condition” to mean that death must occur or be imminent “whether or not” or “regardless of life sustaining treatment.” The laws designated treatments or procedures that could be removed as those that not only prolong dying, but also fail to prevent death (see also Rizzo (1989) for analysis of statutes). In such cases, treatment that prolonged the dying process but prevented death for a considerable time could not be removed. Death had to be imminent, as commonly defined in hours or a few days, even with the life-supports. If the definition of “life-sustaining” demands that death be imminent or inevitable even with the use of such treatment, then why consider withdrawing it at all? Often it is the very treatment that is extending life, so that death is not imminent or “inevitable”, at least for a time. Obviously the physician would have to struggle with the question whether death will occur in spite of the treatment that is sustaining vital functions and postponing clinical death. Such a question may not be answered in time to implement humanely the intent expressed by the living will. Moreover, there is evidence that physicians, depending on their specialty and on the terminal patient’s condition, do differ in their assessments of imminence of death and of the usefulness of life-sustaining treatment and palliative care (Ahronheim et al., 1996; SUPPORT Principal Investigators, 1995). One can expect that the prognosis of imminent death will vary from physician to physician, even if they should agree on the meaning of imminent, and correspondingly the determination of treatment will also vary (President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research, 1983, p. 25). The health care proxy laws counter some of the inadequacies of living-will directives relating to definition of terminal condition and the limitations on withholding and withdrawing treatment in PVS condition, particularly artificial
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hydration and nutrition. In most instances, the proxy directive allows the person to give instructions to the proxy on those issues that living-will directives address in a confusing or limited way. Whenever living-will statutes are unclear in regard to the definition of terminal condition or restrictive on the withholding or withdrawing of artificial hydration and nutrition in a PVS condition, Partnership for Caring (www. partnershipforcaring.org) recommends that the person give explicit instructions on these issues in the appointment of a proxy. Moreover, it advises that one limit the written instructions to the specific points that need to be addressed under law in order not to restrict the agent’s authority to act in one’s best interests. It is important that the person discuss with the proxy what is an acceptable quality of life. For the laws of specific states and their positive and negative features, it is best to consult the web site of Partnership for Caring (www.partnershipforcaring.org), which carries the advance directives of each jurisdiction and instructions on their use in light of their positive and negative features. For up-to-date information, it would be prudent to check the web site for any revisions in state laws. In the event that there is no advance directive, there are at least 28 states and the District of Columbia that now have surrogate decision-making laws. This follows the example of 11 states that in the 1980s formally recognized in law the right of the family to make decisions in behalf of an incompetent adult patient who is “terminally ill” or in a “terminal condition” (Areen, 1987). The laws prioritize members of the family who would have the authority to make decisions in behalf of the patient based on knowledge of his or her wishes or best interests. In view of the failure of many to make directives, states have a need for such a law. Why this is not apparent to all legislatures is a puzzle. In commenting on the “burden-benefit” assessment, McCormick (1985) stated the proper focus should be on the quality of life and not merely on continued existence if one is to arrive at morally realistic evaluation. Moral consensus is in agreement with the law and judicial rulings that a competent individual in a terminal condition has the right to withhold or withdraw treatment whose burdens, psychological as well as physical, outweigh the benefits for the total personal condition or personal quality of life. This is sanctioned even if it is clearly foreseen that the decision will quickly and decisively hasten death. If this is the case, the essential question is why a competent individual should not have the same capacity under the law and morality to hasten death by assisted suicide. What are the essential differences between voluntary passive euthanasia defined as the withholding and withdrawing of treatment by consent of the patient (omission in the moral and legal sense) and assisted suicide (commission)? The same question can be asked in regard to active euthanasia because the arguments are essentially the same. For the present, the analysis will be restricted to what makes the difference between voluntary passive euthanasia and assisted suicide in view of the US Supreme Court’s ruling on assisted suicide. Do the ethical and legal differences really make a difference? US Supreme Court on assisted suicide An examination of the US Supreme Court rulings on assisted suicide is a good starting point of the analysis because the rulings rely heavily on traditional ethical arguments and on historical arguments to arrive at the conclusion that there is no constitutional right to assisted suicide.
In Washington et al. Petitioners v. Harold Glucksberg et al. (1997) and Dennis C. Vacco Attorney General of New York et al. Petitioners v. Timothy E. Quill et al. (1997), the question before the Court was whether the prohibition of the Washington State and New York State in regard to causing or aiding a suicide violated the Fourteenth Amendment of the Constitution. By law the states distinguish between suicide and withholding or withdrawing of life sustaining treatment, making it a felony to promote a suicide by either causing or aiding another person to attempt suicide. In unanimous decisions, the Supreme Court upheld the laws as constitutional. In so doing, it overturned the ruling of the Court of Appeals for the Ninth Circuit Court in Compassion in Dying v. Washington (1996) that had judged the Washington law a violation of the Due Process of the Fourteenth Amendment. It also reversed the ruling of Second Circuit Court in Quill v. Vacco (1996) that judged the New York law a violation of the Equal Protection Clause of the Fourteenth Amendment. The Court was compelled to address two major questions. The first has to do with the liberty interests or right of liberty to make decisions to hasten one’s death by assisted suicide. The second deals with the question whether there are legitimate State’s interests to be achieved in prohibiting such decisions. The Court relied heavily on the Nation’s history, legal traditions and practices, tracing their deeper roots in the over 700 years of Anglo-American common-law tradition. Searching through the tradition, the Court found abundant evidence of the prohibition of suicide and assisted suicide (Washington et al., Petitioners v. Harold Glucksberg et al., 1997, 117 S. Ct., at 2262-2265). Statutory law with its foundation in common law also consistently prohibited and penalized assistance of suicide (Washington et al., Petitioners v. Harold Glucksberg et al., 1997, 117 S. Ct., at 2265-2266). The Court restated its understanding of substantive due process. Whenever asked to break new ground in extending constitutional protection to an asserted right, the Court should proceed cautiously. Caution in recognizing a liberty interest or right under the Due Process Clause was warranted by the implications that such recognition would have for public debate and legislation (Washington et al., Petitioners v. Harold Glucksberg et al., 1997, 117 S. Ct., at 2267-2268). Both would immediately come under the controlling force of the liberty interest or right once recognized. Such an interest or right would then be the dominating factor in all discussions and debates. For these reasons, Chief Justice Rehnquist (Washington et al., Petitioners v. Harold Glucksberg et al., 1997, 117 S. Ct., at 2268) argued that the Due Process Clause protects specially those rights objectively and deeply rooted in the Nation’s history, legal tradition and practices. The “deeply rooted” rights are embedded in not only the legal traditions but also the conscience of the people and as such to be deemed fundamental and implied in the concept of ordered liberty. Their inclusion in ordered liberty stems from the essential connection between their protection and the preservation of both liberty and justice. The second significant consideration is “a ‘careful description’ of the asserted fundamental liberty interest” for the very reason of the weighty constitutional protection provided by the Fourteenth Amendment. It only allows the government’s infringement of the exercise of the right for the achievement of legitimate state interests. Under the Due Process Clause, when a specific liberty interest is at stake, the government bears the burden of proving that the intervention is practically necessary to achieve in a measured way legitimate state interests. In Rehnquist’s opinion, the best
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approach is a careful one that recognizes only fundamental rights deeply rooted in the legal tradition so as to avoid subjectivity in the invocation of rights and the delicate balancing of competing interests in every case. According to Rehnquist (Washington et al., Petitioners v. Harold Glucksberg et al., 1997, 117 S. Ct., at 2270), the right to refuse treatment does not trace its roots to abstract concepts of personal autonomy. It is rather rooted in the rule against forced treatment as battery that follows from the right to bodily integrity and the related rule of informed consent. However, Rehnquist was compelled to confront the statement in Planned Parenthood of Southeastern Pa v. Casey (1992, 505 US, at 851) that “at the heart of liberty is the right to define one’s own concept of existence, of meaning, of the universe, and of the mystery of human life.” He did so by claiming the assertion in Casey was made in a general sense and in the light of previous rulings (Washington et al., Petitioners v. Harold Glucksberg et al., 1997, 117 S. Ct., at 2271). The statement was merely describing those personal activities and decisions already demonstrated to be so deeply rooted in the Nation’s history and tradition or so fundamental to constitutionally ordered liberty that they come under the protection of the Due Process Clause. The distinction between assisting suicide and cessation of life-sustaining treatment depends on two fundamental legal principles of causation and intent, often highlighted in moral arguments. The Court examined them in the Vacco decision (Dennis C. Vacco, Attorney General of New York et al., Petitioners v. Timothy E. Quill et al., 1997, 117 S. Ct., at 2298-2299). It reasoned that when a patient refuses treatment, he or she dies from the underlying fatal disease or condition unlike the patient who takes a lethal drug. The latter is killed by the drug and dies primarily from its effects while the former dies primarily from the effects of the disease or condition. Therefore, the causality differs in regard to the agent of the death. There is also a major difference of intention. The physician in withholding or withdrawing treatment may do so with the intention of following the patient’s wishes and to relieve the patient of futile, degrading and burdensome treatment. In assisting suicide, the physician directly and primarily intends the death of the patient, as does the patient who requests assistance and carries out the act. As interpreted by the courts, common law and statutory law have relied on the actor’s intent or purpose to differentiate between two acts having the same result. A legal distinction is made in cases of homicide between killing as a result of a conduct with the purpose of taking a life and killing as a result of foreseen but unintended consequences of one’s action. In arguing that the legal differences between cessation of treatment under proper conditions and assisted suicide are based on causality and intention, Rehnquist was applying the “doctrine or rule of double effect,” which has had a long tradition, particularly in Roman Catholic moral theology of the Middle Ages. However, in one important way the courts differ from the traditional moral application of the rule. They do allow the physician to forego treatment of a competent patient who intends to hasten death. Under constitutional law and common law, the right and subsequent informed consent of the competent individual prevail to authorize the removal of treatment even with the patient’s expressed intention of hastening death, although the physician may withdraw from the case if the patient’s decision runs counter to his or her conscience. Under the law, the competent person has the right to forego any and all treatment even though the treatment offers substantial benefit for recovery, a benefit
that clearly outweighs the risks. In the religious moral traditions, the person has a moral obligation to use “proportionate” (“ordinary”) means of preserving life. “Proportionate” are means that in a specific case offer reasonable hope of benefits that outweigh substantially the burdens. Moreover, the moral traditions would not approve the intention to hasten death. After the Second World War, Catholic theologians increasingly applied rule of double effect to cases in medical ethics that created moral dilemmas. In a book on medical ethics (McFadden, 1959), first copyrighted in 1946, the author explained the four principles required to justify an action (whether leading to omission or commission) from which flow two effects, one good and one bad. A violation of any one of the principles makes the action immoral. The principles are as follows: (1) The action must be in itself a morally good action, or at least a morally indifferent action. (2) The good effect of the action must precede the bad effect or at least be simultaneous with it. (3) The motive prompting the action must be directed to the achievement of the good effect, never in any way to the bad effect. (4) The good effect must be at least equivalent in importance to the bad effect. For a proper understanding of the application of the rule, there are two important points to be considered. The second principle does not refer primarily to time sequence but rather to causality. The good effect derives from the good or neutral action, not from the bad effect. The fourth principle has to do with proportionality. One should not tolerate or permit a bad effect in order to achieve a good effect that is outweighed by the bad effect. Over the years, the rule of double effect has gained wide acceptance as a helpful tool in resolving moral dilemmas. In 1983, the President’s Commission commented on the usefulness of the rule in cases where specific treatment or its omission has important benefits and serious risks (President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research, 1983, pp. 81-8). It applied the principles to the use of specific treatments or their omission. As an example, it applied the rule to radical surgery or medication to relieve severe pain that could result in the death of the patient. In doing so, they addressed the concern over causing addiction or being accused of addicting or causing death that kept a number of physicians from providing adequate pain relief. A measure necessary to relieve severe pain, but with the potential of hastening death is permitted on more than one consideration. The basis is not only that the hastening of death is the foreseen but unintended consequence of medical care. There must also be the deliberate weighing of all foreseeable effects in the light of a full evaluation of all treatment options in order to justify consciously the risk as proportional to the beneficial effect to the patient. In its interpretation, “the moral issue is whether or not the decision-makers have considered the full range of foreseeable effects, have knowingly accepted whatever risk of death is entailed, and have found the risk to be justified in light of the paucity and undesirability of other options” (President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research, 1983, p. 82). In making this critical point, they were not
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breaking new ground but restating the correct way of applying the fourth principle of proportionality, which conforms to the traditional approach. Rehnquist’s line of argumentation followed the rule of double effect in establishing the legal justification of actions of commission (e.g. pain relief) or omission (withholding or withdrawing treatment) that intend to achieve the best interests of the patient with concomitant serious risks. Thus he sought to justify such actions, while rejecting assisted suicide. Moreover, in regard to cessation of treatment, his reasoning mirrored that of the President’s Commission. As it concluded in 1983, laws, judicial opinions, regulations and medical policies should regard proportionate benefits and burdens of treatments through the eyes of the particular patient. The weighing of proportionality requires an evaluation of impact of treatment on the overall condition or quality of life that includes the psychological as well physical components and not merely on biological existence as the only value. However, Rehnquist deviated from the Commission’s reasoning when he upheld Missouri’s right to refuse the option for substituted judgment on the part of Nancy Cruzan’s parents. According to the Commission, without solid evidence of the patient’s explicit wishes, a closely related family member who has intimate knowledge of the person’s values, beliefs and preferences should be allowed to substitute judgment, taking into account the benefits and burdens. The Commission’s conclusions incorporate elements of moral analyses that from the 1950s led the way in confronting the dilemmas of withholding and withdrawing treatment in terminal cases. Certain statements in the concurring opinions in the Supreme Court’s ruling are interesting for their implications. While affirming the legal difference between the doctor’s respecting the person’s decision to refuse treatment even if that decision means death will be hastened and the doctor’s assisting in suicide, Justice Stevens is “not persuaded that in all cases there will in fact be a significant difference between the intent of the physicians, the patients or the families in the two situations” (Washington et al., Petitioners v. Harold Glucksberg et al., 1997). In his view, the administration of lethal medication and cessation of treatment may have the same intent for both the patient and the doctor. Both could have the intent to hasten death. Or in both instances, the doctor may simply intend to the follow the wishes of the patient and relieve the burden of suffering. Moreover, he concludes: The illusory character of any differences in intent or causation is confirmed by the fact that the American Medical Association unequivocally endorses the practice of terminal sedation – the administration of sufficient dosages of pain-killing medication to terminally ill patients to protect them from excruciating pain even when it is clear that the time of death will be advanced (Washington et al., Petitioners v. Harold Glucksberg et al., 1997).
Therefore, in his judgment, there may be applications of the law criminalizing physician-assisted suicide to specific cases still open to challenge as an unjustified violation of personal freedom, and there are still opportunities for debate in regard to such cases. While seeing no need to address directly the issue of the constitutional right to palliative care, the justices of the Court recognized the need to provide access to such care and the fact that, in Washington and New York, patients can obtain adequate palliative care that may even hasten their deaths. The concurring justices make a point that, if state laws prevented access to adequate palliative care during illness and at the end of life, then the Court might have to review them for their constitutionality. For the
present, the weight of the moral and legal traditions and the argument in favor of state interests are sufficient to declare that there is no constitutional right to physician-assisted suicide under the Fourteenth Amendment. Problems of moral and legal reasoning Personal rights and tradition Although Rehnquist’s conclusions have received broad support from ethicists and jurists who favor ethical and legal conservatism, there are critics that point to two problems with his interpretation that Casey’s concept of liberty embraces only those activities and decisions deeply rooted in traditions or fundamental to ordered liberty interpreted in the light of tradition. The historical newness of the ability to hasten death by deliberately foregoing various life-sustaining treatments in a terminal condition obviously makes impractical the first test of deep traditional roots. According to the arguments brought before the Court in favor of legalization of physician-assisted suicide, the personal decision for assisted suicide in terminal illness falls within the same zone of autonomy that embraces the constitutionally recognized right or liberty interest to decide for or against life-sustaining treatment. Both have to do with the meaning of existence and the mystery of life in face of death and dying; both hasten death. Whether the right to assisted suicide should be constitutionally recognized depends more on social consensus rooted in the ethical analysis of differences and consequences in the context of advanced medical care than on any historical argument based on the Nation’s traditions. Those who support the religious moral traditions and believe in the supreme dominion of God over life reject this conclusion. The critics respond that, in a secular society founded on the rights of the individual and legitimate state interests, religious beliefs and moral convictions based on that belief, even though held by a majority, should not determine law. Moral consensus does have a crucial part in shaping laws and judicial opinions. This is particularly true also in establishing legitimate state interests and in breaking new ground in reform of society and laws. Although religious moral traditions have helped to shape moral consensus down the centuries, they are by themselves not the determining factor in a secular society for all time. The critics point to the fact that the historical evolution of moral consciousness on such issues as religious freedom, slavery and civil rights led to a moral consensus that conflicted with long-held religious moral positions and brought about reform of laws.
The rule of double effect v. real-life dilemmas Another problem in Rehnquist’s analysis relates to the rule of double effect as it is applied not abstractly but concretely to actual cases or real-life dilemmas. The underlying question is whether there is really sufficient moral and legal difference in intention and causality to make the difference. The rule of double effect invoked to uphold the traditional moral and legal distinctions may not be as relevant in the real clinical situation, if one focuses on intention (Quill et al., 1997a). The rule of double effect is clearly applicable if the intention of cessation of life-sustaining treatment and/or the administration of drugs is solely to relieve the patient from burdensome treatment or suffering. But what if the patient or next-of-kin or physician also expressly intends to hasten the dying? The rule of double effect would be undermined
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because death is not only the foreseen but also the intended consequence of omission and/or commission. An explicit intention to hasten death would violate a major principle of the rule. Terminal sedation: a challenge to the rule of double effect Terminal sedation raises serious questions about the realistic applicability of the rule of double effect. It is used to relieve extremes of physical distress with use of high doses of sedatives (Quill and Byock, 2000). In cases of patients with no reasonable hope of recovery, it is a last resort measure to relieve physical suffering. In last stages of the dying process, the use of terminal sedation is accompanied by the cessation of therapeutic treatment and life-sustaining procedures such as artificial nutrition and hydration, antibiotics, and mechanical ventilation. In this context of critical care, the intention is to cause unconsciousness for the sake of relieving the patient of intractable physical distress and to block the experience of severely distressing symptoms, such as those arising from suffocation caused when the patient is removed from artificial ventilation. Terminal sedation is also applied to patients at the end stage of dying who have consciously decided to stop drinking and eating as one last decision to put an end to their suffering. Terminal sedation is seen by some as a proper response to a complex of problems experienced even by some patients receiving the best palliative care. The problems are severe pain in the last week of life, shortness of breath, delirium, bleeding, weakness, open wounds, and seizures (Quill and Byock, 2000). Because this approach hastens death, important safeguards should be taken. They include the determination that palliative care is ineffective, the requirement of informed consent, assurance of diagnosis and prognosis, consultation for a second opinion, careful record keeping and monitoring of the processes (Quill et al., 1997b). When one looks at the series of steps taken to relieve patients of their ordeal, one wonders whether there is not really the intention to end life. The end is achieved not as directly and quickly as with a lethal drug, but certainly the result is the same. As life is more and more extended in illness and particularly in the final stages by medical technology, society will have to face increasingly this kind of predicament. There are those who would argue that, when applying the rule of double effect to end-of-life care, we are trying to impose a traditional way of moral and legal reasoning to a situation that is far too complex and ambiguous for the principles to be realistically applied in all cases. The rule may be readily applicable to certain situations but not to all. Moreover, there is no denying the broad scope of the rights of competent individual to refuse any and all treatment unless the state can prove under the hard scrutiny of the courts that there is a substantial legitimate state interest in limiting the exercise of the right to refuse treatment. Legitimate state interests Another point of criticism is the Court’s argument in behalf of state interests in criminalizing assisted suicide. The Court affirmed that at stake are legitimate interests in protecting human life, the vulnerable from coercion and abuse, family members and loved ones, the integrity of the medical profession, and preventing the movement to active euthanasia. However, the argument advanced in behalf of legitimate state interests leaves unanswered whether a carefully drafted law allowing for
physician-assisted suicide could not also protect the vulnerable from coercion and devaluation of their lives as well as the integrity of the doctor-patient relationship. From the viewpoint of those challenging the prohibition by state law, the Court failed to appreciate to what extent in present health care a number of the chronically and terminally ill also suffer coercion and devaluation because they cannot afford proper care. Moreover, if the interests of the individual and society are best served by the prohibition of physician-assisted suicide, then why allow any state to legalize it? In recognition of the evolving moral, legal and practical issues of physician-assisted suicide, the Supreme Court’s ruling left the door open to states to continue the debate and for the present decide for themselves. The justices preferred that the legislatures of the states deal with the issue of assisted suicide through fact-finding, debate, and legislation. Conclusion In view of the broad right of competent individuals to refuse any and all treatment and to intend their own deaths in the process, as longs the state cannot prove a substantial legitimate interest in compelling them to have treatment, one can wonder whether the traditional arguments advanced by the US Supreme Court are relevant to what is actually taking place in end-of-life care. Perhaps we are not yet in the position to answer these questions. Perhaps it would be better to address the boarder issues of communication between physician and patient and the obstacles embedded in the health care system that prevent individuals from access to comprehensive palliative care. The condition of palliative care From the 1950s to the present, the road to comprehensive palliative care has not been smooth. With the introduction of the hospice movement into the USA from England in the 1970s, improvements have been made. However, the work is yet unfinished. A study of end-of-life care (Teno et al., 2004) attempted to evaluate care in institutional settings, particularly in hospitals and nursing homes, compared with deaths at home. The design of the study examined the deaths of 1,578 from 22 states in 2000, interviewing family members. Despite the limitations of the study and the fact that, for the sake of comparison, there is a lack of national studies on institutional care in hospitals and nursing homes where the majority die, the study indicated some deficiencies that other limited studies have mentioned (see, e.g. SUPPORT Principal Investigators, 1995). In comparison with hospice care, the home health agencies, nursing homes and hospitals received many more unfavorable evaluations in regard to palliative care, physician communication, emotional support and respectful treatment. Fortunately, a number of hospice organizations have developed programs to train physicians, medical students and nurses in the art of palliative. An excellent example is The Center for Hospice and Palliative Care of Buffalo, New York, established in 1978. It is one of the oldest and largest in the nation. In 2003, New York State marked the 25th anniversary of the first law in the nation that began the process of making hospice a permanent part of the State’s health care system. Signed into law on August 7, 1978 by Governor Carey, Chapter 718 of 1978 (New York State, 1978) amended the Public Health Law by adding the definition of hospice and establishing three models of pilot programs, one of which was Hospice Buffalo (Rizzo, 1978). Chapter 416 of 1983 (New
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York State, 1983) followed to make hospice a permanent component of the health care system (Rizzo, 2003). Hospice Buffalo has clinical programs for medical and nursing students on its campus and collaborates with SUNY Schools of Medicine and other institutions educating health care professionals in developing curriculum for palliative care. In addition, its medical staff has undertaken clinical studies in pain relief. However, because of staffing requirements and expense, hospices still can reach only some of the terminally ill with life expectancy of six months or less. Moreover, education of the medical profession is still a major task. It will have to overcome the obstacles of the past. Two factors hamper the quality of education in palliative care (Billings and Block, 1997). The first is the lack of integration of the courses; the second is a format of pre-clinical lectures without required courses in clinical experiences and discussion of personal reactions to such experiences. Hopefully the work of hospices like Hospice Buffalo will bring a significant change through outreach programs not only in schools for health care professionals, but also in nursing homes and hospitals. There are several problems with the health care system’s impact on comprehensive palliative care. For the present, it suffices to mention them (Koppelman, 2004a, b). Over-reliance on aggressive therapy at the end stage of an illness comes at the expense of palliative care. Medicare and private insurance plans favor paying for aggressive and expense treatment while not providing adequate reimbursement for palliative care, counseling and home care. Physicians need to communicate earlier and better with patients concerning their prospects for recovery. Because physicians have emotional responses to their patients who face a serious illness, they need to learn to acknowledge them and deal with them before their emotions negatively affect communication (Back et al., 2003). From time to time, physicians need to follow-up their interaction with their patients by discussing not only their procedures, but also their emotional responses to difficult situation. Discussion with a mature person capable of handling emotional issues would be helpful in coming to grips with emotions that may even arise from their own anxieties about death and dying.
Problem and potential of communication There are numerous articles in medical journals about the breakdown or lack in communication. In view of the fact that so many never make an advance directive and that communication regarding further treatment between doctor and patient can be minimal as the condition worsens, it is no wonder that at the end stage of life there are unresolved issues concerning patient’s preferences or that the family as well as patient are unprepared for the difficult decisions. Beginning end-of-life discussions before the final stage and over a period of time with some consistency would provide patients with the opportunity to make informed consent and enhance palliative care (Quill, 2000). There is agreement among commentators that communication between physician and patient early in the relationship and throughout the progression of the condition is key to a more accurate of appraisal of the patient’s wishes at the end stage. Although communication skills are judged to be one of the three priorities of physician’s competency, a review of literature from 1975 to 2000 (Beck et al., 2002) indicates that there are serious problems in this area. The conclusion is that an intensive program of education is required to correct the deficiency. Early and
consistent communication can promote a smoother transition from curative to palliative care at the end-of-life. Better communication can even facilitate an earlier referral to hospice (Vig et al., 2002). However, this will still be a problem as new therapies, offering great promise, are developed, particularly as a result of genetic research. Understandably patients will want to reach for any hope offered by the most recent advances. In this instance, the larger problem will be affordability of the latest therapies in view of the fact that in the US medical care is still viewed as a commodity in the market economy (Rizzo, 1999). The health care business is well and thriving. It has even crept into the hospice movement. Unfortunately, when profit and paying dividends to stockholders are major concerns, there is always the danger that services will be tailored to the bottom line. After extensive study of for-profit health care and writing on the issue, Dr Arnold Relman (2002), former editor of the New England Journal of Medicine, concluded that most of the problems in the US system stems from the for-profit enterprises, which benefit financially only the owners and investors. The problems that follow from establishing health care as a consumer product in a market economy trace their roots to the early part of the previous century (Rizzo, 1993). Much can be said of the impact of this creation on palliative care. But for now it suffices to say that in the competition for funds in an increasingly expensive health care system, palliative care and hospices may have to confront rationing of resources, as money flows to more profitable health care.
Effectiveness of advance directives Despite the progress made in advance directives since the 1970s, there are those concerned about their effectiveness. One research team (Fagerlin and Schneider, 2004) announced in a rather exuberant manner the failure and demise of living wills. They viewed them as a waste of time, effort, and money except for those who are in imminent danger of dying and have definite preferences. Otherwise living wills fail because of five reasons: (1) despite the propaganda in their favor, most people do not have one; (2) if they do, they do not reflect on the instruction concerning complex decisions in the future; (3) drafters of the wills have not given the means to express accurately the choices for future complex problems; (4) the wills too often are not in the hands of those making decisions when the patient is incompetent; and (5) they do not help the surrogate to represent accurately the wishes of the patient. These failures are based on studies that the authors conclude compel them to come to this shocking, but undeniable conclusion. They would opt for powers of attorney in health care or proxy for health care because the proxy is responding to the immediate situation and has more flexibility to respond to changing conditions in exercising the preferences of the patient. They do see slight benefit in executing a living will in that it may encourage discussion between patient and physician, while pointing out that one study shows little relation between the two events.
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Several observations should be made in regard to this article. The first is that there is as yet no definitive study on the effectiveness of living wills. One thing that is certain in face of complaints about their effectiveness is that they are better than nothing. Without them, one can only imagine the fate of patients and their families in an age of medical technology managed and applied in a market economy. The second point is that, although a proxy who knows the patient would be ideal, in many instances the proxy may not be available or the proxy may be incapable or not well prepared to make a decision in conformity with the patient’s values, beliefs and preferences. The third is that the authors perhaps should have focused more on the inadequacy of communication between doctor and patient and the reasons behind the failure in explaining the failure of the living wills. Another problem may be the failure to record the advance directives in medical records. One study of 252 patients, undergoing high-risk surgery in a major university hospital (Yang et al., 2004) noted that, though the number of advance directives had increased, they had little impact on care and the number in the medical records remained low. An article on medical and legal issues in the ICU (Lustbader, 2004) estimated that 62 per cent of advance directives never reach the physician. A study of 879 physicians, cited in the same article, found that, when they were ignored by 34 per cent of the physicians, it was done in the belief that there was a reasonable chance of recovery (77 per cent) or that the decision of the family may not be in the best interest of the patient (39 per cent) or in the fear of malpractice (19 per cent). All these reasons could be attributed to a breakdown in communication between physician and patient and between physician and family. This failure probably has deep roots, going back to the early stages of treatment. Well before the article of Fagerlin and Schneider drew so much attention, others have made complaints about living wills (Cantor, 1998). Some think it would be better to concentrate on the present needs of the incompetent patient than on previously expressed wishes. They complain about the impossible task of formulating an advance directive in terms of preferences for unforeseen and changing circumstances and conditions. One analysis (Pfeifer, 1999) questioned the effectiveness of advance directives in the form of living wills in a “waxing and waning” condition like chronic obstructive pulmonary disease (COPD) and was not very optimistic about the accuracy of physician and proxy in interpreting patient’s wishes. Prior to becoming incompetent, patients often are indecisive, only deciding on specific treatment in response to critical episodes. The indecisiveness and changes in decision may call into question intent of the prior declaration. Although one limited study (Cook et al., 2003) indicated that the withdrawal of life-supports coincides with patient’s explicit wishes, the same study concluded that results give good reason to be concerned that in the case of incompetent patients, the decisions of family members and physicians may not coincide with the wishes of the patient. Those critical of living wills as declarations of prior wishes generally prefer oral communication between patient and physician and between physician and proxy. The problems are that a reliable proxy may not be available and that physicians may not communicate well with either patient or proxy. The hope is that the proxy makes the decisions in conformity with the patient’s wishes. This can be best assured if the health care proxy knows the person well, is mature enough to handle the emotional impact of making critical decisions and secure enough to take a firm stand with the doctors in
behalf of the patient’s wishes, and, of course, is readily available to serve (see Harvard Women’s Health Watch, 2004). Even with a proxy appointment, a sensible approach would be to encourage written declarations of one’s preferences in regard to treatment in a terminal condition just in case of a breakdown in communication or in the absence of a reliable proxy. There are recommendations to make written instructions more effective. One remedy proposed (Cantor, 1998) is a directive that identifies specific levels of deterioration that the person would find intolerable, without having to specify acceptable or unacceptable life-sustaining treatments. It also gives the surrogate decision-maker permission to interpret general instructions and make judgments in the event of unclear instructions. Another approach (Doukas and McCullough, 1991) is to elicit from the patient a values history, that is, what he or she holds as fundamental values and quality of life values, and then have the patient apply them to a directive indicating treatment preferences. The values history would be a clinical tool to be used in conjunction with a legal advance directive. Such a project would take time, probably requiring several visits with a physician and could be done with the family by consent of the patient. It would be done in steps: first the value statements would be discussed and then specific treatment directives. Since 1991, the method of values history has received much attention as an aid in interpreting advance directives and a help to the person acting as proxy. As valuable as this may be, there are several practical issues. Would physicians be prepared or trained to guide such an analysis and would they be willing to spend the time for counseling without adequate remuneration? As noted, communication skills of physicians are not always the best. Moreover, spreading the sessions over several visits would not eliminate the time it will take to elicit a values history. In this health care system, time means money. Perhaps the Medicare Prescription Drug and Modernization Act of 2003 will contribute to greater willingness to counsel, at least, on the part of some. One benefit would cover the cost of a one session of consultation on the part of a hospice physician for a terminally ill patient before admission into hospice (Koppelman, 2004b). This would involve assessment of pain relief and counseling on options for continuing care. But one session would not seem adequate in terms of timing and time for an adequate appraisal of values history. All these attempts to improve advance directives could contribute to their usefulness. The larger problem is that their implementation in end-of-life care depends largely on the extent that communication between doctor and patient has taken place before the critical moment has arrived. This is the crux of the problem in the health care system. Training of physicians must address the need for communication during the course of treatment. This training should begin early in medical education. It would involve faculty supervision of the students as they relate to patients in clinical practice, coupled with constructive critique of their communication skills immediately after the clinical rounds have been made. The advancements in palliative care, in advance directives, in judicial rulings and statutes still leave us with practical problems in the application of ethical and legal principles to difficult cases. In a technological society, few of us will pass through this life without encountering difficult end-of-life decisions either for ourselves or loved ones. Ethical and legal principles will help us, but they cannot substitute for a health
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care system that provides comprehensive care and guidance in making the ultimate decisions. There are serious questions whether the US health care system is capable of meeting the challenge of the coming years with the increase of an ageing population, an ever increasing inflation of medical costs, a lack of commitment to long-term care and a mentality that views and treats health care as a commodity in the marketplace.
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References Ahronheim, J.C., Morrison, R.S., Baskin, S.A., Morris, J. and Meier, D.E. (1996), “Treatment of the dying in the acute care hospital”, Archives of Internal Medicine, Vol. 156 No. 18, pp. 2094-100. American Medical Association (2000), “American Medical Association’s position on the ‘Pain Relief Promotion Act of 1999’”, 3 July, available at: www.ama-assn.org Areen, J. (1987), “The legal status of consent obtained from families to withhold or withdraw treatment”, JAMA, Vol. 258, pp. 229-34. Back, A.L., Arnold, R.M. and Quill, T.E. (2003), “Hope for the best, and prepare for the worst”, Annals of Internal Medicine, Vol. 138 No. 5, pp. 439-43. Barber v. Superior Court (1983), 147 Cal.App.3d 1006, 195 Cal.Rptr. 484. Beck, R.S., Daughtridge, R. and Sloane, P.D. (2002), “Physician-patient communication in the primary care office: a system”, Journal of American Board of Family Practice, Vol. 15 No. 1, pp. 25-38. Billings, J.A. and Block, S. (1997), “Palliative care in undergraduate medical education”, JAMA, Vol. 278 No. 9, pp. 733-8. Bush, J. (2003), “Schiavo v. Schiavo: amicus curiae memorandum of Governor Bush”, Issues in Law and Medicine, Vol. 19 No. 2, pp. 137-43. Cantor, N.L. (1998), “Advance directive instruments for end-of life and health care decision making: making advance directives meaningful”, Psychology, Public Policy and Law, Vol. 629 No. 4. Code of Federal Regulations (2004), Medicare and Medicaid Programs; Advance Directives, 42 CFR 403ff. Compassion in Dying v. Washington (1996), (9th Cir.), 79 F.3d 790. Cook, D., Rocker, G., Marshall, J., Sjokvist, P., Dodek, P., Griffith, L., Freitag, A., Varon, J., Bradley, C., Levy, M., Finfer, S., Hamielec, C., McMullin, J., Weaver, B., Walter, S. and Guyatt, G. (2003), “Withdrawal of mechanical ventilation in anticipation of death in the intensive care unit”, The New England Journal of Medicine, Vol. 349 No. 12, pp. 1123-32. Cruzan, by Cruzan v. Harmon (1988), 760 S.W.2d 408. Cruzan v. Director, Missouri Dept of Health (1990), 497 US 261, 110 S Ct 2847. Dennis C. Vacco, Attorney General of New York et al., Petitioners v. Timothy E. Quill et al. (1997), 117 S. Ct. 2293, 138 L. Ed. 834, 521 US 793. Doukas, D.J. and McCullough, L.B. (1991), “The values history: the evaluation of the patient’s values and advance directives”, The Journal of Family Practice, Vol. 32 No. 2, pp. 145-53. Dresser, R. (2004), “Schiavo: a hard case makes questionable law”, Hastings Center Report, Vol. 34 No. 3, pp. 8-9. Fagerlin, A. and Schneider, C.E. (2004), “Enough: the failure of the living will”, Hastings Center Report, Vol. 34 No. 2, pp. 30-42. Federal Register (2001), “Dispensing of controlled substances to assist suicide”, Vol. 66 No. 218, November 9.
Harvard Women’s Health Watch (2004), “Living wills and health care proxies”, January, available at: www.health.harvard.edu In re Conroy (1985), 98 NJ 321, 486 A2d 1209. In re Jobes (1987), 108 NJ 394, 529 A2d 434.
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In re Quinlan (1976), 70 NJ 10, 355 A2d 647, cert. denied, 429 US 922. In re Spring (1980), 380 Mass 629, 405 NE2d 115. In re Storar (1981), 52 NY2d 363, 438 NYS2d 266. In re Westchester Country Medical Center on Behalf of O’Connor (1988), 72 NY2d 517, 531 NE2d 607. Kelly, G. (1950), “The duty of using artificial means of preserving life”, Theological Studies, Vol. 11, pp. 203-15. Kelly, G. (1951), “Refinements of definitions after comments”, Theological Studies, Vol. 12, p. 550. Koppelman, J. (2004a), “Experts call for better consumer information, health systems overhaul to improve EOL care”, Vol. 15, Last Acts Quarterly, pp. 1 and 5. Koppelman, J. (2004b), “New Medicare law a mixed bag for chronically ill and dying”, Last Acts Quarterly, Vol. 15, pp. 7-8. Lee v. Oregon (1997), 107 F.3d 1382 (CA9 1997). Lustbader, D.R. (2004), “Medical-legal issues in the ICU: when the courts speak”, available at: www.medscape.com/viewarticle/412835 McCormick, R.A. (1985), “Care or starving? The case of Claire Conroy”, America, Vol. 152 No. 193, pp. 269-73. McFadden, C.J. (1959), Medical Ethics, 4th ed., F.A. Davis, Philadelphia, PA. National Conference of Commissioners on Uniform State Laws (1987), Uniform Rights of the Terminally Ill Act, 9B ULA 609. New York State (1978), Chapter 718 of the Laws of New York State,. New York State (1983), Chapter 416 of the Laws of New York State, Public Health Law, Article 40. Oransky, I. (2003), “Feeding tube right-to-die case rocks Florida”, Lancet, Vol. 362 No. 9394, p. 1465. Pfeifer, M.P. (1999), “End-of-life decision making: special considerations in the COPD patient”, available at: www.medscape.com/viewarticle/408735 Planned Parenthood of Southeastern Pa v. Casey (1992), 505 US 833, 120 L. Ed.2d 674, 112 S. Ct. 2807. Pope John Paul II (2004), “To the participants in the international congress on ‘life-sustaining treatments and vegetative state: scientific advances and ethical dilemmas’”, March 30, available at: www.vatican.va/holy_father/john_ii/speeches/2004/march/documents/ Pope Pius XII (1958), “The prolongation of life”, The Pope Speaks, Vol. 4, pp. 393-4. President’s Commission for the Study of Ethical Problems in Medicine and Biomedical and Behavioral Research (1983), Deciding to Forgo Life-sustaining Treatment, Government Printing Office, Washington, DC. Quill, T.E. (2000), “Initiating end-of-life discussions with seriously ill patients”, JAMA, Vol. 284 No. 19, pp. 2502-7.
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Quill, T.E. and Byock, I.R. (2000), “Responding to intractable terminal suffering: the role of terminal sedation and voluntary refusal of food and fluids”, Annals of Internal Medicine, Vol. 132 No. 5, pp. 408-14. Quill, T.E., Dresser, R. and Brock, D.W. (1997a), “The rule of double effect – a critique of its role in end-of-life decision making”, The New England Journal of Medicine, Vol. 337 No. 24, pp. 1768-71. Quill, T.E., Lo, B. and Brock, D.W. (1997b), “A comparison of voluntarily stopping eating and drinking, terminal sedation, physician-assisted suicide, and voluntary active euthanasia”, JAMA, Vol. 278 No. 23, pp. 2099-104. Quill v. Vacco (1996), (2nd Cir.), 80 F.3d 716. Relman, A. (2002), “For-profit health care: expensive, inefficient and inequitable”, paper presented to the Standing Senate Committee on Social Affairs and Technology, February 21, available at: www.healthcoalition.ca Rizzo, R.F. (1978), “Hospice; comprehensive terminal care”, New York State Journal of Medicine, Vol. 78 No. 12, pp. 1902-10. Rizzo, R.F. (1989), “The living will: does it protect the rights of the terminally ill?”, New York State Journal of Medicine, Vol. 89 No. 2, pp. 72-9. Rizzo, R.F. (1993), “Health care reform in the light of history”, International Journal of Social Economics, Vol. 20 No. 11, pp. 40-56. Rizzo, R.F. (1999), “Genetic testing and therapy: a pathway to progress and/or profit?”, International Journal of Social Economics, Vol. 26 No. 1/2/3, pp. 109-33. Rizzo, R.F. (2003), “History of hospice legislation in New York State”, in Fink, A.K. and Shedd, D.P. (Eds), The Early History of Hospice Buffalo, The Center for Hospice & Palliative Care, Buffalo, NY. Superintendent of Belchertown State School v. Saikewicz (1977), 373 Mass 728, 370 NE2d 417. SUPPORT Principal Investigators (1995), “A controlled trial to improve care for seriously ill hospitalized patients”, JAMA, Vol. 274 No. 20, pp. 1591-8. Teno, J.M., Clarridge, B.R., Casey, V., Welch, L.C., Wetle, T., Shield, R. and Mor, V. (2004), “Family perspectives on end-of-life care at the last place of care”, JAMA, Vol. 291 No. 1, p. 88ff. US Congress (1990), Omnibus Budget Reconciliation Act of 1990 (OBRA ’90), Public Law 101-508; also 42 CFR 403ff. US Congress (1996), Death with Dignity Act, Ore. Rev. Stat. Sections 127.800 et seq. US Congress (1999), Pain Relief Promotion Act of 1999, S. 1272, 106th Cong., 1st Sess., available at: www.loc.gov Vanderpool, H.Y. (1995), “Death and dying: euthanasia and sustaining life: historical aspects”, Encyclopedia of Bioethics, Vol. 1, rev. ed., Macmillan Reference, New York, NY, pp. 554-63. Vatican (1980), Declaration on Euthanasia, Vatican, Rome. Vig, E.K., Davenport, N.A. and Pearlman, R.A. (2002), “Good deaths, bad deaths, and preferences for the end of life: a qualitative study of geriatric out-patients”, Journal of the American Geriatrics Society, Vol. 50 No. 9, pp. 1541-8. Washington et al., Petitioners v. Harold Glucksberg et al. (1997), 117 S. Ct. 2258, 138 L. Ed.2d 772, 521 US 702. Weir, R.F. (1989), Abating Treatment with Critically Ill Patients, Oxford Press, New York, NY and Oxford.
Yang, A.D., Bentrem, D.J., Pappas, S.G., Amundsen, E., Ward, J.E., Ujiki, M.B. and Angelos, P. (2004), “Advance directive use among patients undergoing high-risk operations”, American Journal of Surgery, Vol. 188 No. 1, pp. 98-101. Further reading Balsa, A.I., Seiler, N., McGuire, T.G. and Bloche, M.G. (2003), “Clinical uncertainty and healthcare disparities”, American Journal of Law & Medicine, Vol. 29 No. 2, pp. 203-19. Faber-Langendoen, K. (1996), “A multi-institutional study of care given to patients dying in hospitals”, Archives of Internal Medicine, Vol. 156 No. 18, pp. 2130-6.
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The current issue and full text archive of this journal is available at www.emeraldinsight.com/0306-8293.htm
Neglected dimensions of development: inequality, conflict and aid
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Rukmani Gounder Department of Applied and International Economics, Massey University, Palmerston North, New Zealand Abstract Purpose – As ethnic diversity is regarded as a determinant of growth, this study engages in an analysis of diversity as the forte behind better economic performance and where social stability of a nation is necessary to achieve growth. While these factors alone may not be sufficient to achieve growth and maintain social harmony, domestic institutions and good governance are regarded as vital factors. Design/methodology/approach – Differential performances of diverse ethnic groups are most influential contributions of social capital and its growth impact. In this framework there is a larger role of aid to provide security to a nation to achieve its development objectives. An evaluation of ethnic diversity and land issues in Fiji is undertaken with concerns of a market economy, policies and governance. Findings – An examination of the opposing nature of ethnic diversity and land issues in Fiji provides an insight not only of ethnic conflict, but also of the role of aid to solve conflict. A discussion on ethnicity and being equal in the market relates to the reason for equality before identity. The analysis indicates the role foreign aid can play to achieve stability and avoid ethnic conflict for growth in Fiji. Originality/value – The paper indicates the global issues of inequality and conflict and policy implications for Fiji and the nations facing such problems and aid donors’ role for growth and development. Keywords Ethnic groups, Equal opportunities, Conflict, Economic growth, Fiji Paper type Conceptual paper
Introduction The differential performances of diverse ethnic groups are most influential contributions of social capital and its differential impact on growth. This study engages in an analysis on ethnic diversity-economic growth nexus in the case of Fiji where social stability is a necessary condition to achieve growth. While these factors alone may not be sufficient to achieve growth and maintain social harmony, domestic institutions and good governance are regarded as significant factors. In a society of diverse ethnic communities, bridging social relations with democratic governance and acceptance of the ethnic groups to be part of the social fabric are relevant to manage conflict. Multiculturalism has become an indispensable issue to analyse the question of nationalism, stability, equality, social justice and democracy. As seen in the global International Journal of Social Economics Vol. 32 No. 1/2, 2005 pp. 60-76 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510575649
The author would like to thank Professor Chris Bayly (University of Cambridge) and Dr James Obben (Massey University) for their comments on an earlier draft and Professor Vijay Naidu (Victoria University of Wellington) for providing some supporting material. The usual caveats apply.
context, the dominant groups have homogenised different socio-cultural sub-groups leading to communitarianism and multiculturalism. Fiji’s society, through the colonial migration, has contributed to this social fragmentation. Different social structures and development processes, and failure to recognise the significance of cultural studies and civic education in fostering an integrated community allowed deep differences as well as social conflicts in Fiji. This had led to both vertical and horizontal inequalities. The land property rights of ethnic Fijians are protected by the Constitution that restricts availability of land as a factor of production to other communities. Absence of land property rights itself is central to the problems where the livelihood of other communities (minority groups) are threatened which raises insecurity. Insecurity of land as a means of production increased with non-renewal of land leases and/or exorbitant rents. This problem heightened with the May 2000 coup and most Indo-Fijians faced violence and damage to their assets. Onus is then on the people to safeguard their rights based on a concept of “traditional homelands”, where generations of the labour force are employed and empowered for economic progress through cultivation of the land and/or business for long-term growth. An important development in the aid field occurred as developing countries face conflicts, development assistance has been utilised for security and conflict settlement. In this framework there is a larger role of aid to provide security to a nation to achieve its development objectives. An examination of the opposing nature of ethnic diversity and land issues in Fiji will provide not only an insight of ethnic conflict, but also the role of aid to solve conflict. The paper is organised as follows: the next section presents an overview of ethnic diversity and its contribution to growth. A discussion on ethnicity and being equal in the market has been related to the reason for equality before identity. The penultimate section evaluates issues of economic resources and causes of conflicts. What role can foreign aid play to achieve economic and social stability and avoid ethnic conflict in Fiji? The final section presents the conclusion. Neglected dimensions: land property rights and economic resources Fiji’s nationhood was formed out of diverse cultural groups during the 1970 London talks for independence. Almost towards the end of two decades of independence disagreement on the interpretation of political liberalism resulted in a military coup when there was a formation of a coalition government in 1987. It gave rise to an authoritarian system of illiberal cultural community with implications for economic resources, land property rights, economic growth and conflict. Land issues are discussed first to give a brief view of its economic growth nexus. Land issues The traditional Fijian societies used land for subsistence mode of production, therefore ownership in private property did not exist and was institutionally discouraged. Thus, the system of kerekere (i.e. customary borrowing that is reciprocated in the future) was practised to address any inequality in resource distribution. As the traders, missionaries and the agriculture planters reached Fiji large tracts of Fijian land and the recruitment of native labour were utilised for plantation purposes, which dates before Fiji was ceded to Britain in 1874[1]. The colonisation of Fiji set in place the basic developmental structures of capitalism and introduced and instituted private ownership in property (Narayan, 1984). Scarcity
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of large capital and cheap labour were two interrelated problems to establish national productive systems and the development of the nation as a viable economy[2]. The first land leases were granted in 1915 for 21 years with the possibility of a nine-year extension (Prasad and Tisdell, 1996). In 1940 the Native Land Trust Board (NLTB) was created to administer the land tenure system. In the post-independence period the classifications of land indicated that the State owns 10 per cent, Native Land is 83 per cent and 7 per cent is freehold land. The 1976 Agriculture and Landlord Tenancy Agreement legislation did not focus on economic security of land tenure and the terms remained at 30-year lease while rent fixing, compensation and other related land usage remained unchanged. The sugar industry, agriculture, tourism and peoples’ livelihood rely on land leases. As for the land issues after the 1987 coups, “although the government acknowledged the severity of the problem, it continued to announce new deadlines and promises only to break them regularly” (Kurer, 2001, p. 304). The agriculture land leases started to expire in 1997. Due to lack of long-term leases, non-renewal of expiring leases and uncertainty became the root causes of poor economic performance and poverty. Looking at the land property rights at the time of independence it can be said that displacing non-Fijian communities were not considered at the time of writing Fiji’s 1970 Constitution. Currently, three and half decades later, it almost does not matter what the leaders of Fiji and Britain did then, but people will suffer politically, economically and socially as one looks back at avenging historical wrongs. Labour and inequalities The ethnic groups that constitute Fiji’s multiracial population are Fijians, Indians, Chinese, Europeans, part-Europeans, Rotumans and other Pacific Islanders[3]. The diversity in Fiji’s labour force resulted out of native rule policy for economic development of the nation[4]. The diverse ethnic groups have participated and contributed towards development of Fiji as one of the most developed South Pacific island countries[5]. The working class communities analysed next distinguish the labour force associated in various sectors. Fijians, besides being in the communal and subsistence mode of production, also farm the land and are involved in the public service. Some Fijians are also engaged in business and have joint ventures with other communities. At the end of the Indian Indenture System (in 1916) of plantation workers about 3 to 6 per cent of the Indians came to Fiji as free settlers who were mainly Gujaratis (Ali, 1973). An economic categorisation of the Indian society now shows about 80 per cent as descendants of farmers based in the agriculture sector and Gujaratis descendants of traders are engaged in the retail trade business. A fraction of Indo-Fijians operates small stores/trade shops with a miniscule number in commercial business, and many of them form a part of the professional arm of the nation. The Europeans and Chinese are associated with the commercial trade sectors and provide professional services. Rotumans living on the island of Rotuma are involved in the subsistence agriculture sector while those in Fiji are in the public service. Fiji is relatively well endowed with basic resources that determine growth, yet non-integration socially and economically of its citizens has contributed to poor economic performance and political instability[6]. Within this plural society the communities are separated within the same political system so total integration is
lacking. The communities expect the state to bypass reactionary e´lite to lead the people and intervene to create a broad-based mass politics in a democratic system. This has been observed through change of government twice with elections, but the vested interest has been manipulated within the Fijian and Indo-Fijian communities where the literature about the e´lite in business is replete with examples[7]. The theory related to government and the interest groups suggest that public policy outcomes result from the interplay between few interest groups seeking wealth transfers and the more diffuse interest of groups that supply these transfers (Stigler, 1973). Fiji’s inter-dependent ethnic communes result into influence and disparities of material benefits. As such the pattern of wealth transfers within the polity benefits some at the expense of others. The political competition during Fiji’s elections noted these adversities and failures of the previous governments. However both these democratically elected governments of 1987 and 1999 were short-lived[8]. Coups served some of the interest groups with an intention not to share political power in the multicultural nation. Also, the non-altruistic benefits of government power may explain this action. How do all these affect development when wider perspectives of well-being are neglected? An immediate concern is the effect it has on families, communities, ethnic groups, social and work place groups. Besides income inequality that exists between households (high to low-income quintile, i.e. vertical inequality) horizontal inequality also exits in Fiji. Stewart (2001) defines horizontal inequalities “as inequalities between culturally defined groups in economic, social and political access, and resources”. Inequalities in Fiji arose due to government policies from all these dimensions that affect diverse cultural groups. Elements related here are very low number of non-Fijian members in the government, police force and military force. The top bureaucracy, civil service composition, new appointments and promotions in the civil service are affected and loss of income-earning opportunities has affected displaced farmers. Naidu (2001) discusses in detail some of these issues relating to racialism, racism, and xenophobia in Fiji. Where one group dominates the government, race becomes a major determining factor for allocating economic resources, and social identity causes many barriers and ill-being. Any weakness in government services will be a serious obstacle to human development. Another area where inequality arises is the provision of economic and social resources through economic affirmative action plans and access to benefits[9]. The goals to identify ethnic Fijians with economic functions have been imposed through various government policies over the past 30 years that became part of broad-based post-independence development programmes. Several differentials in policies, more particularly in the post-coup period, were drawn to assist Fijian businesses. The Interim Government of post-2000 coup also formulated a “Blueprint” to fill inequality gap between the Fijian and non-Fijian communities. However, some Fijian leaders have questioned why past Fijian-led governments have failed to meet their interests and aspirations despite the existence of economic affirmative action programmes and Fiji’s five-year development plans since independence[10]. Compartmentalising two major ethnic groups, the racially biased 1990 Constitution and differential policies have created large inequalities besides loss of trust and anger, particularly so when all communities contribute to growth.
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In the allocation of social services funds Fijian aspirations for education and employment have been undertaken to facilitate their entry into several sectors through preferential access to state-funded scholarships, state-funded soft loans for Fijians in business, and state assistance to various Fijian business ventures[11]. The Fiji Development Bank established grant loans for development, special loan schemes with low interest rates and access to the bank’s normal lending schemes for the Fijians. Another excess to the loans made to the Fijians was by the state-owned National Bank of Fiji (NBF). This resulted in financial mismanagement and corruption that accumulated bad debt of more than F$200 million (i.e. US$143 million)[12]. The differentials in policies and preferences for diverse ethnic groups suggest sub-optimal policies selected under many circumstances that have led to inequality in low provision of public goods. As such, Indo-Fijian schools have found less resources being allocated to most of the schools, even when these schools have higher Fijian enrolments than Indians and they too suffer the biases (fijilive.com, 2001). The Indo-Fijian agriculture tenants faced increased rent ranging from 390 per cent to 1,500 per cent assessed on tenants dwellings and ownership of capital goods (tractors) while the rent was determined and applied selectively leading to corruption (Prasad, 1997). The government also embarked to combat and neutralise Indo-Fijians in the sugar industry through the Sugar Industry Protection Decree and National Protection Decree of June 1991 that criminalised legitimate trade union activities. In addition, other industries were controlled under the Economic Protection Decree. Where cultural differences constructed by leaders for political and economic purposes exits the neglect to grant land property rights for development also places individuals at the centre of concern as it will lead to horizontal inequalities. Fiji has many political, economic and social dimensions of inequality and “these inequalities have in no way been tackled” (Stewart, 2001, p. 17). Other major element to avoid further inequality is based on welfare analysis of development policy. Displacing people from land because of cultural differences and bringing the resentment position accentuated by leaders has become a source of conflict in agrarian societies. This also has a bearing on their capacity to overcome difficulties imposed by unfavourable structures, thus economic and social uncertainties create long-term adversities for economic development. The dominance in government by one group and its unwillingness to share political power suggests that any policies to correct inequalities may be thwarted. Economic resources and effects of slow economic growth Has the wealth of nations been the sources of growth for better economic performance? Taking into consideration the factors of production like land, labour and capital the value of these resources to contribute to growth depend on the policies related to accommodate their value. The primary requisite is getting the property rights’ right for effective production process. Yet, developing economies face a major challenge in this respect, especially in terms of land, their primary resource base. For countries locked in ethnic conflicts, the challenge is even greater. Many of the former British colonies in Africa, Asia, and the Pacific are each battling ethnic crisis in which land issues are the core to economic performance that affect the welfare of the people. The growth experience of Fiji indicates that lack of property rights, absence of the rule of law and right institutions accompanied political instability that had adverse
implications on economic factors (Gounder, 2002)[13]. Overall, it increased economic costs leading to impaired economic development. The uncertainty of state policy on renewal of land leases has affected productivity and growth in the sugar industry. In the joint ventures schemes large international hotel chains operate in concert with the chiefs of the land-owning unit to reduce uncertainty of property rights to resources but at a cost to economic efficiency and aggregate output (Chand, 2001). Also, the garment sector is affected by insecure property rights, thus operations like off-shore management, failing to reinvest profits, no linkages with domestic investors deprive the nation of long-term infrastructure investment and local capacity building[14]. Also, benefits for personal gain occurred that led to bank fraud which often is grossly inadequate and corruption often rife. This subverted the political process, abuse of traditional institutions for material gain for some and inefficient reforms; thus such deficiencies have contributed to misallocation of resources, economic decline and weak institutions. On the issue of distributive conflicts and possible failure of why the Fijians (land owners) received a smaller proportion than Indo-Fijian farmers, the economics literature clarifies that complex relationship between inequality of payment under the NLTB and the land owning units and unsuccessful collective actions explain why such inequality in distribution exists. Ward (1995) points out that tenancy of traditional landholdings and authority over groups’ land provides the economic basis of chiefly status, 30 per cent of the land rents find their way into chiefly coffers. Thus, conditional receipts in recognition of obligations have often become personal and unconditional income as the obligations are not met. The NLTB distributed F$18,726,453 in 1998, of that F$5.6 million was allocated to the chiefs (Native Land Trust Board, 1998). Also, the traditional Fijian practices do not include accountability for funds received. Essentially, the case here clearly points to the issue of imperfect information and transaction costs. The terms and conditions of contracts in many transactions for goodwill payment, higher rent, inefficient land management, conditions of land leases such as improvements, directly affect the efficiency of land productivity based on who is empowered to make such decisions. Some slow-growing developing countries that overcome some crucial obstacles, however, are locked into a no-growth steady state. What factors go wrong even when traditional factors provide no concerns? The growth literature suggests that political-institutional factors are the missing links (see Gounder (2002) and the literature cited therein). Political stability and establishment of institutions to protect property and contractual rights is at least as important to avoid conflicts to achieve growth. The empirical evaluation in the recent growth literature includes ethnicity as a growth determinant; Collier (2000) notes that democracy eliminates the adverse effect of ethnic fragmentation on growth. Easterly (2001) points out that with good institutions ethnic diversity does not lower growth. Easterly and Levine (1997) discuss Africa’s growth tragedy caused by ethnic divisions. Fiji’s economic slowdown has deep political roots. In the post-1987 coup period slow growth and rising unemployment have given new life to nationalism, provincialism and protectionism with serious implications[15]. Fiji entered the 1990s with a sharply different economic and political structures compared to a decade earlier. A number of structural reforms were introduced, but the economy did not perform to its capability despite new reform policies resulting in political, economic
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and social conflicts. The real per capita income of 1987 to early 1990s was well below the levels of early 1980s (Gounder, 1999). After over a decade of shaky economic base the priority of the democratically elected government in 1999 under the new 1997 Constitution was to combat slow growth[16]. This government saw to a modest rise in growth, i.e. 9.6 per cent in 1999, but the May 2000 coup negatively affected growth, declining by 9.3 per cent in 2000. The gravest impact of the crises is an increase in the number of people living in poverty where increasing ethnic tensions, power politics and race have been regarded as the causes of domestic problems[17]. The other severe effects have been deep structural problems and a persistent decline in productivity. Factors that affected this are an asserted rigidity of national economic system, a fall in growth of skilled labour (affecting knowledge and technology), and political instability which retarded investment and outflow of capital. The resultant low savings and investment rates not only constrained growth, but also severely limited capital to build market economy and effective democracy. The endogenous shocks (e.g. poor economic policies, coups, social upheavals, conflict) linked with the exogenous shocks (e.g. commodity-price inflations, Asian crises) caused productivity and output slowdown in the 1990s. Scandals over political and business corruption have undermined public confidence. These vast associated problems led to a downturn of the economy that is more complex and pervasive. The government’s prescription for cure is to increase the prices of land leases and double dipping of goodwill payment to land owners and the NLTB. However, this affects the demand for land and decline in productivity, thus low income generated from the land will result in associated economic crises. Stability of the export sector and profits of the manufacturing firms will continue to be adversely affected by negative costs. Causing ethnic segregation and having discriminatory policies also led to less accumulation and leakage of capital so wealth creation is affected in the absence of vital structures, particularly trust. Development policies seem to be prioritised for profits of large organisations that have worsened social inequalities. What are the dangers of the new depression Fiji is experiencing? Businesses and individuals hold debt-burdens and divert cash flows to repayment at the expense of spending while lenders have turned cautious. This in turn created social crisis while the economic slump was blamed on ethnic hatred. Ultimately economic development is adversely affected with low production, job loss, falling income, high crime rates and school dropouts, trafficking of drugs, sickness, AIDS, and environmental problems. Segmentation in the production system led to transfer of hardship to Fijians, Indo-Fijians and other ethnic groups: There are severe inequalities within each community, greater in the Indian community, such that poverty levels and basic need indicators are somewhat worse in this community (Stewart, 2001, p. 16).
The factors leading to humanitarian crises and conflict are an interaction of economic and social factors with political and cultural divisions. What can be done to reduce social problems and promote growth? Improved prospects for peace should be greater spending on all people and productivity-raising investment. Workers can be shifted to new jobs and financial resources reallocated to create those jobs and income-earning opportunities. In the absence of such shifts in human and capital resources, particularly displacing people from land will create more
problems seen in the lessons of the Great Depression and Cold War periods. While growth alone cannot solve all the problems by itself, economic growth creates additional resources for higher standard of living. National and collective actions and security for all can move towards a liberal society and open economy. Pursuing economic and social policies, increasing participation of all people will serve not only their interest, but also that of the nation through global markets to promote unity, build closer links, economic success and political viability. Equality before identity The internal reasons of what multiculturalism offered have been discussed in terms of ethnic classification, economic resources based on social identity, inequalities and causes of conflict in the previous section. Within this perspective reason for equality before identity is crucial to question social identity and its overpowering influence for development as self interest and human motivations play a substantial role in the market economy and where important social values matter. Lessons from the colonial time of moving the economy towards a market-oriented system of earning income show that conflict created in the form of confrontation, threats, personalised politics, and long-standing prejudices between races contributed to ethnic conflict that affected people and Fiji’s development. The leaders of Fiji have pledged for national reconciliation to build a society based on goodwill and compromises. The words of wisdom also plainly apply to how markets and societies work, any lack of political, economic and social values of its respective functions affect growth, thus reason for equality before identity is essential. The sense of social identity has a significant impact on human behaviour and it is central to human life. But the question of social identity has to be asked, “where identities emerge by choice or passive recognition and how much reasoning can enter into the development of identity” (Sen, 1999, p. 6). In the Theory of Justice (Rawls, 1971), the framework of fairness for a group of people involves arriving at rules and guiding principles of social organisation that pay particular attention to everyone’s interests, concerns and liberties. Applying Adam Smith’s assumptions of self-interest and human motivations to a market economy suggest that social role or such values matter (Smith, 1976). Taking into consideration Smith’s (1976, pp. 26-7) famous words of “why the butcher, the brewer, or the baker wants to sell their products, and why the consumers want to buy them”, the economic functions of such activities relate to production and the distribution processes. Essentially, success of a market-based economy depends on social norms where productivity and discipline is greatly influenced by work ethics. Important to the “culture of the Fijian way of life” raises the question of the glory of capitalism that everyone wants to share yet moral quality of good business behaviour is just as important: The perception among the Fijian institutions is that Fijian aspirations can be enhanced in isolation from others’ rights and against established norms and values of civil society, and that economic progress can be achieved without the certainty of property rights and equality of political rights based on sound democratic principles and good governance (Prasad, 1997, pp. 7-8).
The unconstrained greed and/or moral success in their societal behaviour, or defence of particular customs and traditions split up the nation that is not within normative reach
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of each other. Capitalism based on ethnic identity and economic affirmative actions come into conflict with Fiji’s economic liberalisation polices of globalisation that ultimately threatens state policies that seek to grant ethnically-based preferences (Ratuva, 2000). The question arises then is whether the government can respond to the climate of globalisation and maintain close affinities to the policies of market economies. Ethnic separation categorised in the 1970, 1990 and 1997 Constitutions by race and the influence of shift in social identity as a “visitor or vulagi” to non-ethnic Fijians followed decisive politics (see also Ravuvu, 1991, pp. 58-60). Therefore, “identification of the citizen with the republic as a common enterprise is essentially the recognition of a common goal of the role of political identity” (Taylor, 1995, pp. 191-2). However, the implications of this doctrine in culture, identity and way of life have not been the case despite Fiji being a republic nation. Given Fiji’s republic status and the plural society means that being part of the nation also direct the citizens to embrace loyalty that is similar to indigenous people. A question arises then, what relationship does it have to being equal in the market? The practical interactions in the markets and exchange of goods and services involve norms that are not derived through relationships between people. For example, Fiji’s sugar sold in the European Union (EU) market receiving a higher preferential price of at least two or three times the price of world market price of sugar does not mean that the higher price is given because of confined inter-group relations but is supported in terms of relations between nations. Also, Fiji’s commitment to the peace-keeping force in Lebanon to uphold peace under the United Nations banner is even when the involved conflicting parties do not belong to Fiji. As markets do not see the identity of the person to buy and sell the commodities and provide services, the political conception of separatism can be ruled out to bring all actors to market for equal rights.
Aid, conflict settlement and growth For economic development of developing countries in the post-Second World War period the provision of aid administered with the promotion of welfare has been its main objective. Aid focus involved economic assistance, humanitarian assistance, emergency relief, and food aid. A recent important development in the aid field occurred as developing countries face conflicts; it produced more complex circumstances and multidimensional issues of using aid for security and conflict settlement (see Macrae, 2001; Addison, 2000). The 1990s witnessed the expansion of political aid by major bilateral and multilateral donors to address conflict prevention, and management and resolution (i.e. post-conflict peace building). A normative and political dimension to development cooperation policy incorporates good governance, democracy and participatory development as core objectives (Santiso et al., 1998). What role can foreign aid play to achieve stability and avoid ethnic conflict for economic growth in Fiji? For this, aid is important for development-related goals to solve the conflict. First, development assistance can support prevention of conflict for economic development. So conflict is not just linked to poverty, but also becomes part of the development process within the political framework where economic, social and political-preventive diplomacy are employed to support a nation’s development goals. Second, as conflict occurs, than development assistance can be utilised for various purposes (i.e. emergency humanitarian aid, multinational peace-keeping force,
multinational negotiation, etc). Foreign aid’s new role is vital in the light to obtain peace and progress for the people. Social conflict to the extent countenanced now in Fiji was not seen immediately after the first 1987 coup. The racially biased 1990 Constitution, consistent ignoring land leases, and non-acceptance of the democratically elected government in 1999 once more led to other problems[18]. So conflict rose with insecurity. The May 2000 coup heightened violence; damage was done to houses, farms and personal property (farm implements and vehicles were razed) and cattle were slaughtered; burning and looting of homes and shops affected the Indo-Fijian community. Most people moved to displaced peoples centres to escape the racist attacks on their property and life. Two refuge camps were established one at the Fiji Girmit Council complex in Lautoka for people residing on the main island of Viti Levu. Some 70 families i.e. around 300 men, women and children were affected by post-coup racist violence, children and youth comprised the largest number (Naidu, 2001). Another camp in Valelawa was established on the other main island of Vanua Levu for those evicted farmers whose leases had expired and were about to expire and had the potential to being evicted by the NLTB/landowners. Around 40 families i.e. some 200 individuals were involved. Support to the displaced people in Lautoka came from the Fiji Human Rights Groups (the camp organisers), the Citizens Constitutional Forum, Fiji Women’s Crisis Centre and religious groups like Sai Society of Fiji. The Valelawa camp has been supported by the National Farmers Union. The centres existed for more than two years with no support from the government directly. With some 16 families still at the Valelawa camp no government assistance has reached this people. The President of Fiji, Ratu Josefa IIoilo in the Great Council of Chiefs meeting held in May 2002 pointed out that “unity for all Fiji’s communities is the only option to the way forward for the nation . . . We had allowed our politics to emphasise our racial differences rather than focusing on the ties that binds us together . . . We should instead take the alternative route in endeavouring to forge ahead as one people, one nation and one destiny, all people in Fiji are members of just one race and that is the human race” (fijilive.com, 2002). These words focus on rebuilding the nation and ultimately the lives of the people. It requires action by the government and the global community. The EU has supported the President’s call for unity as guidance for Fiji in overcoming some of the obstacles, and has restarted its development cooperation programme by allocating $42 million to cover development programmes and $4.2 million as a reserve for unforeseen events (Daily Post, 2002b). Most bilateral donors (i.e. Australia, France, Japan, New Zealand) suspended aid to Fiji after the May 2000 coup but reinstated their aid programmes in 2001. A proportion of bilateral allocation has been utilised for conflict resolution activities. An area where assistance could have been directed is to the farmers who lost their homes and entire livelihood. Some farmers lost their assets of a value of around F$120,000 while some lost more than this value (Daily Post, 2002c). The government in the spirit of national reconciliation, nation building and unity promised compensation to affected farmers (i.e. home, food ration, farm implements including fertilisers and seedlings) until their crops were harvested and sold. The government compensation of $5,000 worth homes and three months’ food rations were all some farmers received. Farmers lost their entire asset and to start-up their livelihood/business relates to sunk costs. They need fixed costs to start, as bygones are forever bygones, sunk cost leads to sunken feelings where
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lives were endangered by the very people who worked on the farms and where investment has been totally lost resulting in zero income. As development assistance from external sources was to assist these people, resolve conflict and build a caring society, people found lack of assistance arriving from the government. In the case where farmers faced violence, children and women were also part of the disturbing escalation in the violence. Economic factors and ethnicity played a large role in the actions of the rebels. A long-term adverse impact that has a high intensity belligerent effect is on the children who witnessed the atrocities and threats on them and their families in Mauniweni and Seaqaqa districts where people have lived in the multi-racial community for over 100 years. The racial relationships between the communities were shattered during the May 2000 coup. Non-cooperation from the rebel leaders and village head indicated moral hazards[19]. After over a year and a half of the farmers living in a refuge camp the request by the village head for talks of reconciliation began. Peace, conflict resolution and human rights were discussed in the process of reconciliation and recovery. While it is one thing to be part of international peacekeeping force that Fiji has been involved in Lebanon, Solomon Island, it is quite another to understand the desires and motives of belligerent to influence their actions in ways conducive to peace rather than conflict. Community concerns for all people and noble motives of unity, peace, work ethics, sharing resources, bearish enmity towards no one, cultural values and societal goals are in turn to determine the respective goals to attain peace. Another of the greatest social challenges now for the development of assistance in Fiji is the provision of resources for the survival of some 400,000 people living in poverty. Establishment of various programmes by the government under the economic affirmative action indicate inequality in resource allocation. Absence the inclusion of all ethnic groups in the government’s blueprint is a criticism made even by Citizens’ Constitutional Forum, human rights organisations and various leaders of the Senate. The Indo-Fijian farmers need assistance for resettlement and to start another means of livelihood. Inequitable treatment of various ethnic groups can be a major source of social instability and hence a major obstacle to improvements in well-being. As conflict causes low income and low income causes conflict, the two-way causation is complex and multi-dimensional; it culminated in horizontal inequalities especially when policies of deliberate exclusion from access to a wide variety of social and economic elements were adopted. This illustrates a rise in the cost of peace due to rising inequality, which in turn will prevent other ethnic groups to progress economically and politically. A number of humanitarian crises is escalating since 1997 caused by non-renewal of land leases and since the May 2000 crises where there was violence, threats and mass displacement of people. Not only do these effects cause huge suffering, but they are also a major cause of underdevelopment and poverty. With no income and basic needs to support any activities, humanitarian crises are increasing. In the international community’s fight against poverty, the central objective of the World Bank, United Nations Development Programme, International Monetary Fund and other bilateral donors’, prevention of humanitarian crises needs to be given the highest priority and should incorporate considerations to eliminate inequalities.
The role of aid for development and conflict resolution should implement projects that can provide income-earning opportunities, programmes for school assistance to avoid high drop out rates in the primary and secondary levels of education, improve poor health and housing conditions and incorporate programmes to combat both horizontal and vertical inequalities. In this case the ratio of funds required to start-up could be from external aid agencies via programmes such as micro financing. Financial services help the poor expand their economic activities and increase their income for self-confidence to grow simultaneously. Since the aid agencies have committed to resolve conflicts, getting to the affected people and targeting aid in real terms to assist this people are just as relevant. History notes that economics of depression lead to conflict; overcoming this through external sources also avoids the power of abusing aid provided for actual purpose. As the public sector is a key player in Fiji, how institutions fit into the process to identify the growth components and resolve ethnic conflict are most crucial for resource allocation that affect policy reforms and national reconciliation. The nation needs a strategy for domestic factors of production; a sound framework for handling conflicts while norms of behaviour, conventions and the code of conduct is just as important towards eliminating conflict legislated as part of one package for all. Stable growth will also require closer coordination between government, communities and aid agencies. As Fiji has adopted market-economy principles stronger growth will require eliminating ethnic identity and segregation for long-term growth. The focus of attention should include policies and resources at the micro level and their possible impact at the macro level. Therefore, the role of social capital in the functioning of democratic institutions in the segmented societies require those engagements that build trust among people, increase the predictability of the behaviour and promote collective action. An important aspect of these values is unity. Conclusion Fiji’s institutional arrangements have been the outcome of strategic ethnic and distributive conflicts and inequality in the distribution of power and resources. The institutions have failed to recognise linkages between politics and economics and along with the internal dynamics of debilitating domestic structures and processes development goals are hindered. Government, at every level is a key player and therefore it is important for it to be attentive to how development strategies affect the nation. Causing segregation and having discriminatory policies led to factor distortions, increase in economic costs and poor economic performance under which production and exchange took place. One of the challenges is that institutions relate to democratic rule, property rights, so economic hardship will not enable to exploit ethnic rivalries and tensions, but mitigate the adverse consequences for transformation. The present state of Fiji directs to lack of institutional structures and opportunities for cooperative problem solving where societies have been sharply divided along ethnic lines. In this context it will result into barriers faced by the poor in the capital market through lack of income earning capacity that reduces a society’s potential for productive investment, innovation and human resource development. The political arena does not indicate that under such circumstances the government is motivated by considerations to improve its political support base and carry out re-distributive
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reform. Other communities in Fiji have contributed to increasing productivity and enhanced credibility of commitments. Thus, to create socially more efficient land property rights is vital, just as is the accountability of various institutions. To check for the abuse of power at all levels work better when the poor have more of a stake in the asset base. With unity and solving ethnic and social inequalities can close a whole range of hardships for all communities by providing security and involvement in the production process, and comprehend factors to potentially prompt a condition that befits all citizens. When there are so many humanitarian needs and human misery connected to ethnic conflict, there is little prospect for a fast recovery in output and employment without provision of political and civil rights, equity, security and basic resources. International cooperation sought to meet the changing domestic requirements and encounter economic goals for reconstruction and growth are important for economic development. The most important challenge for development cooperation is to improve serious problems of horizontal inequality, assist unemployment, social, ethnic and nationalist tensions so violence can be contained. Despite traditional national politics and interest groups in Fiji, a democratic system can progress to find solutions to preserve stability and nurture growth through its policy formulation for the well-being of all people. The societal peace and harmony, reason for equality before identity and to promote collective actions for development are such values that matter in a market economy.
Notes 1. Land alienation took place between 1840 and 1874 (Ward, 1995). Of the 4.5 million total land area of Fiji, the Whites owned 1.5 million acres of land (Prasad and Tisdell, 1996). 2. With the commencement of trade activities the Fijians under the Deed of Session possessed the non-alienated land at that time. The plantations were managed by imported labour, i.e. initially 1,649 labourers came from other Pacific islands. Then in 1879, Governor Gordon brought Indians to work mainly on sugar plantations. This situation can be compared to Governor Gordon’s use of immigrant labour in Trinidad and Mauritius. 3. These groups of people have their own religion, own culture and language besides own work ethics. The British annexed Rotuma in 1879 that was administered as a dependency of the Colony of Fiji, which became part of Fiji at independence in 1970. 4. When Fiji was ceded to Great Britain in 1874, the British rule established a system of indirect rule (divide and rule policy) for separate native administration to preserve indigenous culture and way of life. Indians were brought to Fiji on work on the farms under the Indian Indenture System. 5. Fiji’s economy comprise of subsistence and commercial sectors, the latter being predominantly engaged in the production of exports. Agriculture, tourism and manufacturing sectors are major contributors to gross domestic product, thus trade is highly important to Fiji. 6. “Non-integration – consciously engineered and preserved as it had been . . . constituted Fiji’s main problematic feature” (Doornbos and Akram-Lodhi, 2000, p. 11). 7. Some recent comprehensible studies by Lawson (1991), Sutherland (1992), Durutalo (1996), Chand (1997), Ratuva (2000) discuss this issue where some provisional chiefs, e´lite Eastern chiefs, and Indo-Fijian commercial business community mark the literature on e´lite.
8. The 1987 coalition government of Bavadra lasted a month and the 1999 coalition government of Chaudhry governed a year of its term. Also abrogation of the 1997 Constitution by the Fiji Military, non-inclusion of the Fiji Labour Party as a coalition partner to form the government in 2001 even though the party won 27 seats out of 71 (second highest number of Parliamentary seats) are some political dimensions of vested interested groups. See also Lal and Pretes (2001). 9. Some examples of other countries that face problems of access to benefits are British Guyana and Yugoslavia. 10. The economic affirmative action in the pre-1987 coup period was associated with a more “conservation paramountcy of Fijian interest” perspective, while the affirmative economic action of the post-coup period is commonly seen as an embodiment of “progressive” ethnic Fijian thinking (Ratuva, 2000, p. 226). 11. Latest statistics on Fijian education indicate a 90 per cent drop out rate from 1988 to 2000, and the scholarships provided to ethnic Fijians have a very low completion rate (fijilive.com, 2001). These initiatives had only limited success (Sutherland, 1992) and the funds and resources allocated under economic affirmative action in large part have primarily benefited a small minority of Fijians (Ratuva, 2000). 12. To avoid total collapse the government injected F$213.3 million (US$152 million) to restructure NBF. Government budget deficit reached 9.2 per cent of gross domestic product (GDP) in 1997, of which over 13.3 per cent was a direct result of the NBF crisis. 13. The potential causes of Fiji’s problems ranges from bad policies, economic volatility, poor education, political instability, institutional to ethnicity and lack of democratic principles (Gounder, 2002). 14. Chand (2001) points out these issues as lessons for development from Pacific Island countries experiences. Levine (1997) notes some of these concepts are due to impact of culture and thus conflict exist in Fiji, Papua New Guinea, Vanuatu, and the Federated States of Micronesia. 15. Fiji experienced immediate decline in income, private and foreign investment, an outflow of skilled labour accompanied by a negative impact on the trade balance. Economic growth declined by 6.4 per cent in 1987 and stagnated in 1988 while 1991-94 period averaged 2.5 per cent but fell to 1.4 per cent in 1995. The adverse consequences of traditional growth factors led to a loss of competitiveness. Reform policies were introduced, i.e. emphasis on export-led growth, reduction of protective tariffs, provision of export incentives, reform of the tax system (Government of Fiji, 1993). Various reasons were given to justify the coups, see Powles (1996) Doornbos and Akram-Lodhi (2000). 16. Fiji experienced negative growth rates of per capita GDP in 1997 and 1998, and “the medium term outlook continues to be affected by low levels of investment, downturn in employment growth, building and construction remain very weak, and partial indicators of plant and equipment investment point to little, if any growth” (Reserve Bank of Fiji, 1999, p. 1). Fiji’s Bureau of Statistics notes that after the May 2000 coup, “Fiji’s trade deficit widened by $71.2 million for the year ended 2001” (Daily Post, 2002a). 17. About 25 per cent of the households lived below the poverty line in 1991 compared to 10 per cent in 1977 (Ahlburg, 1995, United Nations Development Programme and Government of Fiji, 1997). “Approximately 60 per cent of the households are living below the poverty line, poverty accelerated after the events of 2000” (Narain, 2002, p. 2). 18. According to Elster (1994) constitutions matter for economic performance to the extent that they promote stability, accountability and credibility. 19. Save the Children Fiji and Save the Children New Zealand (2002) undertook a project in 2002 to address the issues of racial tension so children could voice their concerns through Playthreatre in Mauniweni, Fiji. Murshed and Sen (1995) have discussed the issues of moral
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hazard in relation to aid conditionality and military expenditure in developing countries. In the African context Addison (1998) presents various issues of moral hazard and the post-conflict reconstruction and reform policies. References Addison, T. (1998), “Rebuilding post-conflict Africa: reconstruction and reform”, Research in Progress, No. 18, UNU/WIDER, Helsinki. Addison, T. (2000), “Aid and conflict”, in Tarp, T. and Hjertholm, P. (Eds), Foreign Aid and Development Lessons Learnt and Direction for the Future, Routledge, London. Ahlburg, D.A. (1995), Income Distribution and Poverty in Fiji, UNDP, Suva. Ali, A. (1973), “The Indians of Fiji”, Economic and Political Weekly, Vol. 7, p. 8. Chand, S. (1997), “Ethnic conflict, income inequality and growth in independent Fiji”, Discussion Paper, No. 97/6, Research School of Pacific and Asian Studies, The Australian National University, Canberra. Chand, S. (2001), “Lessons for development from Pacific Island Countries”, Pacific Economic Bulletin, Vol. 16 No. 1, pp. 95-108. Collier, P. (2000), “Ethnicity, politics and economic development”, Economics and Politics, Vol. 12, pp. 225-45. Daily Post (2002a), 9 May. Daily Post (2002b), 15 May. Daily Post (2002c), 28 June. Doornbos, M. and Akram-Lodhi, A. (2000), “Introduction: confronting the futures, confronting the past”, in Akram-Lodhi, A.H. (Ed.), Confronting Fiji Futures, Asia-Pacific Press, Canberra, pp. 3-20. Durutalo, A. (1996), “Social consequences of economic policy”, in Grynbery, R. (Ed.), Economic Prospects for the Pacific Islands in the 21st Century, School of Social and Economic Development, University of the South Pacific, Suva, pp. 121-43. Easterly, W. (2001), “Can institutions resolve ethnic conflict?”, Economic Development and Cultural Change, Vol. 49 No. 4, pp. 687-706. Easterly, W. and Levine, R. (1997), “Africa’s growth tragedy: policies and ethnic division”, Quarterly Journal of Economics, Vol. 122 No. 4, pp. 1203-50. Elster, V. (1994), “The impact of constitutions on economic performance”, in Bruno, M. and Pleskovick, B. (Eds), Proceedings of the World Bank Annual Conference on Development Economics, World Bank, Washington, DC, pp. 209-26. fijilive.com (2001), 21 April, available at: www.fijilive.com/news fijilive.com (2002), “Speech of President IIoilo”, 9 May, available at: www.fijilive.com/ news/news.php3 Gounder, R. (1999), “The political economy of development: empirical evidence from Fiji”, Economic Analysis and Policy, Vol. 29, pp. 133-50. Gounder, R. (2002), “Democracy, economic freedom, fiscal policy and growth: findings and reflection for Fiji”, Contemporary Economic Policy, Vol. 20, pp. 234-45. Government of Fiji (1993), Opportunities for Growth: Polices and Strategies for Fiji in the Medium Term, Government of Fiji, Suva. Kurer, O. (2001), “Land and politics in Fiji: of failed land reforms and coups”, Journal of Pacific History, Vol. 36 No. 3, pp. 299-315.
Lal, B. and Pretes, M. (Eds) (2001), Coups: Reflections on the Political Crises in Fiji, Pandanus Books, Canberra. Lawson, S. (1991), The Failure of Democratic Politics in Fiji, Clarendon Press, Oxford. Levine, S. (1997), “Culture and conflict in Fiji, Papua New Guinea, Vanuatu, and the federated states of Micronesia”, in Brown, M.E. and Ganguly, S. (Eds), Government Policies and Ethnic Relations in Asia and the Pacific, MIT Press, Cambridge, MA, pp. 457-508. Macrae, J. (2001), Aiding Recovery? The Crises of Aid in Chronic Political Emergencies, Zed Books and Overseas Development Institute, London. Murshed, S.M. and Sen, S. (1995), “Aid conditionality and military expenditure reduction in developing countries: models of asymmetric information”, Economic Journal, Vol. 105 No. 429, pp. 498-509. Naidu, V. (2001), “Racialism, racism and xenophobia in Fiji”, paper presented at the World Conference against Racism, Racial Discrimination, Xenophobia and Related Intolerance (WCAR), South Africa, 31 August-2 September. Narain, D. (2002), Poverty – A Rising Social Ill, mimeo, available at: www.fijilive.com/news.php3. Narayan, J. (1984), The Political Economy of Fiji, South Pacific Review Press, Suva. Native Land Trust Board (1998), ALTA: The Survey, Findings and Recommendations, ALTA Task Force Final Report, Vol. 1, Parliamentary Paper No. 4, Native Land Trust Board, Suva. Powles, C.G. (1996), “Constitutional reforms in Fiji”, Pacific Economic Bulletin, Vol. 11, pp. 73-5. Prasad, B.C. (1997), “Property rights, governance and economic development”, in Chand, G. and Naidu, V. (Eds), Fiji: Coups, Crises, and Reconciliation, 1987-1997, Institute of Applied Studies, Suva, pp. 2-31. Prasad, B.C. and Tisdell, C. (1996), “Getting property rights ‘right’: land tenure in Fiji”, Pacific Economic Bulletin, Vol. 11 No. 1, pp. 31-46. Ratuva, S. (2000), “Addressing inequality? Economic affirmative action and communal capitalism in post-coup Fiji”, in Akram-Lodhi, A.H. (Ed.), Confronting Fiji Futures, Asia-Pacific Press, Canberra, pp. 226-48. Ravuvu, A. (1991), The Fac¸ade of Democracy: Fijian Struggle for Political Control, 1830-1987, Reader Publishing House, Suva. Rawls, J. (1971), Theory of Justice, Oxford University Press, New York, NY. Reserve Bank of Fiji (1999), News Review, No. 16, p. 10. Santiso, P., Harris, P. and Bloomfield, D. (1998), “Sustaining the democratic settlement”, in Harris, P. and Reilly, B. (Eds), Democracy and Deep-rooted Conflict: Options for Negotiators, International IDEA, Stockholm. Save the Children Fiji and Save the Children New Zealand (2002), The River Divides, Pilot Project Report, Save the Children Fiji, Suva. Sen, A. (1999), Reason before Identity, Oxford University Press, Oxford. Smith, A. (1976), An Inquiry into the Nature and Causes of the Wealth of Nations, Clarendon Press, Oxford, (originally published in 1776). Stewart, F. (2001), “Horizontal inequalities: a neglected dimension of development”, WIDER Annual Lectures, Vol. 5, United Nations University, World Institute of Development Economics Research, Helsinki. Stigler, G. (1973), “General economic conditions and national elections”, American Economic Review, Vol. 63 No. 2, pp. 160-71.
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Sutherland, W. (1992), Beyond the Politics of Race: An Alternative History of Fiji to 1992, Panther Publishing Press, Canberra. Taylor, C. (1995), Philosophical Arguments, Harvard University Press, Cambridge, MA. United Nations Development Programme and Government of Fiji (1997), Fiji Poverty Report, Suva. Ward, R.G. (1995), “Land, law and customs: diverging realities in Fiji”, in Ward, R.G. and Kingdom, E. (Eds), Land Custom and Practice in the South Pacific, Cambridge University Press, Cambridge, pp. 198-249.
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On the theory of post-Communist economic transition to market
Post-Communist economic transition
Vladimer Papava Georgian Foundation for Strategic and International Studies, Tbilisi, Georgia
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Abstract Purpose – The paper investigates the utility of economic theory for post-Communist economic transformation. It serves to explain the main reasons for market reform failure in different post-Communist countries. Design/methodology/approach – A literature review suggests that after the collapse of the Communist system there was no economic theory of transition to market. Whenever one considers the transition of post-Communist economies to a market system (which, in fact, is nothing but post-Communist transition to capitalist economies), it has to be placed on record, as this kind of transition has no precedent in history. Findings – The main mistake of gradualists stems from their overlooking some very important conditions for successful transition: political guarantees and internal assets for reforms. And the success of shock therapy rests on the paradox, “the worse, the better”. Originality/value – There is as yet no special economic theory of post-Communist transformation and it is just developing. This paper helps one to understand the main features of shock therapy and gradualism for designing the framework of such a theory. It is geared towards researchers and students interested in the theoretical aspects of the post-Communist economic transition to markets. Keywords Economic change, Marxist economics, Capitalist systems Paper type Literature review
Whither economic theory? Professor Igor Birman, the famous Russian economist who emigrated from the USSR many years ago, once noted that capitalism had been developing for many centuries and this process had never depended on educated or uneducated economists, their advice and recipes (Birman, 1996, p. 521). Although this assertion is not unquestionable at all, in principle, it alludes to that historical phase in the development of economic science when it (science) was nothing but a mere reflection of economic praxis. Economic science has a long history, but it was not always prepared to give right and timely answers to all topical questions that praxis would raise. Nevertheless, as a rule, economic science would manage to “catch up” in a few years stimulating thereby a search for new solutions to practical issues of economic growth. The rise and development of Keynesianism is one of the most remarkable examples in support of this assumption. Despite this, leading economists in the West tend to exaggerate the issue of the crisis of economic thought which, in their opinion, consists in its incapacity to suggest right solutions to the problems and predict the future of capitalist economy (Heilbroner and Milberg, 1996). The collapse of the Communist regime in East Europe and the former USSR and an almost concurrent disintegration of the latter resulting in the emergence of 15 newly independent states gave rise to substantially new problems, no solution to which could be confined to any of those classical schemes that were elaborated by economic science during the whole period of its existence (Nove, 1993).
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The transformation of Communist-style governmental institutions into market-based ones by itself is a very difficult task (Nunberg, 1999). In the countries that emerged as a result of the disintegration of the former federal states (such as the former USSR, Yugoslavia and Czechoslovakia) and that are not successors of the latter, the process of transition from the Communist-oriented economic system to market economy is further aggravated by a need to lay economic, but not merely economic, foundations for one’s own statehood (Balcerowicz, 1995, p. 146; Milanovic, 1998, p. 3; Papava, 1996a, p. 252). In this context, by far “easier” looks the challenge that the former German Democratic Republic had to deal with, as the transition to market in this country was preceded by the unification of two German states (e.g. Derlien, 1999). This process belongs to a group of the most significant events of the end of the twentieth century (Stiglitz, 1992, p. 137) and could be regarded as a global process of transition to market economy (Berend, 1994), whose impact on the development of economic thought could be compared with such events as the overcoming of the Great Depression of the 1930s (Avtonomov, 1996, p. 11), or the reconstruction of Europe after the end of the Second World War. As John Kenneth Galbraith points out, the said process is on a par with both world wars, as one of the three greatest historical events that the twentieth century is remarkable for (Inozemtsev, 1998, p. 7). It is not by accident that referring to the process of post-Communist transformation some economists have used the word “refolution” which is formed by the combination of the words “reform” and “revolution” (Goldstone, 2001, p. 117). In a number of works (e.g. Andor and Summers, 1998; Kuzin, 1994), the problems of transition to market economy are considered in the light of and by analogy with the so-called “economic miracle” approach (Petrakov, 1998, p. 1990). (In the Georgian context, see (Petukhov, 1999).) The practice of evaluating successful applications of market mechanisms by using language like “economic miracle” gained in popularity especially with respect to the countries of East Asia (World Bank, 1993). However, the financial crisis of the end of the twentieth century that had shaken those economies up drastically reduced reasons which could justify the use of the word “miracle” in an economic discourse (Claessens and Glaessner, 1997; Weder, 2001). That the modern economic theory is still unable to give exhaustive and theoretically justified answers to many important questions relating to the transition to market economy has been recognised by many leading economists of our times (e.g. Becker and Becker, 1997, p. 259; Stiglitz, 1996, p. 3). It might be stated without reservation that there is no economic theory of transition at all (Bertenev, 1996, p. 301; Papava, 2000). Birman (1996, p. 521) in his traditionally radical and, therefore, debatable style has asserted that economic theory reaffirmed its “convincing impotence” in dealing with the problems of transition to market economy. It must be emphasised that from the standpoint of western economists even the problems of centrally planned development, not to mention those of transition to market, have always been considered as a temporary deviation from the generally accepted capitalist norm, for which reason thinking of transitory problems to them is nothing but a waste of time (Aukutsionek, 1996, p. 11). Nevertheless, the world’s many well-known economists believe that since the early 1990s transition to market economy has become a key subject matter of economic research (Galbraith, 1992, p. 46), encouraging economists to review the problems of economic theory itself in the light of post-Socialist development (Buchanan, 1992).
The first comprehensive textbooks of transition to market have already been published. Their authors come from both economies in transition and western developed nations (e.g. Abalkin, 1997; Belokrylova, 2002; Buzgalin, 1994; Geiger, 1992; Nikolaeva, 2001; Papava, 2002b).
Post-Communist economic transition
On the transformation terminology Before continuing the discussion, it would be advisable to touch on some terminological issues. Specifically, referring to the post-Communist economies it is common to use expressions like “economy in transition” or “transitional economy” which are very vague by their nature, as it is not clear what kind of “transition” we are talking about. Although in the modern world it is transition to market economy that usually takes place, but by its nature this process is not a homogeneous one as economists have set apart two types of transitional economy – the traditional and the new ones: while the former is typical of tropical Africa and South Asia, the latter is more widespread in East Europe, the former USSR, some Latin American countries and China (Geiger, 1992, Ch. 1). It must also be noted that according to generally accepted definition “economies in transition” include just the countries of East Europe, former Soviet republics, China and Mongolia, although there are multiple countries across the globe (up to 30 of these in Africa alone) that are at the stage of transition from central planning to free market (Yarbrough and Yarbrough, 1997, p. 469). The world history of the twentieth century knows such occurrences as the transition from capitalism to socialism (Bukharin, 1990, pp. 81-207) and then to communism (Kanth, 1997, pp. 211-25; Kornai, 1992, pp. 26-30; O’Brien, 1989, pp. 6-13, 23-8;); transition from capitalism to post-industrial, post-economic society (Bell, 1976; Inozemtsev, 1995, 1998); transition from modern capitalism to socialism (Brown, 1995, pp. 334-56; Buzgalin, 1994, pp. 23-32); transition from Stalinism to the socialist market economy (Nolan, 1995); and transition to drastic growth of production in the USA (Feldstein, 1980). As Drucker points out, today mankind is in the process of transition to a global economic system (Inozemtsev, 1998, p. 6) and is on the verge of the formation of post-Communist society (Drucker, 1993). According to Galbraith (1998, pp. 209-16), ongoing transition leads to an “affluent society”. In the 1990s, with the upcoming of the third millennium, the issues of cyberspace, cybereconomy and a sovereign individual in it were raised (Davidson and Rees-Mogg, 1998, pp. 11-39). It must be noted that practically all more or less serious economic developments observed in different regions and parts of the planet could be reviewed in the context of the world’s universal economic transition (Hinshaw, 1996). Belarus is the most apparent example of reversion from market to a central planning economy (Antachak et al., 2001). Balcerowicz (1995, p. 145) suggested the following classification of historical “transitions”: . Classical transition that implies the process of expanding democracy in leading capitalist nations in 1860-1920. . Neoclassical transition which was reflected in democratic developments after the Second World War (in West Germany, Italy and Japan in the 1940s; in Spain and Portugal in the 1970s; in some Latin American countries in the 1970s and 1980s; and in South Korea and Taiwan in the 1980s).
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Market-oriented reforms in non-Communist countries (in West Germany and some other western nations after the Second World War; in South Korea and Taiwan in the early 1960s; in Chile in the 1970s; in Turkey and Mexico in the 1980s; and in Argentina in the 1990s). Asian scenario of post-Communist transition (China in the late 1970s and Vietnam in the late 1980s).
From the standpoint of the “welfare state” the whole world could be regarded as one that undergoes the process of transition to that direction (Esping-Andersen, 1997). In the light of developments that have resulted in the shaping up of a “New World Order” the meaning of the term “transition” has expanded to connote a set of strategies which enables the society to define and achieve the given order with minimum losses (Calkins and Vezina, 1996, p. 311). It is useless to look for a general definition of the terms “economy in transition” and “transitional economy”, as it cannot give us anything either in theoretical, or (especially) in practical senses. A good example of the general approach to the process of transition, in general, and “transitional period”, in particular, consists in the definition of it as “a period of time during which certain historical choice has to be made” (Rakitskaya, 1996, p. 87). It must be noted, however, that as the author of this definition remarks no “transitional period” could be in place if the choice is self-evident (Rakitskaya, 1996, p. 87). According to one of the many ambiguous definitions of “transitional economy”, it is a status between any two psychologically and theoretically opposite regulatory approaches, which are separated from each other by systematic or shocking conversion and which, in turn, differ from each other by powerfulness and duration (Kuznetsov, 1994, pp. 5-6). Another definition of “transitional period” or “transitional economy” says that it embraces both transition to a certain normal and balanced development status and a switch from one sustainable and balanced mode to another (Basilia et al., 2001, p. 93). Another general approach consists in reconsidering the “process of transition” in the light of the “catastrophe theory”. Specifically, such “processes”, in a sense, are typical of a transition from one social/economic organisation to another, which can be referred to as a system transformation and, in a broader sense, any kind of system modification (Shurgalina, 1997, pp. 66-7). One more example of the general approach to the “process of transition” is based on “institutional analysis of the evolution of transition to development” applied in different countries (Intriligator et al., 1999). It is obvious, therefore, that no generally accepted definition of “transitional period” has been developed yet (Berezin, 1999, p. 253; Papava, 2000). Based on all the above-described approaches one can conclude that whenever discussion is specifically about the transition of post-Communist economies to the market system (which, in fact, is nothing but post-Communist transition to capitalist economy) or, as Galbraith (1996, p. 101) would say, “to something approaching a market economy”, it has to be placed on record, as this kind of transition has no analogy in history (Campbell, 1991, p. 227). To exhaust the subject of terminology, it must also be noted that out of these two terms – “post-Socialist” and “ post-Communist” – we would recommend to give
priority to the latter as it denotes development orientation of relevant nations before their transition to market economy (Menshikov, 1996, pp. 17-22). It is also important to note that debates over the definition of the word “socialism” could not be considered concluded (Balcerowicz, 1995, pp. 19-27), as scholars tend to distinguish between Marxist, Soviet, Chinese, Yugoslavian and African models of socialism (Brown, 1995, pp. 181-286). Furthermore, there have been suggestions to set apart so-called “Afro-Asian Socialism” (Nafziger, 1997, p. 541); if you add to this “Fascist” (von Mises, 1981, pp. 363-8) (especially as there is the substantial difference between post-Fascist and post-Communist models of transition to market economy (Olson, 1995, pp. 53-4)), “Islamic” (Ignatenko, 1988, pp. 130-2) and “Swedish” socialisms, vagueness of the word “post-Socialist” becomes more than apparent. Besides, according to some scholars, the system that was established in the former USSR was by no means “socialist”, but rather “pseudo-socialist” (Mikulskiy, 1999, p. 8) or “quasi-socialist” (Simonia, 1999, p. 14), not to mention estimations like “state monopolistic feudalism” used referring to it (Papava, 1995). Sociologists have repeatedly noted that whenever the nature of certain society is not completely discerned, to avoid confusions, they tend to add to it the prefix “post” (like in words “post-industrial”, “post-economic”, “post-Socialist”, “post-Soviet”, etc.). In this connection, outstanding are the works by Balcerowicz who prefers to replace the ambiguous terms like “post-Communist” and “post-Socialist” with a more understandable word “capitalist” (Papava, 2002a, p. 5). Like socialism, capitalism by its nature is not homogenous. That model of capitalism that is shaping up after the downfall of the Communist regimes is significantly different from its American, European or Japanese counterparts. This allows us to introduce the term “post-Communist capitalism” (Papava, 2002b). Two ways of post-Communist transformation The practical uselessness of many classical theoretical schemes of transition to market economy resulted in the fact that in many countries this extremely sophisticated process was initiated and conducted in a wrong way. Among the first consultants that arrived from the West to provide advisory services to the reformers in the post-Communist states, apart from the representatives of the International Monetary Fund (IMF) and World Bank, as a rule, were independent experts, not to mention occasional trippers and charlatans. At best, they were armed with some knowledge of economic theory and/or some experience in successful reforms implemented in Latin America, Asia and Africa (Adams and Brock, 1993, p. XIII). Birman (1996, p. 522), in his traditionally sardonic style, remarks that the reason for the mass departure of economists from the West was that nobody listened to them in their own homelands. As a rule, their advice was limited to general statements of the advantages of and the need for fastest transition to market economy (Stiglitz, 1996, p. 3). Today, owing to quite inclusive empirical data, it has become possible to develop original scientific works about post-Communist transformation containing quite serious theoretical generalisations. Based on this, both practising reformers and economic theorists are divided into two major groups: the first one consists of the supporters of “shock” in economic reforms; the other one is composed of “gradualists”. Each group has been established as one of the two key trends of the post-Communist transformation (e.g. Bogomolov, 1998, pp. 49-52; Boz´yk, 1999; Hoen, 1999).
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Apart from this generally accepted classification, it might be interesting to represent the post-Communist transformation of economy as three different strategies, namely “Gradualism” (implemented in Hungary), “Shock Therapy” (which has its origin in Poland and Czechoslovakia), and the “Third Road” (the cradle of which is considered to be found in the Balkans); the latter consists in so-called “Gradual Gradualism”, which means that transition to market is a very long process, the privatisation programme is limited to small enterprises, and private ownership is allowed only in trade, services and tourism (Berend, 1995, pp. 133-7). The “Third Road” might be of special interest only to those who are concerned about the idiosyncrasies of gradualism (specifically, the extreme forms of it). In this connection, it is important to note that very often it is the speed of reforms rather than core values and theoretical beliefs that lies at the heart of disagreements between economists (Birman, 1996, p. 521). The “Shock Therapy” (which is basically used by the Russian economists), or “Big Bang” (e.g. Kowalik, 1994, p. 116), or “Bitter Pill” (Adams and Brock, 1993, p. XIII) is a strategy which consists in the maximisation of radical transformations in the shortest possible period of time. The key elements of the strategy of “Shock Therapy” include liquidation (or, at least, minimisation) of budget deficit and pursuit of tight monetary policy under the conditions of fixed money supply or fixed exchange rate. The “Shock Therapy” doctrine stems from the orthodox macroeconomic stabilisation scenario (e.g. Kiseliova, 1996, p. 113), which stipulates that budget deficit should be liquidated (or, at least, minimised) and a tight monetary policy, coupled with a fixed money supply or fixed exchange rate, should be established within a limited period of time. At the same time, success depends a good deal on political stability (Jochem, 1999). It is also important to note that the orthodox scenario of “shock therapy” is identical to so-called “Washington Consensus” which, in turn, forms the basis of the IMF approach to transformational developments (Stiglitz, 1998). If tight budget and monetary policies are pursued under the conditions of regulated prices and incomes, then there is a macroeconomic stabilisation scenario in place, which is referred to as heterodox or non-orthodox scenario (Kiseliova, 1996, p. 113). Such an approach, as a rule, is applied in those countries where stabilisation programmes have not produced any positive results and to win people’s support, as a temporary measure (and only as such), along with orthodox ones, the governments resort to regulated prices and incomes (Rostovskij, 1997, pp. 102-3). The method of “Shock Therapy” was first applied in West Germany after the end of the Second World War. It started its “new life” in post-Communist Poland (Aleksashenko, 1990; Balcerowicz, 1994, 1995, pp. 273-369; Blanchard et al., 1994, pp. 17-22; Johnson and Kowalska, 1994; Narinskiy, 1990; Pankow, 1993; Sachs, 1993; Schaffer, 1992; Wellisz, 1997). Later different variants on the same method were applied with a different level of success in many other post-Communist countries (Alekseev et al., 1995, p. 465), including some former Soviet republics (Stroev et al., 1999, pp. 285-352). The gradualists, who support the idea of gradual, step-by-step reforms (World Bank, 1996, pp. 11-16), have built their criticism of the “Shock Therapy” method on highlighting inconsistencies and contradictions between different aspects of this strategy that may become evident during accelerated implementation of reforms (Krogel et al., 1992).
Traditional debates between the advocates of “Shock Therapy” and the gradualists often resembles the “Theater of the Absurd” (Adams and Brock, 1993, p. XV). An illustrative example of this is a quasi-scientific comparison, based on a very superficial resemblance, according to which the “Shock Therapy” supporters are seemingly the followers of Marx (?!), whereas the gradualists are also seemingly the continuators of the German Historical School (Avtonomov, 1997, pp. 6-7). The main mistake of gradualists, in our opinion, consists of their overlooking some very practical and important conditions that could be elevated to the level of necessary conditions to gradual reforming. In particular, the success of gradual reforms depends on certain political guarantees, which should, firstly, ensure positive evaluation of reforms by the people and, secondly, enable the government to keep control of the national economy in their hands. As the experience of post-Communist reforms has demonstrated, in many countries (and, first of all, in the USSR at the times of “Perestroika”) this essential condition was not (or more precisely could not be) met (World Bank, 1996, pp. 11-16). Of no less importance is the second condition, which requires strong financial support of reforms and without which the success of post-Communist transformations is inconceivable. If a nation cannot afford such support, it should request international financial institutions and the G-7 nations for assistance. These latter, due to an established practice, ask the IMF for their opinion. The IMF, in turn, backs the “Washington Consensus”, which is the same thing as the “Shock Therapy”. This means that the gradualist approach, if applied, will require a government to have huge reserves of its own financial resources, all other things being equal. China, the country that has preserved the Communist regime, in its “softer” form though, represents a classical example of gradual reforms (Boone et al., 1998, pp. 153-81; Cheung, 1998a; Nafziger, 1997, pp. 597-607). It is noteworthy that the retention of a leading role by the Communist Party was a stability factor of market (or quasi-market) reforms not only in China, but also in Vietnam (Dang, 1999; Kolodko, 2000, pp. 73-8). Furthermore, under such circumstances, more or less a long period of time has to pass before the government ventures on reforms (Diykanbayeva, 2001, p. 6). However, the chances of replicating the Chinese experience in other countries are very little, as there are no guarantees that the above essential conditions precedent to success of gradual implementation of market reforms will be in place. Specifically, inability to meet the first condition precedent to the practical implementation of the gradualist approach, as well as a number of other historical/political factors prevented the governments of the former USSR and the most of post-Soviet countries even from considering the issue of transplanting the Chinese experience into their national contexts (Yevstigneeva and Yevstigneev, 1999, p. 10; Mau, 1999, pp. 6-9). There are some prominent economists in the world though (not to mention ordinary ones), who like to entertain themselves with reflections on utopian models like this. For example, Stiglitz (1999, pp. 1-3, 25), winner of the 2001 Nobel Prize in Economics, the former senior vice president and the chief economist of the World Bank remarks that the Chinese model seemingly could have been adopted by Russia and other former Soviet republics. Unfortunately, this authoritative economist shows complete disregard for the history of formation of the USSR, as an imperial power, as well as all those political developments and armed conflicts that resulted from the collapse of the empire.
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Another reason why the Chinese model was essentially infeasible on the Soviet soil was that by the time of Mikhail Gorbachev’s coming to power the authority of the Communist Party Leader, due to consistent – even if unconscious – “attempts” of Nikita Khruschev and Leonid Brezhnev, had significantly been weakened and gradually been divided between different levels of the Communist Party’s and the Soviet government’s bureaucratic/hierarchical machine. In China, however, even though Deng Xiaoping renounced extreme dogmas of Maoism, he never relinquished those powers that had been established in the Chinese system of governance since the epoch of “Cultural Revolution”. Furthermore, while the regime of “Perestroika” initiated by Gorbachev was preceded by the period of so-called “inertial immobility”, ˚ slund, 1995, Deng embarked on reforms on the “remains” of “Cultural Revolution” (A Ch. 1). In other words, theoretically, from the political standpoint, the best possible (while practically the only possible) chance to implement Chinese reforms in the former USSR was at the hands of the Soviet leadership at the time of Stalin’s death. The “mystery” of success of the Chinese reforms could be explained by: first, high percentage of domestic investments in GDP; second, consistency of government’s decisions with respect to gradual implementation of market mechanisms (first of all, in terms of establishing “free economic zones”); third, mass employment of the managers of Chinese descent trained in different developed countries by Chinese companies; and fourth, relatively low percentage (only 18 percent) of employment in large government-owned enterprises (Thurow, 1996, pp. 53-8). The above explanation of the success of the Chinese reforms sheds more light on those objective preconditions that are necessary for the implementation of gradual reforms and that are missing in many other post-Communist countries. All this allows us to conclude is that the success of the gradualist approach in China depended a lot on peculiarities of national context, which, by itself, by no means can demonstrate any advantages of such an approach (Bogomolov, 1998, p. 50). Furthermore, it is important to note that drawn-out reforms resulted in the loosening of fiscal/budgetary control in China, which in turn did much harm to the national economy (Tanzi, 1994, Ch. 13). Uzbekistan represents another remarkable example of the gradualist approach to market-oriented reforms (Khikmetov, 2001). Although unlike China the Communist regime did not survive in this country, it was replaced with no less an authoritarian system of governance which, on the one hand, has never renounced quasi-democratic Communist approaches (e.g. only two political parties – both loyal to the president of Uzbekistan – were allowed to take part in the parliamentary elections in 1994; during the recent “successful” referendum a huge majority of people “voted” for the delay of a presidential election) (Apostolou, 1997, p. 101). Among the key achievements of the Uzbek model of gradual reforms are often mentioned the slowest fall of gross domestic product (GDP) rate among all post-Soviet countries (18 percent in 1990-1995), preservation of industrial output almost at the same level (Zhukov, 1997, p. 48), and the intervention of significant foreign investments (Safaev, 1997, p. 100). It must be emphasised, however, that Uzbekistan is very rich in strategic resources, such as gold, oil, cotton and wheat, which is a key factor of the country’s economic growth and makes the “triumph” of the Uzbek model of reforms much less impressive (Kasenov, 1998, pp. 37-40; Rumer, 2000, pp. 36-47; Trushin, 1998a, b; Zhukov, 2000, pp. 160-9). In this context, noteworthy is the assumption that as a rule, any deviation from common
sense in any country’s economic policy must be explained by national peculiarities the content of which very often might not be explained at all (Segvari, 1999, pp. 49-50). As a general rule, no economy that is undergoing the process of post-Communist transformation can avoid a drastic decline in production as a whole and in industrial output, in particular; the fall of labour efficiency, investments and real incomes (Nove, 1993, p. 22; 1995, pp. 227-30). It is also important to note that at the initial stage of post-Communist transformation there is a high correlation between the reduction in production size and the fall of production capacity (Kolodko, 2000, pp. 252-6). To be more specific, the decrease in output most often takes place in those companies that were established before the start of post-Communist transformations (Konings and Walsh, 1998). Accordingly, the tendency to decline originates in the Communist regime ˚ slund, 2001a). It is also believed that successful post-Communist reforms may itself (A result in a shift from the fall of production to its growth (Winckler, 1992), which means that the production curve is a U-shaped one (Blanchard, 1997, pp. 1-20). In this regard, it must be emphasised that there is no agreement between the economists on the reasons for such a shift to economic growth (Tanzi, 1997, pp. 315-16). In conclusion, we would like to agree with Galbraith who remarks that economic growth is always accompanied by destructive tendencies resulting from the growth itself, for which reason recession or depression becomes inevitable (Inozemtsev, 1998, p. 14). The experience of fast economic reforms implemented in different countries demonstrates that the deterioration of living conditions of a vast majority of people is a universal phenomenon, which is caused by the fall of production, increases in prices and decreases in real incomes (Standing, 1997, pp. 230-4). This phenomenon is often referred to as “Transformational Fall” (Kornai, 1993), “Transformational Crisis” (Nikipelov, 1996, pp. 189-90; Olsevich, 1997a, pp. 255-77; Zukowski, 1996), “post-Communist Great Depression” (Milanovic, 1998, pp. 23-30), “Trap of Reforms” (Klaus, 1997, p. 184), the cause of which lies not in the essence of “Shock Therapy”, but rather in the negation of the latter (Mau, 1999, p. 11), delays in implementing reforms ˚ slund, 2001b), and of course, in the collapse of the old system (Sachs, 1994, Ch. 4), as (A those countries that opted for the “shocking” reforms were first to enter the phase of economic growth (de Melo et al., 1997; Gaidar, 1997, p. 11). It is noteworthy that the said “Transformational Crisis” often casts doubts on the reformers’ ability to maintain political stability, for which reason initiators of the “shocking” reforms, as a rule, have to resign from their positions (classical examples include Balcerowicz in Poland and Gaidar in Russia in the early 1990s) (Crawford, 1995, p. 11). The practice has shown that the “Shock Therapy” produces the best results in such countries where the status of the economy before the reforms (or before the “shock”) was so bad that the people were ready to tolerate whatever is necessary to overcome the existing situation (Geiger, 1992, Ch. 13). In that case, negative effects of the “shock” are disregarded, whereas positive ones are so apparent that the initiators of the “Shock Therapy” can feel secure from any political threat. Thus, the success of the “Shock Therapy” rests on the paradox: “The Worse, the Better”. If there is a big question mark over the country’s future and its ability to survive, there must be no doubt whether the “Shock Therapy” method is really needed, as under such circumstances the country has no choice and positive results are almost
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guaranteed. Such a situation might be classified as “Minimal Shock with Maximum Therapy”or “Soft Big Bang” (Papava, 2002b, pp. 54-5). There is a universally accepted assumption that the developed nations ought to support the post-Communist countries in order to provide them with some “relief” from pains that these latter suffer from in the course of post-Communist transformation. In the meantime, such a relief may become a key obstacle in the way of reforms as it may reduce an ability to appreciate the need and inevitability of reforms and may tempt governments into postponing the implementation of radical reforms (Becker and Becker, 1997, pp. 261-2). Jeffrey Sachs believes that to avoid such negative effects, financial aid to the reformist governments should be tightly associated with the fulfilment of certain strict conditions and the biggest portion of such aid should be used for the alleviation of hard social conditions of the population. However attractive this suggestion may be, its rightness is still questionable (Hinshaw, 1996, pp. 128-30). A post-Communist country’s choice of the economic policy model depends on whether decision-makers, as well as their supporters and opponents have (e.g. Abalkin, 1996) or have not (e.g. Illarionov, 1996) taken into account the above-described necessary conditions of gradual reforming. In this connection, it must also be noted that the opponents’ criticism of “Shock Therapy” is based, on the one hand, on their assumption that the monetarist scheme this approach rests on is useless in terms of dealing with the problems of post-Communist transformation (e.g. Abalkin, 1996; Fedorenko, 2001, pp. 412-13) and, on the other hand, on their claim that it has nothing to do with true monetarism and that instead it proposes “false monetarism” (Olsevich, 1997b). More precisely, it is not pure monetarism that we are dealing with in this particular case, but rather its combination with the neoclassical theory, where the latter makes a conceptual basis and the former provides guidelines for actions (Menshikov, 1996, pp. 106-7). They also claim that the “Shock Therapy” method is good for “treating” the market, but is no good for creating it (Petrakov, 1998, pp. 194-5; Menshikov, 1996, pp. 113-15). To the extent that the monetarist approach to post-Communist reforms is broadly applied by the IMF (Allen, 1992) and the World Bank in their financial/economic programmes, the opponents of “Shock Therapy” mechanically criticise those programmes too (e.g. Abalkin, 2001, pp. 46-50). It is interesting, however, that a history (in modern sense of this word) of such criticism dates from to the “pre-post-Communist” or the “pre-shock” period (Nafziger, 1997, pp. 566-74). We all make mistakes and so does the IMF (e.g. Papava 2003; Stiglitz, 2002). Its recommendations sometimes are good and sometimes are bad (Hinshaw, 1996, p. 134), but its goals are always acceptable to almost all. For example, many people among the Russian scientific and political circles generally agree to the assumption that the IMF goals are not in conflict with Russia’s interests in the country’s economic security, whereas from the standpoint of some peculiarities typical of the national context the IMF’s recommendations do make a threat to the country’s economic security (Veduta, 1998, pp. 328, 362). In this connection, especially interesting is the disagreement that occurred between the World Bank and the IMF at the end of the twentieth century. Specifically, the former refused to accept the conceptual approaches of the latter, called for the IMF to revise its traditional policies and proposed an essentially new approach which
consisted in the elimination of the elements of “Shock Therapy” in the institutional reforms policy (Stiglitz, 1998, 1999; World Bank, 1999). On the newest trends in economic theory and post-Communist transformation of economy The correlation between economic and political liberties and their mutual impact on each other (Friedman, 1982, pp. 7-21) allows us rightly to understand all those mechanisms by which political factors influence the process of post-Communist transition to market economy (Braguinsky, 1998; Cheung, 1998b; Intriligator, 1998). Furthermore, it allows us to conclude that a theory of “Public Choice” is the best doctrine that might be applicable to this process (Lavigne, 1995, pp. 249-50). Although the said theory was developed in relation to the developed economies (Buchanan and Tullock, 1962), later it was successfully used for the purposes of developing countries as well. In addition, in the economic/research literature it is often referred to as a “New Political Economy” (Paulson, 1994, p. 97) and can be used more or less successfully to study post-Communist transformations too (Paulson, 1994, Ch. 18). In particular, this theory provides very good results in terms of the analysis of the process accelerating or braking mechanisms (e.g. Murrell, 1991). As far as the need of developing constructive conceptual basis for economic reforms is concerned, particularly attractive seems to be the so-called institutional approach (e.g. Intriligator, 1997; Intriligator et al., 1999; North, 1997; Papava and Khaduri, 1997) one of the elements of which – the evolutionary theory (Hamilton, 1991; Nelson and Winter, 1982) – has effectively been used for the study of the problems of post-Communist transformations (Murrell, 1991). The concept of “Routine” is a key “tool” of this theory which is defined as established rules and methods by which the company’s business behaviour is reproduced. The followers of the evolutionary theory who deduce their key assumptions from the analysis of “Routine” that existed in the organisations before the start-up of the post-Communist reforms, consider that new market-style organisations must be encouraged, but in the process of gradual transformation old organisations should coexist with the new ones. Thus, they distinguish the following two ways of transition to market economy: the “top-down” and the “bottom-up” ones. The first path consists of the mandatory privatisation of government-owned enterprises, whereas the other requires that the structure of the economy be modified by establishing new companies and encouraging the development of already existing private firms (Brezinski and Frirsh, 1996, p. 297); these measures, under the conditions of appropriate macroeconomic policy – namely, as a temporary measure, imposing “light” tax burden on businesses – must ensure an evolutionary transition from the Communist-style economy to market. It must be emphasised that recently the president of the World Bank has developed a new “Comprehensive Development Framework” (Wolfenson, 1999), according to which a priority should be given to the bottom-up option (Stiglitz, 1999, p. 25). It is desirable that this approach be taken as a basis of national strategic development programme of each post-Communist state (e.g. Koichuev, 2001, pp. 163-94). Another doctrine which is in full harmony with the evolutionary theory is (Gutnik, 1996, 2002) that of “Economic Order” (Eucken, 1949, 1952) which, depending on the context and the given historical epoch, provides the “key” to understanding the structure of economy in transition (Avtonomov, 1999).
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It is important to note that very often the evolutionary approach to post-Communist development is equated with gradualism (Lavigne, 1995, p. 250). In doing so, they fail to notice the fact that neither the “Shock Therapy” method can be “confined” to one single action in the course of post-Communist transformation. This can be explained in a simple way if we take into account the fact that transition to market economy requires implementation of a set of the following six steps (Lipton and Sachs, 1990): (1) macroeconomic stabilisation; (2) liberalisation of prices; (3) liberalisation of foreign trade and ensuring convertibility of national currency in accordance with current transactions; (4) company reform, first of all, through privatisation; (5) establishing a social security system; and (6) developing an institutional and legal infrastructure of market economy (and a market-based financial system in it). This set of six steps could be presented in a different arrangement; for example, macroeconomic stabilisation may be split into monetary and fiscal elements, whereas the company reform and the institutional structure development may be combined to form one group (Wolf, 1994, pp. 170-6). Out of the above six steps, only the first three can be taken in a quick manner (quickness, on the one hand, is a key condition of “Shock Therapy” and, on the other hand, constitutes an essence of “Washington Consensus” (Stiglitz, 1998)), whereas the implementation of the rest will need a much longer period of time in any setting, as establishing institutional and legal infrastructure, because of particularly complicated nature of the task (Boettke, 1998), is likely to take many decades (World Bank, 1996, pp. 11-12). It is exactly owing this assertion that once very tensed debates between the “Shock Therapy” advocates and the gradualists have become softer (Papava, 2000, p. 4). It must be emphasised that although the “Shock Therapy” method is really ineffective for developing market institutions, the acceptance – at least, theoretically – of the assumption that post-Communist reforms should have started with institutional changes only (Kolodko, 1999; Stiglitz, 1999) and that liberalisation and stabilisation programmes should have been embarked on only after the accomplishing of this task would amount to the refusal to establish all those market signals that are necessary to foster the development of private sector in a long-term perspective, as well as the “conservation” of a major part of Communist-style mechanisms of economic regulation. In other words, one who accepts the idea that post-Communist transformations must start with merely institutional reforms is about to cause severe delays in the process of establishing market economy and democratic system of economic regulation. To the extent that post-Communist transformation is, by nature, a long process, there emerge natural questions: . Which way should the reform go after the end of “Shock Therapy”? . What steps should be taken to follow up and build on the achievements of “Shock Therapy”?
One possible answer to these questions rests on a “Social Promotion” method of economic reforms which requires to create certain conditions that by encouraging the formation of a strong class of businesspeople will speed up the process of social stratification; on the other hand, to ensure support of reforms on the part of low-income groups and improve their hard living conditions, a consistent and a beneficiary-oriented social assistance policy should be developed and implemented (Papava, 1996a, pp. 260-7; 1996b, 1999, pp. 281-91). A combination of well-known mechanisms of promoting supply and demand, namely the so-called Laffer/Keynesian Synthesis, is proposed as a theoretical base of the “Social Promotion” method (Papava, 1996a, pp. 263-4, 266-7; 1999, pp. 287-91). In conclusion, it must be noted that to date there is no special economic theory of post-Communist transformation. It is just in the process of developing (Papava, 2000). Nevertheless, some well-known economic theories and combinations of certain elements of the latter could be used more or less successfully to produce a complete analysis of the collapse of Communist economic system (e.g. Rosser and Rosser, 1997) and to develop effective economic policy mechanisms applicable to the period of post-Communist transformations (e.g. Susˇjan and Lah, 1997).
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Yarbrough, B.V. and Yarbrough, R.M. (1997), The World Economy: Trade and Finance, The Dryden Press, Fort Worth, TX. Yevstigneeva, L. and Yevstigneev, R. (1999), “Where do reforms lead to? (Reflections on a J. Stiglitz essay)”, Voprosy ekonomiki, No. 9, pp. 4-18 (in Russian). Zhukov, S. (1997), “Kazakhstan, Kyrgyzstan, Uzbekistan in social/economic structures of the modern world”, Mirovaya ekonomika i mezhdunarodnye otnoshenija., No. 3, pp. 45-60 (in Russian). Zhukov, S. (2000), “Adapting to globalization”, in Rumer, B. (Ed.), Central Asia and the New Global Economy, M.E. Sharpe, Armonk, NY, pp. 149-73. Zukowski, R. (1996), “Transformation crisis in post-Socialist countries: patterns and causes”, International Journal of Social Economics, Vol. 23 No. 10/11, pp. 279-96. Further reading Luttwak, E. (1999), Turbo-Capitalism. Winners and Losers in the Global Economy, Harper Perennial, New York, NY. Kolodko, G.V. (Ed.) (2000), “The shock therapy vs gradualism: ten years later”, From Shock to Therapy. Political Economy of Post-Socialist Transformations, ZAO Zhurnal Ekspert, Moscow, pp. 4-8 (in Russian).
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Socio-economic factors determining adult literacy in developing countries
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Krishna Mazumdar Indian Statistical Institute, Kolkata, India Abstract Purpose – This study attempts to find the socio-economic factors behind the differential achievement level in adult literacy in developing countries. Design/methodology/approach – Considers a number of theories. These include modernization theory, dependency/world systems theory, developmental state theory, new human ecology theory and convergence-divergence theory as an explanation of the differential level of adult literacy rate. Findings – The findings reveal the importance of the initial level of adult literacy and the population growth. Similarly short-term economic growth has a significant impact on the initial level of adult literacy, and the medium human development and low human development samples Originality/value – This attempt to find the factors behind adult literacy is of importance not only as a constituent indicator of the human development index, but also through its various contributions towards economic growth. Keywords Literacy, Adults, Developing countries, Social economics Paper type Conceptual paper
International Journal of Social Economics Vol. 32 No. 1/2, 2005 pp. 98-120 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510575667
Introduction Adult literacy is a crucial life skill, which enables individuals to participate more fully in the practices of their community. However, there are dramatic differences in literacy levels observed around the world, such as between developed and developing countries and between males and females. In fact, literacy level of a country or a society or a group of people is assumed to reflect the quality of human capital of the country or society or group of people. Literacy is accepted as an indispensable component of human development. Illiteracy or the absence of literacy is considered as the greatest impediment to human development. Literacy acts in a number of ways. It has been observed that where literacy rates are higher, population growth rates are low, making economic growth faster even with limited resources. Literacy makes the task of social transformation relatively easier. Diversification of economic activities opens up new opportunities of gainful employment, but it is possible only if the prospective employees are literate. More and better education is a prerequisite for rapid economic development around the world. Education stimulates economic growth and improves people’s lives through many channels: by increasing the efficiency of the labor force, by fostering democracy (Barro, 1996) and thus creating better conditions for good governance, by improving health, by enhancing equality (Agnihon et al., 1999) and so on. Therefore, an attempt to find the factors behind adult literacy is of importance not only as a constituent indicator of human development index, but also through its various contributions towards economic growth. In this context we discuss a few background alternative theories.
There are several alternative explanations of cross-national variation in quality of life. Consequently there arose a number of theories. These include modernization theory, dependency/world systems theory, developmental state theory and new human ecology theory. We consider these theories for analyzing determining factors behind adult literacy. We also take into account convergence-divergence theory as an explanation of adult literacy. The following few paragraphs provide a brief account of the above-mentioned theories. Modernization theory Proponents of the modernization theory contend that development is “unidirectional, progressive, and gradual, irreversibly moving societies from a primitive stage to an advanced stage, and making societies more like one another as they proceed along the path of evolution” (So, 1990; Levy, 1966; Moore, 1974; Rostow, 1960). Less developed countries (LDC) are at the “ traditional” stage of development, which is characterrized by an agrarian-based, subsistence economy, poor living standards, and traditionalism in all its cultural and institutional forms. LDCs will eventually reach the “modern” stage by industrializing, but it is the “backwardness” of the traditional culture and institutions that block LDCs from fully industrializing. This “backwardness” will be overcome eventually through the diffusion of Western technology and values (Apter, 1965; Moore, 1974; Rostow, 1960). Proponents of the modernization theory believe that industrialization is the major driving force of human well-being (Moore, 1974; Smelser, 1959; So, 1990; Rostow, 1960). Industrialization fosters the development of a modern urban-based economy and increases economic development, creating employment opportunities (Kerr et al., 1960; Moore, 1974). As industrialization stimulates economic growth of a country, there is an increased capacity to meet basic human needs such as education, housing, health care. Thus newly created social affluence and prosperity provide the basis for the development and improvement of housing, nutrition, health care, social security, education, and other public and community services. In effect, industrialization fosters human well-being by increasing material opportunities. Results of existing cross-national research for various samples of countries at different points of time suggest a strong positive relationship between various forms of industrial and economic development and human well-being (Bradshaw and Huang, 1991; Bradshaw et al., 1993; Breedlove and Armer, 1996; Dixon, 1985; Firebaugh and Beck, 1994; Goldemberg et al., 1985; London and Williams, 1988, 1990; Moon, 1991; Moon and Dixon, 1985; Olsen, 1992; Ragin and Bradshaw, 1992; Shen and Williamson, 1997; Stokes and Anderson, 1990; Williamson, 1987; Wimberley, 1990, 1991). Dependency/world systems theory Dependency/world systems theory was introduced in 1960 as an alternative to the modernization theory. (Shannon, 1996; So, 1990). Proponents of this theory share with the Marxists tradition the belief that capitalism is an exploitative system that generates much human misery. However, they shift attention from class relations within a country to relations between countries in a world system. They are of the view that there exists a hierarchical system in the world, consisting of three strata core countries, periphery countries and semi-periphery countries. According to them the world system is characterized by exploitative relations between countries occupying
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different positions in the system (Shannon, 1996; Wallerstein, 1979). Core countries extract surplus from peripheral countries that might otherwise be used to improve the well-being of the people of the peripheral countries. Dependency/world systems theorists (e.g. Chase-Dunn, 1989; Chase-Dunn and Grimes, 1995; Frank, 1972; Wallerstein, 1979) reject the modernization view that LDCs have failed to modernize because of their “historical backwardness”. Instead, they contend that it is the “imposed backwardness” resulting from core exploitation and repression that is responsible for the failure of the LDCs to modernize. In other words, the underdevelopment of the LDCs is no accident: it is a condition created by the developed countries. Human well-being is retarded by the dependent relations between and within countries for several interrelated reasons. Dependent relations foster extraction of resources and surplus that could otherwise be invested in economic growth and public programmes designed to improve indigenous well-being. Extraction thereby reduces well-being by reducing resources and opportunities in the LDCs. Results of cross-national research are mixed: several cross-national researches based on various samples of countries at various points in time suggests that dependancy reduces human well-being (Bradshaw and Huang, 1991; Bradshaw et al., 1993; London and Williams, 1988; Moon, 1991; Nolan and White, 1983; Ragin and Bradshaw, 1992; Shen and Williamson, 1997; Stokes and Anderson, 1990; Williamson, 1987; Wimberley, 1990, 1991; Wickrama and Mulford, 1996; Wimberley, 1990, 1991), whereas other studies indicate little or no such influence (e.g. Breedlove and Armer, 1997; Dixon, 1985; Firebaugh and Beck, 1994; Moon, 1991). State theory Developmental state theorists (e.g. Evans, 1979, 1995; Evans et al., 1985) contend that modern states play important roles in the operation of national economies. Several researchers hold the view that state intervention in the economy influences quality of life (Bates, 1981; Gough and Thomas, 1994; Moon, 1991). They argue that states operate in ways that may increase human well-being. States may reduce inequality in the economy by redistributing income and reducing poverty. Redistribution may take place through taxation and expenditures or even more directly through the provision of collective goods and services such as clean drinking water, sanitation, health care and educational facilities and investments in infrastructure. Expenditure and investment in such areas are important determinants of human well-being. There is difference of opinion regarding the relation between the existence of a strong state and promotion of human well-being through the redistribution mechanism to reduce poverty, inequality or improve the standard of living of the common people. In fact, the existence of a strong state does not always guarantee state redistributive efforts that enhance human well-being. It may be expected that a strong state with a democratic set up or socialist orientation is more likely to pursue redistributive policies promoting human well-being. Although the theorists differ regarding the mechanisms linking state intervention and human well-being, there is a general consensus that redistributive state intervention has positive impacts on human well-being. Several cross-national studies indicate a positive link between state involvement in the economy and human well-being (London and Williams, 1990; Moon, 1991; Moon and Dixon, 1985). Several
studies indicate that socialist countries have been more successful in promoting basic human needs than their capitalist counterparts (Cereseto and Waitzkin, 1986; Mandle, 1980). Considerable research has been done indicating that countries spending more for redistributive social services such as public health, social security, educational facilities have achieved higher levels of human well-being than those countries spending less for such services (Anand and Ravallion, 1993; Frey, 1994; Sen, 1981).
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Human ecology theory The new human ecology perspective (e.g. Dunlap and Catton, 1994; Murphy, 1995, 1997) challenges the modernization, dependency and state theory narratives. Proponents of the modernization, dependency and state theories based their theories on the assumption that societal development is unlimited. However, the new human ecology theory is based on the idea that there are social and ecological limits to societal development. This perspective introduces the notion of ecological scarcity: the idea that there are limits to the rates at which resources can be used and pollutants can be emitted without threatening plant and animal species, natural ecosystems, and the larger biosphere as well as the health and well-being of humans. Convergence theory Proponents of the convergence theory suggest that the existing difference among countries in per capita income is due to initial difference in the same. According to Lucas (1988, 1990) and Romer (1986) initial differences could grow without bound over time due to spillover effects. Interestingly, while the bulk of theoretical literature on growth has focused on models which generate divergence across economies with very different initial conditions, the bulk of their empirical writings, exemplified by Barro (1991) and Mankiw et al. (1992), have found evidence that economies with low initial incomes tend to grow faster than economies with high initial incomes, after controlling for rates of savings and population growth. This finding has been treated as evidence of convergence. These empirical studies have, in turn, generated an opposing literature (Durlauf and Johnson (1995) and Quah (1996)) which argues that cross-country growth is inconsistent with convergence and thus is consistent with a variety of endogenous mechanisms. We start by assuming adult literacy of a country depends on initial adult literacy (in this study it is ADLI75), per capita gross domestic product of the current year (PCGDP99), government expenditure on education for a last few years (EXPE95-97), gross domestic product of the current year (GDP99), total population of the current year (POP99), short-run and long-run growth rates of the per capita gross domestic product (PCGDPGR75-99 and PCGDPGR90-99), population growth rate over the period 1975-1999 (POP75-99) and urbanization (URB). The abbreviations used in the rest of the article are as follows: EXPE ¼ Public expenditure on education as percentage of GNP, 1995-1997. GDP$ ¼ Gross domestic product, 1999 (in terms of US dollars). PCRGDP99 ¼ Per capita real gross domestic product, 1999. PCGDPGR75-99 ¼ Growth rate of per capita gross domestic product,1975-1999.
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PCGDPGR90-99 ¼ Growth rate of per capita gross domestic product,1990-1999. POP99 ¼ Total population, 1999. POPGR75-99 ¼ Population growth rate 1975-1999. URB ¼ Percentage of urban population in total population, 1999.
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ADLI75 ¼ Adult literacy rate 1975. Justification of inclusion of each variable is discussed below: . Initial adult literacy. Initial value of any variable plays an important role in determining the end value of that variable. According to the convergence theory the lower the per capita income of a country the higher will be the rate of growth of that country and the country will catch up with the country with higher per capita income. However, in the case of social indicators, in general, we find higher initial value of a variable leads to higher end of value of that variable i.e. divergence rules (see Mazumdar, 2002). Hence, we consider ADLI75 as a determining factor of ADLI99. . Per capita real gross domestic product. It is assumed that income could play a crucial role in determining the standard of living of a country. Higher per capita real gross domestic product (PCRGDP) enables a country to spend for better infrastructure etc. – consequently more schools, colleges, universities would be set up in a country and people would get a better chance of being literate. Moreover, if the average income of the country is high, the people of the country would send their children to schools, colleges universities, at least everyone would try to be literate. As a high income family, in general, spends more money on their children’s education than a relatively poor family. The same picture is observed for high-income countries where most of the people are literate (nearly 100 percent or exactly 100 percent). . Public expenditure on education. Public expenditure on education varies a great deal from country to country. In the 1990s, some countries have spent as little as 1.00 per cent of their gross national product (GNP) on education (Haiti, Indonesia, Myanmar, Nigeria and Sudan). Others have spent between 8 and 10 per cent of their GNP on education.(Nambia, Botswana, Jordan). Public expenditure is admittedly an imperfect measure of a nation’s commitment to education, not least because some nations spend more on private education than others. Moreover, public expenditure on education may be supply-led and mediocre quality, and may thus fail to foster efficiency, equality and growth, in contrast to private expenditure on education, which is generally demand - led and thus, perhaps, likely to be of a higher quality. Even, so this yardstick should reflect at least to some extent the government’s commitment to education. Therefore, this study incorporates public expenditure on education for 1995-1997 as a determining factor of ADLI99. . Population growth. The traditional view is that higher rate of population growth results in a slower rate of growth of measures of well being such as life expectancy, per capita real income etc. Recently, it has been argued that population growth is only one among many to effect adversely human
.
.
well-being. This view has been supported by the example of China. China has substituted its high rate of growth of population by the spread of knowledge, which has increased productivity. Total population. Total size of population plays a significant negative role in well-being is the traditional view. Because the higher the population, the larger the share of GNP spent for maintenance of the population and lesser is the available income for betterment of social well-being. In this study we include population size as a determining factor of adult literacy of a country in 1999. Urbanization. Urbanization is associated with aspects of a better life, such as, schools, colleges, universities, hospitals, etc. Extension of urban areas or more citizens living in the urban areas, the possibility of number of people to be literate increases. Moreover, the urban people are more aware about importance of literacy. Therefore addition of urbanization is an obvious factor in determining adult literacy in 1999.
Data and sample The Human Development Report (UNDP, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002) divides the countries of the world into three broad groups: high human development (which consists of countries having a human development index above 0.800), medium human development (which consists of countries with human development index between 0.500 and 0.799) and low human development (which consists of countries with a human development index below 0.499). Our sample comprises of 56 countries belonging to the last two groups, having a human development index below 0.800 in 1999. The sample has been drawn from all regions over the world. It excludes only little countries because in those countries most of the data are based on extremely little primary data. Most of the data have been collected from Human Development Report 2001 (UNDP, 2001). Different previous issues of the same publication are also used to collect data. Some data are taken from different issues of the World Development Reports and different editions of the World Tables (World Bank, 1992, 1993, 2001). The data set includes ADL99 and nine explanatory variables for the countries for which data are available for 1999. The initial period is taken as 1975. Method of analysis This study assumes that the adult literacy rate is a function of the eight (including lagged variables) explanatory variables as mentioned in the previous section. Ordinary least squares (OLS) multiple regression equation of the following form has been estimated. The basic equation presenting the relation between ADLI99 and the determining variables is as follows: ADLI99 ¼ a0 þ a1 ADLI75 þ a2 PCRGDP þ a3 EXPE þ a4 GDP99 þ a5 POP99 þ a6 PCGDPGR75-99 þ a7 PCGDPGR90-99 þ a8 POPGR75-99 þ a9 URB þ m:
ð1Þ
We estimate equation 1 for the FULL sample as well as for MHD and LHD samples.
Adult literacy in developing countries 103
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All of the eight predictor variables do not have significant coefficients for any of the sample. Therefore, for the purpose of analysis a question of choice of variables for each of the sample arises. In this respect, the best procedure involves in fitting all possible subset of equations to a given body of data. With q variables the total number of equations required to be fitted is 2q (including an equation that contains all the variables and another that contains no variable). This method clearly gives an analyst the maximum amount of information available concerning the nature of relationships between the dependent variable (Y) and the set of explanatory variables (Xs). However, the number of equations and the supplementary information that must be looked at may be prohibitively large. An efficient way of using the results from fitting all possible equations is to pick out the three “best” equations containing a specific number of variables. But when the number of variables is large, the evaluation of all possible equations may not be perfectly feasible. In this particular case the number of equations to be computed and to be analyzed is 28 for each of the five kinds of samples (i.e. 5 £ 28 equations). Therefore, in order to find out the determinants of ADLI99 for each sample, we have to think of some other appropriate method. Backward elimination procedure has been tried in this study. This procedure starts with the full equation and successively drops one variable at a time. The variables are dropped on the basis of their contribution to the reduction of error sum of squares. The first variable deleted is the one with the smallest contribution to the reduction of error sum of squares. This is equivalent to deleting the variable, which has the smallest t-ratio in the equation. If all the t-tests are significant, the full set of variables is retained in the equation. Assuming that there is one or more variables having insignificant t-ratios, the procedure operates by dropping the variable with the smallest insignificant t-ratio. The equation with remaining variables is then fitted and the t-tests for new regression coefficients are examined. The procedure is terminated when all the t-tests are significant or all variables have been deleted. Accordingly for different samples we end with different sets of variables having all coefficients significant. Results and discussions Results have been discussed in three parts for three types of samples: FULL, MHD and LHD. FULL sample Tables I-III report results for the full sample. An estimate of the equation 1 for the full sample shows that ADLI75, PCGDPGR90-99, POPGR75-99 a significant impact on ADLI99. R 2 reported is 0.6220. The last column of Table I presents correlation coefficients between ADLI99 and the predictor variables. It has been observed that ADLI75 shows the highest relation with ADLI99. POPGR75-99 reports to have negative relation with ADLI99. We estimate another relation for the FULL sample: ADLI99 ¼ a0 þ a1 ADLI75 þ a2 PCGDPGR90-99 þ a3 POPGR75-99 þ m:
ð2Þ
From Table II we found that all the variables have significant positive impact on ADLI99. R 2 reported is 0.5941. Table III reports correlation coefficients between the predictor variables. The range of the value is 2 0.6139 to þ 0.7815. The highest values have been obtained for GDP99
0.6604* 0.0005 1.5573 20.0313 0.0018 1.7482 2.2252* 9.3637* 0.1095 21.3664 0.6220
ADLI75 PCGDP99 EXPE95-97 GDP99 POP 99 PCGDPGR75-99 PCGDPGR90-99 POP75-99 URB Constant R 2
1 2 3 4 5 6 7 8 9 10 11
Note: 5 percent significance
Coefficients 3
Predictor variable 2
Sr. no. 1 6.419 0.5798 1.241 2 1.436 0.0922 1.322 2.014 2.865 0.7485 20.1185
T-statistics (DF 73) 4 53.089 3975.9 4.2536 85.245 69.654 0.6464 1.1375 2.2661 47.786
Mean of the predictor variable 3 28.253 3201.6 1.6816 185.90 211.88 2.0981 2.4834 0.8125 19.839
Standard deviation of the predictor variable 4
0.6996 0.4141 0.2437 0.0707 0.0005 0.2580 0.3319 20.2357 0.3775
Correlation coefficient between dependent and predictor variable 5
Adult literacy in developing countries 105
Table I. Determinants of adult literacy 1999 – full sample (56 observations)
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Sr. no. 1
106
Table II. Determinants of adult literacy in 1999: (significant variables only) – full sample (56 observations)
Table III. Correlation coefficients between predictor variables – full sample (56 observations)
Coefficients (t-statistics) Model I 3
Predictor variable 2
1
ADLI75
0.72211* (8.044)
2 3 4 5 6 7
PCGDP99 EXPE95-97 GDP99 POP99 PCGDPGR75-99 PCGDPGR90-99
8
POP75-99
9 10
URB Constant
11 12
R 2 DF
2.4763* (3.001) 10.275* (3.260) 5.7591 (0.5236) 0.5941 52
Note: 5 percent significance
1 2 3 4 5 6 7 8 9
1
2
3
4
5
6
7
8
9
1.00 0.4730 0.1002 0.2574 0.09389 0.1829 0.1646 20.6139 0.4669
1.00 0.2552 0.3796 0.00336 0.1439 0.1228 2 0.2636 0.6063
1.00 20.0932 20.2166 20.0543 20.1326 0.1045 0.2007
1.00 0.7815 0.4184 0.3060 2 0.2477 0.2010
1.00 0.5297 0.4616 20.1898 20.1285
1.00 0.6741 2 0.3422 2 0.2292
1.00 20.2133 20.1214
1.00 2 0.1130
1.00
and POP99. The relation between short- and long-term growth rates of PCGDP has followed this. POP growth has negative relation with all other predictor variables.
Medium human development sample Results for the medium human development sample have been presented in Tables IV-VI. Estimations obtained for equation 1 have been reported in Table IV. The table shows that significant impacts have been observed for ADLI75, PCGDPGR90-99 and POPGR75-99. The adjusted R 2 is obtained as 0.3679. Column 5 of Table IV pictures correlation coefficients between predictor variables and the dependent variable. ADLI99 has a negative relation with GDP99, POP99, POPGR75-99 and URB.
0.4816* 0.0004 1.5350 2 0.0240 2 0.0103 0.9256 4.6672* 6.6366* 0.1709 10.791 0.3677
ADLI75 PCGDP99 EXPE95-97 GDP99 POP 99 PCGDPGR75-99 PCGDPGR90-99 POP75-99 URB Constant R 2
1 2 3 4 5 6 7 8 9 10 11
Note: 5 percent significance
Coefficients 3
Predictor variable 2
Sr. no. 1 3.300 0.4315 0.9350 21.028 20.4976 0.5375 3.473 1.824 0.8527 0.5059
T-statistics (DF) 4 66.684 5,349.0 4.3816 122.90 2.0447 1.0342 1.6605 2.0447 55.395
Mean of the predictor variable 3 21.470 3,023.1 1.6221 216.31 0.8673 2.2561 2.5079 0.8673 17.419
Standard deviation of the predictor variable 4
0.3099 0.0620 0.0372 20.1816 20.1627 0.2349 0.3872 20.0085 20.0512
Correlation coefficient between dependent and predictor variable 5
Adult literacy in developing countries 107
Table IV. Determinants of adult literacy 1999 – medium human development sample (38 observations)
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Sr. no. 1
108
Table V. Determinants of adult literacy in 1999: (significant variables only) – medium human development sample (38 observations)
Table VI. Correlation coefficients between predictor variables – medium human development sample (38 observations)
Coefficients (t-statistics) Model I 3
Predictor variable 2
1
ADLI75
0.48306* (3.276)
2 3 4 5 6 7
PCGDP99 EXPE95-97 GDP99 POP 99 PCGDPGR 75-99 PCGDPGR 90-99
8
POP75-99
9 10
URB Constant
11 12
R 2 DF
3.3021* (3.293) 8.0260* (2.194) 25.788 (16.19) 0.2975 34
Note: 5 percent significance
1 2 3 4 5 6 7 8 9
1
2
3
4
5
6
7
8
9
1.00 0.05411 2 0.1544 0.0797 2 0.0453 2 0.0534 2 0.0663 2 0.6121 0.0797
1.00 0.2738 0.2600 20.1388 20.0447 20.1413 20.0137 0.4296
1.00 20.1625 20.2874 20.2376 20.2762 0.2042 0.1202
1.00 0.7770 0.3962 0.2638 2 0.1541 0.0510
1.00 0.5436 0.4848 2 0.1380 2 0.3088
1.00 0.6742 20.2179 20.5461
1.00 20.0925 20.4803
1.00 0.1038
1.00
Next we estimate a new equation formulated with the significant variables only: ADLI99 ¼ a0 þ a1 ADLI75 þ a2 PCGDPGR90 2 99 þ a3 POPGR75 2 99 þ m:
ð3Þ
The results are presented in Table V. All the predictor variables are positively significant and the R 2 is 0.2975. Table VI presents correlation coefficients between predictor variables. They lie between 2 0.5461 to þ 0.7770. The maximum correlation coefficient has been found between GDP99 and POP99 followed by correlation coefficient between PCGDPGR75-99 and PCGDPGR90-99. POPGR75-99 has a negative relation with all other variables. Low human development sample Estimates of the low human development sample of equation 1 have been presented in Table VII. It has been observed that only ADLI75 has a significant positive impact on
Coefficients 3 0.9436* 2 0.0169 3.1528 1.5316 2 0.4778 2 1.2619 0.1309 2 6.3279 0.0764 46.597 0.7974
Predictor variable 2
ADLI75 PCGDP99 EXPE95-97 GDP99 POP99 PCGDPGR75-99 PCGDPGR90-99 POP75-99 URB Constant R 2
Sr. no. 1
1 2 3 4 5 6 7 8 9 10 11
5.474 2 1.340 1.192 0.6575 2 0.5815 2 0.3082 0.0621 2 0.5124 0.3492 1.243
T-statistics (DF 8) 4 24.389 1077.1 3.9833 5.7500 17.406 20.1722 0.0333 2.7333 31.722
Mean of the predictor variable 3 17.143 400.64 1.8186 10.482 30.095 1.4555 2.0886 0.3970 14.504
Standard deviation of the predictor variable 4
0.9120 20.0070 0.5472 20.0551 20.0829 0.09440 20.2667 0.0999 0.2962
Correlation coefficient between dependent and predictor variable 5
Adult literacy in developing countries 109
Table VII. Determinants of adult literacy 1999 – low human development sample (18 observations)
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ADLI99. R 2 obtained is 0.7974. Correlation coefficients between ADLI99 and the predictor variables are presented in the fifth column of Table VII. High correlation has been found between ADLI75 and ADLI99. Negative relations are obtained for PCGDP99, GDP99, POP99 and PCGDPGR90-99. Next we estimate an equation of the form:
110
ADLI99 ¼ a0 þ a1 ADLI75 þ m:
ð4Þ
The equation presents a significant positive impact of ADLI75. R 2 has improved a little to 0.8212. These are reported in Table VIII. Table IX presents correlation coefficients between predictor variables. The correlation coefficients lie between 2 0.6267 to þ 0.9837. The highest value of correlation coefficient has been obtained between GDP99 and POP99. Negative relations have been obtained for POPGR75-99 and all other predictor variables.
Sr. no. 1 1
Table VIII. Determinants of adult literacy in 1999: (significant variables only) – low human development sample (18 observations)
Table IX. Correlation coefficients between predictor variables – low human development sample (18 observations)
Coefficients (t-statistics) Model I 3
Predictor variable 2 ADLI75
1.0622* (8.892)
2 3 4 5 6 7 8 9 10
PCGDP99 EXPE95-97 GDP99 POP 99 PCGDGR 75-99 PCGDPGR 90-99 POP75-99 URB Constant
11 12
R 2 DF
23.817 (6.750) 0.8212 16
Note: 5 percent significance
1 2 3 4 5 6 7 8 9
1
2
3
4
5
6
7
8
9
1.00 0.1396 0.4810 0.0480 0.0307 0.1622 2 0.120 0.02132 0.2515
1.00 0.4110 0.3108 0.2205 0.3525 0.5918 2 0.1660 0.2678
1.00 2 0.1944 2 0.2616 0.3506 0.04940 0.0464 0.2843
1.00 0.9837 0.3672 0.3923 2 0.0394 2 0.0187
1.00 0.4094 0.3903 2 0.1276 2 0.2014
1.00 0.5426 2 0.6267 2 0.2216
1.00 2 0.1802 2 0.0452
1.00 0.4180
1.00
Sample 1 FULL
MHD LHD
Significant variables 2 ADLI 75 PCGDPGR90-99 POP75-99 PCGDPGR75-99 ADLI 75 PCGDPGR90-99 POP75-99 ADLI75
Predictor variables with high correlation coefficient with LIFE99 3
Predictor variables with negative correlation coefficient with LIFE99 4
ADLI75
POP75-99
Adult literacy in developing countries 111
ADLI75
PCHGDP99 GDP99 POP99 PCGDPGR90-99
Salient features of the results First, results of determinants of adult literacy for all types of samples shed light on the importance of the initial level of adult literacy (ADLI75) and population growth over the period (POP75-99) (see Table X). Second, short-term economic growth (PCGDPGR90-99) has a significant positive impact on ADLI99 in case of full sample, medium human development and non-high human development samples.
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Table X. Summary results of determinants of adult literacy
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Further reading Atkinson, A.B. and Bourguignon, F. (1982), “The comparison of multidimensional distributions of economic studies”, Review of Economic Studies, Vol. 49 No. 2, pp. 183-201. Bairoch, P. (1975), The Economic Development of the Third World since 1900, Methuen, London. Barro, R.J. and Sala-i-Martin, X. (1995), Economic Growth, McGraw-Hill, York, NY. Baster, N. (Ed.) (1972), Measuring Development: The Role and Adequacy of Development Indicators, Frank Cass, London. Bauer, R.A. (Ed.) (1966), Social Indicators, MIT Press, Cambridge, MA. Bollen, K.A. (1980), “Issues in the comparative measurement of political democracy”, American Sociological Review, Vol. 45 No. 2, pp. 370-90. Bollen, K.A. (1983), “World system position, dependency and democracy: the cross-national evidence”, American Sociological Review, Vol. 48 No. 4, pp. 468-79. Bollen, K.A. (1985), “Political rights and political liberties: an evaluation of human rights measures”, 1950-1984, Human Rights Quarterly, Vol. 7, pp. 567-91. Bollen, K.A. (1990), “Political democracy: conceptual and measurement traps”, Studies in Comparative International Development, Vol. 25, pp. 7-24.
Bollen, K.A. (1993), “Liberal democracy: validity and method factors in cross-national measures”, American Journal of Political Science, Vol. 37 No. 4, pp. 1207-30. Bornschier, V. and Chase-Dunn, C. (1985), Transnational Corporations and Underdevelopment, Prager, New York, NY. Boserup, E. (1981), Population and Technological Change: A Study of Long-term Trends, University of Chicago Press, Chicago, IL. Bradshaw, Y.W. and Fraser, E. (1989), “City size, economic development, and quality of life in China: new empirical evidence”, American Sociological Review, Vol. 54, pp. 986-1003. Bradshaw, Y.W. and Tshandu, Z. (1990), “Foreign capital penetration, state intervention and development in Sub-Saharan Africa”, International Studies Quarterly, Vol. 34, pp. 229-51. Brown, L.R. (1995), “Nature’s limits”, in Brown, L.R. (Ed.), State of the World, W.W. Norton, New York, NY, pp. 3-20. Bunge, M. (1981), “Development indicators”, Social Indicators Research, Vol. 9, pp. 369-85. Burkett, J.P., Humblet, C. and Putterman, L. (1999), “Pre-industrial and post-war economic development: is there a link?”, Economic Development and Cultural Change, Vol. 47 No. 3, pp. 471-95. Burney, N., Othman, A. and Mohammed, E. (2002), “The efficiency of the public education system in Kuwait”, The Social Science Journal, Vol. 39 No. 2, pp. 277-86. Camacho, M. and Perez-Quiros, G. (2002), “This is what the leading indicators lead”, Journal of Applied Econometrics, Vol. 17 No. 1, pp. 61-80. Chen, B. and Feng, Y. (2000), “Determinants of economic growth in China: private enterprise, education and openness”, China Economic Review, Vol. 11 No. 1, pp. 1-15. Chiang, P.H. (1979), “Control of urbanization: the Chinese case”, Asia Quarterly, Vol. 3, pp. 119-28. Chowdhury, O.M. (1991), “Human development index”, The Bangladesh Development Studies, Vol. XIX No. 3, pp. 125-7. Clargue, C. (1986), “Short-cut estimates of real income”, Review of Income and Wealth, Vol. 32 No. 3, pp. 313-31. Crenshaw, E.M., Ameen, A.Z. and Christenson, M. (1997), “Population dynamics and economic development: age-specific population growth rates and economic growth in developing countries, 1968 to 1990”, American Sociological Review, Vol. 62 No. 6, pp. 974-84. Das Gupta, P. (1995), An Inquiry into Well-being and Destitution, Oxford University Press, New York, NY. Das Gupta, P. (1996), An Inquiry into Well-being and Destitution, Clarendon Press, Oxford. Das Gupta, P. and Weale, M. (1992), “On measuring the quality of life”, World Development, Vol. 20 No. 1, pp. 119-31. Desai, M. (1991), “Human development: concept and measurement”, European Economic Review, Vol. 35 No. 2-3, pp. 350-7. Dixon, W.J. and Boswell, T. (1996a), “Dependency, disarticulation, and denominator effects: another look at foreign capital penetration”, American Journal of Sociology, Vol. 102 No. 2, pp. 543-62. Dixon, W.J. and Boswell, T. (1996b), “Different productivity, negative externalities and foreign capital dependency: reply to Firebaugh”, American Journal of Sociology, Vol. 102 No. 2, pp. 576-84. Doppelhofer, G., Miller, R.I. and Sala-I-Martin, X. (2000), “Determinants of long-term growth: a Baysian averaging of classical estimates (BACE) approach”, NBER Working Paper, No. 7750, NBER, Cambridge, MA.
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Dossel, D.P. and Gounder, R. (1994), “Theory and measurement of living levels: some empirical results for the human development index”, Journal of International Development, Vol. 6, pp. 415-35. Doyal, L. and Gough, I. (1991), A Theory of Human Need, Macmillan, London. Dreze, J. and Sen, A.K. (1989), Hunger and Public Action, Clarendon Press, Oxford.
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Gormely, P.J. (1998), “The human development index in 1994: impact of income on country ranking”, Journal of Economic and Social Measurement, Vol. 21, pp. 253-67. Gould, F. (1983), “The development of public expenditures in western, industrialized countries: a comparative analysis”, Public Finance., Vol. XXXVIII No. 1, pp. 38-69.
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Financial support systems: the student experience in England and France Susan Curtis
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Manchester Metropolitan University Cheshire, Crewe, UK, and
Rita Klapper Ecole Supe´rieure de Commerce de Rouen, Mont Saint Aignan, France Abstract Purpose – To investigate how the financial status of students in England and France affects their experience of university life. Design/methodology/approach – A questionnaire survey was carried out among undergraduates in two countries. There were 168 responses from students studying at a French university and 325 responses from students studying at an English university. Findings – The financial burden in France rests with parents, while in England students are largely responsible for their own funding. Indicators suggest that English students may be suffering from financial difficulties. Students continue the tradition of enjoying themselves and socialising, whatever their nationality and financial status. Research limitations/implications – The comparison made was not between institutions of equal status. The Institut de Formation Internationale in Rouen is part of a Grande Ecole group which is private, and may attract students from higher income families. The students at Manchester Metropolitan University Cheshire study in a rural locale (the towns of Crewe and Alsager in south Cheshire), which is unusual for a UK university and it may well be that a lower proportion of these undergraduates come from higher income families than the French students. Practical implications – While it would seem to be more equitable and economically efficient for individuals to pay directly for services they receive, rather than those services being funded by higher tax, this study highlights certain problems. The quality of the educational experience for English students may be reduced by their continuing to live at home with parents and carrying out low level work while studying. Originality/value – No other research appears to have been carried out in the UK or in France on this topic. Keywords Higher education, Students, Educational funding, England, France Paper type Research paper
Introduction Recent publicity in the UK has highlighted severe problems some students are now facing regarding their financial status and their levels of debt on graduation (Christie et al., 2001), and the increased likelihood of students dropping out of university due to financial problems, (Bennett, 2003). There has also been research indicating that prospective students may not choose their preferred course and university due to lack of funds and fear of debt in the UK (Forsyth and Furlong, 2000). British students are increasingly taking on paid work during term-time which is also being met with disapproval from those who foresee detrimental effects on academic studies from this dual role (Goddard, 2003). Despite this adverse publicity, some commentators are advocating that the rest of Europe should go over to the UK-style loan system on the
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grounds that it is more equitable and efficient for the economy than a grant system (Guille, 2002). Europe-wide research has found that the UK is actually one of the lowest-cost countries to study in, in terms of student monthly spending, (along with Spain, Ireland and Portugal) and that France, The Netherlands, Denmark and Switzerland recorded the highest student expenditures (Daniel et al., 1999). This study intended to investigate student finances in two countries with high and low student expenditure – England and France – in order to explore the differences of the student experience in more detail. The financing of higher education Participation in higher education (HE) yields national economic gains, improves personal economic life chances and spreads wider social benefits (Bynner and Egerton, 1999). In France currently, and the UK under previous funding arrangements, the governments made an investment in HE on behalf of taxpayers in order to benefit the economy and society. Personal benefits to the graduates are numerous and came almost free of cost. The current system of funding in England aims to redress the balance somewhat by making students invest in their own education. The focus on student “investment” as the main new source of funding grew out of a government requirement to expand HE numbers, coupled with a refusal to increase public sector funding for it. The idea of student investment was crystallised in the Dearing Report (1997 quoted in Williams and Light, 1999), which noted “the greatest benefit accrues to graduates themselves. On average, they receive an excellent return for their investment in higher education”. Compared to other European HE systems, the French one seems to be more complex. In fact, we find a three tier educational system with universities, Grandes Ecoles and a range of training providers such as lyce´es and private schools. The first two epitomise the longest tradition in France. Whereas French universities are open access institutions, the Grandes Ecoles system (these are either management or engineering schools) is very selective, and tuition fees are charged. However, bursaries are available from the state and public sector organisations and the Grandes Ecoles themselves. There is little doubt, however, that diplomas awarded by the Grandes Ecoles function as an “ascenseur social” – a social elevator that catapults students to highly demanded senior management positions in French society. Holding a degree from a Grande Ecole has become a “source of legitimacy in France for gaining access to the most prestigious positions” (Tregaskis and Dany, 1996, p. 22). Over the past four years there has been a push for French parents to place their children into private schools and HE institutions in Paris, mainly as a result of the public education sector strikes and poor teaching quality. In contrast to the Grandes Ecoles, French universities charge no tuition fees, students only pay a registration fee. Support is exclusively a grant system in France, and the aid system covers roughly 30 per cent of the costs incurred even by the students defined as most needy. This can be considered only as a subsiding system for the most needy students. Grants or loans provide for 22 per cent of French students’ total expenditure and 44 per cent of UK students’ total expenditure. The funding of HE in the UK is the subject of radical and dramatic change, following the report of the National Committee of Enquiry into Higher Education (the Dearing Committee) in July 1997. While the proposal to introduce fee payments by
students was not unexpected and had been “the culmination of many years of debate” (Williams, 1998, p. 77), the new Government’s swift acceptance of the principle of Dearing’s proposals to introduce tuition fees of £1,000 per year and maintenance grants of up to £4,370 per year caught many unprepared. Tuition fees of £1,000 per annum were introduced by the UK Government in September 1998, and all remaining grant entitlements were abolished. The fees were means-tested, however, and only those students whose family incomes (parental, husband or wife) exceeded a certain means-tested threshold were required to pay the full amount. Loans from the government-backed Student Loan Company (SLC) were made available to contribute towards students’ living costs, and special “hardship” loans could be obtained in specific circumstances. In addition to SLC loans, students could also borrow from the high street banks. In France the state has not engaged in a reform to increase the financial participation of students by raising fees and developing loans. Public financial aid directly provided to students is then limited to grants that are means-tested and attributed to 19 per cent of the first and second cycle students (undergraduates). They exempt students from paying fees and serve to cover part of their living costs. The amounts vary according to different criteria, such as parental resources or number of siblings. Indirect aid is important in France. The State provides a subsidy to student social security, tax deductions for parents, meals (canteens), discounts for travelling costs and social housing. These indirect subsidies are often omitted in international comparisons. Taking into account this part of the French public aid to students would lead to a two-fold increase in the amount given (Guille, 2002). English students also benefit from a range of social concessions. Full-time students are entitled to free medical prescriptions, discounts with respect to rail and bus travel and some forms of entertainment (e.g. theatres) offer concessions to students. Some banks also permit free overdraft facilities up to a limit, which, while useful for budgeting, probably do not average more than £20 per year in interest waivers (Williams and Light, 1999). The gap in English students’ income and expenditure is estimated to be in excess of £2,000 (NUS, 1999; Callender and Kemp, 2000; Christie et al., 2001), which means that students must obtain additional sources of income. This has resulted in many students taking paid work on a part-time basis whilst studying full-time. The Select Committee Report on student finance and retention recognised the potential impact of part-time employment on both studying and retention, and thus recommended that institutions should provide guidance to students that they should not work more than 12 hours per week (reported in Thomas, 2002), a 12-hour limit was also recommended by Cubie (The Independent Committee of Inquiry into Student Finance, 1999). There is a contradiction here in that, on the one hand students are treated as rational adults investing in their futures, and on the other are told how and how not to make that investment. This tension of child/adult, dependent/independent role is reflected in many students’ current experience of university, juggling their roles of part-time worker/full-time (or half-time?) student with varying degrees of success. The overall aim of the study was to investigate student finances in two countries with high and low student expenditure – England and France, these countries have very little comparative data available. Part of this investigation was an exploration of the two education systems as well as the financial support system available for students and the differences of the student experience in more detail. The references to
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English and French students are to the systems the students are in rather than the nationalities of the students. Both cohorts contained overseas students. Methodology Questionnaires were administered during class time in March 2003 to Business undergraduates in two HE institutions, Institute de Formation Internationale (IFI) in France and Manchester Metropolitan University (MMU) in England. The French institution is part of the ESC Rouen Groupe. The Groupe includes the ESC, which is a Grande Ecole that offers predominatly postgraduate programmes, as well as an engineering school, IFI and further education institutes. The French students’ course was of four-year duration, but year 2 were on work placement at the time the questionnaires were administered, 168 responses from years 1, 3 and 4 were gathered in France. English students were on a three-year course and 325 responses were gathered from all years. The total number of English students on the course was 546, giving an overall response rate of 59 per cent. Numbers of students responding from each year was France – year 1, 27 students; year 3, 59 students; year 4, 59 students; England – year 1, 112 students; year 2, 80 students and year 3, 133 students. Gender division was 39 per cent male and 61 per cent female in France and 56 per cent male and 44 per cent female in England. All students were full-time undergraduates and were between 18 and 24 years of age, although a small minority of English students were mature, the eldest being 38 years. The questionnaire was almost identical in both countries, the difference being that figures asked for in France were in euros and in England, sterling. Figures quoted in the paper are in Euros, the exchange rate used is £1 ¼ e1:4. The questionnaire contained questions on students’ income and expenditure, and also accommodation, car ownership, part-time working during term-time, debt, class contact time, assessments and social outings. Findings Expenditure Student expenditure on HE can be divided into the academic costs of study and the living costs associated with study. The former is comprised mainly of tuition fees, including library/computer/laboratory fees, and personal expenditure on books, personal computer, and other associated equipment. The latter may be divided into essential and non-essential costs and includes accommodation, food, travel, entertainment, and clothing, etc. Tuition fees in England were £1,075 for the academic year 2002-2003 (approximately e1,505), which the majority of respondents paid, and e180 registration fee for most institutions in France (Crace, 2003). Although English tuition fees are uniform across institutions, French HE institutions can determine their own fees. The Institute de Formation Internationale is part of the Groupe Ecole Supe´rieur de Commerce de Rouen and charges e4.800 in the first year and e5,000 in the following years. As can be seen from Table I, the main difference in the payment of tuition fees would appear to be that English parents are less likely to pay tuition fees than French. A factor that may explain English parents’ reluctance to finance their children’s HE is the recency with which the current fees have come into place. Many English parents
have not had much time in order to prepare for the level of expenditure now required to finance HE. The other difference is the “other” category which over one-quarter of English students placed themselves in, this includes payment of fees by local authorities (for low-income households) and, more rarely, by employers. The relatively high number of English students in this category indicates that their own, or their parents’, incomes are low. Students who rely financially on their parents – which includes most school leavers – and whose parents’ residual income is less than £20,970 a year will make no contribution towards fees. Parents who earn between £20,970 and £31,230 will be asked to pay part of the contribution, calculated on a sliding scale. Families who earn £31,231 or more are expected to pay the full fee contribution of £1,125 a year. French students attend IFI with the knowledge that the fees are higher than at many other HE institutions. In fact, the excellent ranking of the ESC (the management school belongs to the top ten) has a favourable impact on IFI. As a result, the students attending a Bachelor at IFI expect to obtain more senior and possibly more international positions. Thus they and their parents are willing to invest in the high tuition fees. Table II shows that the main difference in accommodation arrangements would appear to be that more than twice as many English students continue to live at home with their parents than French students. A study by Mori (Woodward, 2003) of 21 English universities found that choice of course was affected by “being able to live at home”, cited by 35 per cent of students from working class backgrounds, compared with 13 per cent of those from professional families. Percentages of students living in halls of residence is very similar in both countries (20 and 21 per cent), but those living in rented accommodation differ considerably, being 40 per cent in England and 60 per cent in France. Students at MMU tend to be in halls of residence during their first year only, very few second and third year students live in halls. Daniel et al. (1999) estimated in 1999 that 60 per cent of French students do not live at home with their parents, this study has found the figure to be closer to 85 per cent. As can be seen from Table III, there was very little difference in the percentages of English and French students owning cars. All the car owners in Watts’ (2000) study
Parents Self Combination of self and parents Other (e.g. LEA)
At home with my parents I live with other family members Hall of residence on university campus A rented house/flat Other
English
%
French
%
147 63 20 85
47 20 6 27
121 26 12 8
72.5 16 7 5
English
%
French
%
111 6 68 129 11
34 2 21 40 3
26 3 34 101 2
15 2 20 60 1
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Table I. Who pays your tuition fees? (n ¼ 482)
Table II. Where do you live while studying at university? (n ¼ 492)
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described their car as “essential” and defended their opinion when probed by analysing their individual situations in the context of public transport in the area. Some respondents described the public transport possibilities for getting to university as expensive, unreliable and inconvenient, others needed their cars to travel to their part-time jobs. The figures in Table IV do not concur with Daniel et al.’s (1999) findings that it is less expensive to study in England than in France. Not all students spend money on the items listed in Table IV; for example, among the English students there were only 49 smokers (15 per cent), whereas there were 54 French smokers (33 per cent). A total of 74 per cent of English students and 55 per cent of French students spent money on alcohol. Of the French students, 29 per cent spend money on textbooks and photocopying, compared to 56 per cent of English students. A feature of the strongly directed-learner system in France is that students are given textbooks and photocopies of articles and handouts as part of the course, they do not need to spend extra money on these items. There are no significant differences in spending patterns between the two countries. The French spend more on food, travel, cigarettes and telephone bills. The English students spend more on accommodation, alcohol, leisure, gifts, clothing and photocopying and printing.
Income As Table V shows, it would appear that, as expected, more English students work part-time during term time than French. These figures need to be interpreted against the background of intensive teaching of 30 hours per week at IFI. This leaves very little time for students to pursue any part-time working commitments. Around half of English students work part-time and this is within previous survey findings for this department at MMU (Curtis and Lucas (2001) – 44 per cent; Curtis and Williams (2002) – 59 per cent).
Table III. Do you own a car? (n ¼ 438)
Table IV. Spending for an average month at university (n ¼ 493)
Yes No
English
%
French
%
140 130
52 48
75 93
45 55
Food (including takeaways and eating out) Accommodation Travel Alcohol Leisure (cinema, sport, etc.) Gifts for others Clothing and shoes Cigarettes Textbooks, photocopying and printing Telephone bill Totals
English (in Euros)
French (in Euros)
82.29 218.58 62.63 98.81 33.92 12.27 61.48 9.53 15.19 27.14 621.84
100.98 200.16 64.71 85.87 28.80 10.56 31.75 20.44 8.26 29.25 580.78
As can be seen from Table VI, a higher proportion of French students work low numbers of hours than English students, although 65 per cent of French students and 80 per cent of English students work less than 20 hours per week. Of those who do work, it would appear that in both countries students are reluctant to work more than 21 hours per week. As can be seen from Table VII, parental support as a proportion of total student income varies considerably between the two countries (14 per cent of income in England and 63 per cent in France). Only 43 English students and five French students used credit cards, and only 74 English students and five French students had bank overdrafts or bank loans. The majority of English students are dependent on their student loans and wages from their part-time jobs as their main sources of finance. French students are very dependent on parental contributions. The expenditure figures do not include the payment of tuition fees, which slightly more English students pay themselves than French (20 per cent:16 per cent). Half of English students’ income is made up of loans (student loans, credit card spending and bank loan or overdraft), while only 7 per cent of French students’ income is made up in this way.
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Debt According to Daniel et al.’s (1999) research, approximate monthly expenditure for students was e366 in France and e195 in the UK. Differences between income and
Yes No
0-10 11-20 21-30 31-40
English
%
French
%
173 150
54 46
25 140
15 85
English
%
French
%
50 91 28 7
28 52 16 4
9 6 6 2
39 26 26 9
Wages Money from parents Money from other family members Student loan Credit card spending Bank loan/overdraft Bursary/grant Other (e.g. savings) Total income
English
% of total
French
% of total
157.13 87.93 10.22 183.80 23.24 103.43 – 56.37 622.12
25.25 14.13 1.64 29.54 3.73 16.62 – 9.06
62.46 66.58 5.84 21.81 2.38 16.24 46.38 60.34 582.03
10.65 62.88 0.85 3.78 0.34 2.74 7.90 10.30
Table V. Do you work part-time during term-time? (n ¼ 488)
Table VI. How many hours per week do you work? (n ¼ 198)
Table VII. Sources of finance for an average month at university (in Euros) (n ¼ 493)
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expenditure were: France e258 and the UK, e30, indicating that French students may have greater levels of debt than English. The average amount owed by UK students is £6,228 (e4,448) compared with £5,961 for 2001 (Barclays, 2002). This survey found that 241 English students were in debt (75 per cent of the total) and 82 had no debts; 53 French students were in debt (32 per cent of total) and 114 had no debts (68 per cent of the total). As with the other tables, Table VIII shows figures that are averaged out across the years. For example, the total debt for English first-year students was £3,794, and third year debt was £9,888. The average total debt in euros was 8,015. These figures are for March and would be higher by the end of the year in June. Although French students do have debts, they are less than English students’ debts and are spread among fewer individuals. The main source of debt for English student is the student loan, but for French students the debt is more equally balanced between student and bank loans and loans from parents and others. Table IX shows that proportions of French students agreeing with the statements on debt tended generally to be less than English students. However, the pattern was similar in that less than half of all students were surprised at the level of their debt, around half were “very worried” about the debt. Similarly, around half considered the debt to be an investment. Research at Lancaster University Management School found that students did not treat loans or overdrafts as real debt, but as a long-term investment (Utley, 2003). More striking differences were the proportions of students “not at all concerned”, almost a third of the English students and less than one-fifth of the French. Also, two-thirds of the English appeared to be grateful that the level of debt was not already higher and almost half of French were pleased that it was not higher. Other aspects of the student experience Class contact time was very different in the two countries, with French students having lessons for around 25 hours per week and English students being in class for around 12
Table VIII. How is your debt distributed? (All figures in Euros) (n ¼ 294)
Table IX. On seeing your debt, what is your reaction to it? (n ¼ 294)
Student loan Credit cards Bank loan/overdraft Money owed to parents and others Other Total debt
Surprised it was so high Very worried Not at all concerned I am pleased that it is not more than it already is It is not debt, it is an investment in my future
English
French
6,315.40 361.20 1,155.00 57.40 127.26 8,015.86
486.03 18.55 505.41 300 0 1,309.99
English (% agree)
French (% agree)
40 52 31 65 56
36 44 18 47 52
hours per week. English students have fewer assessed pieces of work per year, generally around 12 were cited, while French have 15-20 per year. Tasks or homework that are not assessed was also not frequent in England, only 12 per cent of English students had unassessed work set for them once or twice per week. French students were more likely to have non-assessed work set during the week – 76 per cent had non-assessed homework at least twice a week. Crace (2003) quotes a French exchange student from Institut d’Etudes Politiques in Lille when comparing the two systems as saying: “In France, most of the learning is instructional and takes place in the classroom. Here in England, academics are much more accessible; we are encouraged to develop and express our own opinions. The learning process is much more creative as a result”. Although one cannot take one anecdote to represent the total student experience of the two systems, it would appear that French students are kept considerably busier than English students; English students are treated more as independent learners than French. As can be seen from Table X, over one-third of English students and just over half of French students go out three times per week or more in the evenings. It would appear that drinking and socialising are important to student life in both countries, despite the constraints of French students’ academic workload and English students’ part-time jobs.
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Conclusion There appears to be many more differences than similarities between the two systems of HE explored in this paper. In particular the French three-tier system with Grandes Ecoles, universities and other types of institutes finds no equivalent in the UK. The French institution that was researched belongs to a Grande Ecole, which is very different from a French university in terms of funding. In general there appears to be a higher financial burden on parents in France as students do not have much time to work part-time during term-time and relatively high tuition fees have to be paid in addition to students’ weekly living expenses. Although relatively few French students work they do not miss out on work experience as they spend a substantial amount of time, i.e. 12 months, in a firm of their choice. However, it is not always the case that the student gets paid on a placement, which means further financial commitment for the parents. In comparison, the financial burden of HE appears to be placed much more on the students’ themselves in England. The consequence of being an investor in one’s own future appears to entail living at home with more students working in low-level low paid jobs during term-time. These are indicators that English students may be experiencing financial difficulties. The other indicators of this found in this survey were: levels of
None 1 2 3 4 5þ
English
%
French
%
17 68 104 65 21 37
5 22 33 21 7 12
4 32 42 29 16 30
2 20 26 24 10 18
Table X. How many times a week do you go out socially?
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debt, low parental contribution and the number of students whose tuition fees are paid by their local education authority. Many English young people graduate with high levels of debt. French students enjoy a good social life, have work placements relevant to their course of study and comparatively little debt on graduation. The benefits of studying in both systems include the acquisition of transferable skills, enhanced employability, increased confidence in the world of work, and the improvement of organisational and time management skills (Pickering and Watts, 2000; Curtis and Shani, 2002). In particular in the English system students assume responsibility for their own career from an early stage in life, the down side of which may be that they lose the carefree approach to studying. This development does, however, go hand in hand with the idea of producing independent learners in the English education system, a philosophy that finds limited application in the French system, in particular at the Grandes Ecoles. Negative effects for English students centre on the degree to which employment and academic responsibilities tend to produce a conflict of interests. Pickering and Watts (2000) found that this conflict was said to result in feelings of pressure and a sense of being pulled in two directions. Goddard (2003) reported on research carried out by Little and Brennan which questioned 1,500 students at seven universities, funded by universities and UK and HEFCE. A total of 40 per cent of students were working in excess of 15 hours per week. The study found that term-time work interfered with the acquisition of academic knowledge and skills. Of the students who were working during term-time, 42 per cent missed lectures, 35 per cent missed seminars and tutorials and 35 per cent had difficulties accessing library or computer facilities due to work. The TUC’s (2000) survey of working students highlighted other concerns: unsocial hours, travelling home late at night, low pay, bullying and other harassment and health and safety hazards. Work-related negatives include low pay (on average £4.37 per hour), many students receiving no sick pay or holiday pay, health and safety hazards, and stress and tiredness (TUC, 2000). Students tend to be supported very little by their lecturers at university. Support tends to be ad hoc and partial and falls short of considered and formalised policies which universities should implement (Smith and Taylor, 1999; Curtis, 2001). Negative effects for French students appear to focus on stress induced by a relatively heavy workload (25-30 teaching hours per week, a relative large number of assessed and unassessed assignments, etc). In addition, teaching is very directive and leaves relatively little time for individual activities. Taking on part-time employment during term-time would seem to be virtually impossible. It is therefore surprising that even a small minority manage this. Even though the possibility to spend one year on an industrial employment increases the employability of these students it needs to be borne in mind that these placement are very often not well paid or not even paid at all. This puts even more pressure on the parents to provide for their children. While it would seem to be more equitable and economically efficient for individuals to pay directly for services they receive, rather than those services being funded by higher tax, this study highlights certain problems. The quality of the educational experience may be reduced by continuing to live at home with parents and to carry out low level work while studying. This is a contentious issue, but the advent of top-up fees in England in 2006 will increase the problem and make the system more e´litist (as it already is in France).
Lincoln and Walker (quoted in Williams, 1998) take the view that a graduate tax in the form of a surcharge on income tax would be the most economically efficient and equitable way of raising money from the direct beneficiaries of HE. This may alleviate the problems associated with accumulating debt and part-time working during the period of full-time study. Guille (2002) proposed that other European countries should adopt a UK-style system of funding. She argues that making all students eligible to loans would first, promote private responsibility. Second, repayments should be income-contingent, as in the UK, because they are automatically tailored to ability to pay: borrowers with no or low earnings make no repayments, and, beyond a threshold, repayments increase or decrease in proportion to income at a reasonable rate. Third, Guille proposes that students should pay interest because interest rate subsidies are expensive for governments and give students an incentive to complete their studies or repay as slowly as possible. It looks as if, not only will England not return to a publicly-funded grant system, but also that other countries are under pressure to come into line with the English system.
References Barclays (2002), “Student debt stabilising according to Barclays student survey”, Press Office, 8 July, available at: www.newsroom.barclays.co Bennett, R. (2003), “Determinants of undergraduate student drop-out rates in a university business studies department”, Journal of Further and Higher Education, Vol. 27 No. 2, pp. 123-41. Bynner, J. and Egerton, M. (1999), The Social Benefits of Higher Education: Insights from Longitudinal Data, Centre for Longitudinal Studies, Institute of Education, University of London, London. Callender, C. and Kemp, M. (2000), Changing Student Finances: Income, Expenditure and the Take-up of Student Loans among Full and Part-time Higher Education Students in 1998-99, Vol. 1998-99, Department for Education and Employment, London. Christie, H., Munro, M. and Rettig, H. (2001), “Making ends meet: student incomes and debt”, Studies in Higher Education, Vol. 26 No. 3, pp. 363-83. Crace, J. (2003), “Joint honneurs”, Guardian Education, 3 June, pp. 14-15. Curtis, S. (2001), “Students working part-time during term-time: the view of academic staff”, paper presented at the Higher Education Close Up 2 Conference, Lancaster University, Lancaster, 16-18 July. Curtis, S. and Lucas, R. (2001), “A coincidence of needs? Employers and full-time students”, Employee Relations Journal, Vol. 23 No. 1, pp. 38-54. Curtis, S. and Shani, N. (2002), “The effect of taking paid employment during term-time on students’ academic studies”, Journal of Further and Higher Education, Vol. 26 No. 1, pp. 129-38. Curtis, S. and Williams, J. (2002), “The reluctant workforce: undergraduates’ part-time employment”, Education þ Training, Vol. 44 No. 1, pp. 5-10. Daniel, H.-D., Schwarz, S. and Teichler, U. (1999), “Study costs, student income and public policy in Europe”, European Journal of Education, Vol. 34 No. 1, pp. 7-21. Forsyth, A. and Furlong, A. (2000), Socio-economic Disadvantage and Access to Higher Education, The Polity Press (for the Joseph Rowntree Foundation), Bristol.
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Goddard, A. (2003), “Paid work damaging to studies, report says”, Times Higher Education Supplement, 23 May, p. 9. Guille, M. (2002), “Student loans: a solution for Europe?”, European Journal of Education, Vol. 37 No. 4, pp. 417-31. Independent Committee of Inquiry into Student Finance (1999), Student Finance: Fairness for the Future, (The Cubie Report), Scottish Executive, Edinburgh. National Union of Students (NUS) (1999), The Student Hardship Survey, NUS, London. Pickering, A. and Watts, C. (2000), “Pay as you learn: student employment and academic progress”, Education þ Training, Vol. 42 No. 3, pp. 129-34. Smith, N. and Taylor, P. (1999), “‘Not for lipstick and lager’: students and part-time work”, Scottish Affairs, No. 28, pp. 147-63. Thomas, L. (2002), “Student retention in higher education: the role of institutional habitus”, Journal of Educational Policy, Vol. 17 No. 4, pp. 423-42. Tregaskis, O. and Dany, F. (1996), “A comparison of HRD in France and the UK”, Journal of European Industrial Training, Vol. 20 No. 1, pp. 20-30. TUC (2000), Students@work2000, TUC, London. Utley, A. (2003), “Students put lifestyle before bank balance”, THES, 28 February, p. 7. Watts, C. (2000), “The effects of part-time paid employment during term time on the academic performance of full-time first year undergraduates”, Occasional Paper, December, University of Brighton Educational Research Centre, Brighton. Williams, G. (1998), “Current debates on the funding of mass higher education in the United Kingdom”, European Journal of Education, Vol. 33 No. 1, pp. 77-87. Williams, G. and Light, G. (1999), “Student income and the costs of study in the United Kingdom”, European Journal of Education, Vol. 34 No. 1, pp. 23-41. Woodward, W. (2003), “We are not to be ignored”, Guardian Education, 21 January, pp. 12-13.
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Distribution of income and the structure of economy and society
Distribution of income
A.H.G.M. Spithoven Faculty of Social Sciences, Utrecht University, Utrecht, The Netherlands
133
Abstract Purpose – Many economists and politicians have declared the price mechanism to be the most effective coordination mechanism. On the contrary, the economic perspectives at the beginning of the twenty-first century reveal that an increase in the supply of products does not necessarily engender an increasing demand. That is why more and more economists agree that every society not only can, but also must, choose the combination of coordination mechanisms that are most appropriate under its specific conditions. Design/methodology/approach – Economic development and growth are approached as being dependent on the development of society and vice versa. The empirical relation between economic openness of a country and the structure of its industrial relations is analysed in relation to different economic outcomes. Special attention is paid to the question whether a policy to engender smaller income differentials does or does not provide a positive drive for the structural change towards a modern information technology-based economy. Findings – Although some authors argue that smaller income differentials coincide with lower productivity rates, this study reveals that there is no such trade-off. Different sets of coordinating mechanisms determine economic performance. The market mechanism is therefore not the overriding force determining economic development. On the contrary, income and education seem to be two drivers of the sectoral shift to an ICT-based service economy. Originality/value – Different sets of coordination mechanisms seem to support the same economic performance. This implies that governments should once again take responsibility for structuring the economy and society – that is to enforce a system of reliable justice for the vast majority of citizens. Keywords Income, Distribution of wealth, Labour efficiency, Industrial relations, The Netherlands, Communication technologies Paper type Research paper
Introduction In the mid-1930s the traditional, non-intervention approach to economics was challenged by John Maynard Keynes. Influenced by his General Theory, many economists elaborated how governments could avoid widespread unemployment and promote economic growth. Since the Second World War, different strands of Keynesian economists were studying this problem. But in the mid-1970s, with the slowing down in economic growth and with rising unemployment, Keynesian policies were “declared” ineffective and income distribution was driven out of sight. Supply-side economics, and new classical economics, focussed attention on supply and neglected the demand side of the economic system. Early in the 1980s economists and politicians revived the pre-war ideologies and fell back on neoclassical recipes for curing the ailing economic situation. Privatisation and deregulation became the main instruments of economic policy. The price mechanism was once again declared the most effective The author is indebted to Professor Y.S. Brenner for helpful comments on an earlier version of the article.
International Journal of Social Economics Vol. 32 No. 1/2, 2005 pp. 133-154 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510575685
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coordination mechanism. The result of the “new” approach was that, after a short recovery of growth, the economic perspectives at the beginning of the twenty-first century became disappointing. It became apparent that an increase in the supply of products does not necessarily engender an increasing demand. Next to the conventional critique of the market as an adequate mechanism for the promotion of growth and an equitable distribution of income, new arguments were put forward by new-institutional economists which strengthen scepticism about the market mechanism’s salubrious functioning. They point out that markets are beset by economic agents with imperfect information, opportunistic behaviour and bounded rationality. If it is assumed that economic agents will not act without perfect information, the consequence would be that no market transactions could take place. Agents will not buy a good or service when they cannot be certain that they will get the corresponding quality for the price they have to pay. At the same time no producer will sell an article below its cost. Markets only come into being when appropriate institutions remove the uncertainty caused by imperfect information (Akerlof, 1970). Also opportunistic behaviour requires institutions without which markets cannot function properly. Self-interest is bounded by the rules and regulations of the free market context. Prohibitions on lying, stealing, injuring, and promise breaking are important institutions for markets to be able to fulfil their tasks. Self-sacrifice is not ignored by the new institutional economists, but is a concept within institutions such as the business contract or the marriage contract. And, the last mentioned, bounded rationality, engenders “satisficing behaviour” which is the pursuit of satisfactory aspiration levels of the objectives of decision making and which may not involve maximising profit (Simon, 1987, p. 243). Actual economic decision making does not fit the model of the “homo economicus acting in a world with full information, independent decision-making, polypolistic competition, transitivity, and fixed preferences” (Beckert, 2003, p. 769). In reality economic behaviour is embedded in social structures and is coordinated by different sets of coordination mechanisms. At one time the dominating coordination mechanism is the market, i.e. by prices. Another time the dominating coordination mechanism is authority, i.e. the economic, political or social power or right to give orders or make decisions. And another time again, the dominating coordination mechanism is custom, i.e. accepted or habitual practices – routine. The multidimensional structure of the coordination of transactions was elaborated by the economic historian Douglas North and by others. North’s work veers from many neoclassical precepts and employs a holistic approach to the understanding of economic processes which include the influence of ideology, culture and politics. He postulates that economic development is path-dependant, namely that “long-run economic change is the cumulative consequence of innumerable short-run decisions by political and economic entrepreneurs that both directly and indirectly (via external effects) shape performance” (North, 1990, p. 104). The reason is that time is irreversible and decisions taken in the past influence future decisions. More and more economists seem to agree that every society not only can, but also must, choose the combination of coordination mechanisms that are most appropriate under its specific conditions. Markets require informal institutions (e.g. trust) and governments have to intervene in the market when it fails. The bigger the external
effects of a specific production, the more intervention is needed. That is why pure public goods have to be produced by the government and the market production of quasi-collective goods has to be accompanied by several institutions, whether or not they were called into life by the government. Economic development and growth is dependent on the development of society and vice versa. The development towards an information society is one of the intriguing examples of this interaction. The emerging new information and communication technologies (ICTs) seem to transform all industries (manufacturing and services). They cumulate in an amazingly fast growing number of applications and use of the internet, which stands for interconnected networks. The growth of the number of applications and use of the internet resulted in an euphoria about what became known as the New Economy. One of the new dogma’s was that the economy can sustain a high rate of economic growth together with low inflation rates (Atkinson, 2002). The euphoria first faded because of the so-called productivity paradox. Overall productivity rates did not reflect the rising investment in ICT from the early 1980s to the late 1990s. Second, because of the world-wide recession in the first years of the twenty-first century. The productivity paradox may well turn out to be mainly a mirage. Once the assumption is excluded that investment has a short-run effect on productivity (Spithoven, 2003), and it becomes obvious that the recession since the beginning of the twenty-first century does not have receded or impeded the apparently structural change driven by the new information technologies (Atkinson, 2002). The digital technologies have altered, and seem to continue to alter, the way we work and the kind of work people do. It also created and seems to continue to create opportunities for new consumer products (new communication devices, new sources of information and entertainment, e-shopping, e-mail). However, the digital technologies did not and do not change basic principles of economics such as the relationship between investment and consumption. The digital technologies did not and do not alter the fact that economic growth can only take place at the cost of consumption and that new investments are only induced by positive changes in demand (Brenner, 1998, Ch. iiv, p. 20). Investment and consumption must develop in conjunction with each other. This means that the share of investment in total output must be quite stable in the long run. To maintain close to full employment “the free enterprise system requires an adjustment of consumers’ purchasing power in line with the progress of technological innovation” (Brenner, 1991, p. 216). When consumers’ purchasing power is inadequate to clear markets and firms do not take their social responsibility, government, whether or not in consultation with the social-economic partners, may well be the only force to get the economy on its full-employment track again. In what follows in this article, the relation between economic openness of a country and the structure of its industrial relations is discussed first; then the question is raised if differences in the character of industrial relations result in different economic outcomes; and finally the relation between income distribution and economic efficiency is analysed. Attention is paid to the question if a policy to engender smaller income differentials does or does not provide a positive drive for the structural change towards a modern information technology-based economy.
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The smallness of nations as one of the factors explaining the structure of their industrial relations Katzenstein (1993) argues that economic openness makes an industrialised country vulnerable to shifts in the world economy. Small countries have no other choice but to make flexible adjustments to changes in the international economic environment and to compensate their inhabitants and firms for the instabilities in investment and employment. That is why corporatism, which is one of the structures of industrial relations, is rooted in the smallness of open industrial economies. Here corporatism must neither be interpreted as a system akin to the corporatism first suggested by the Syndicalists, nor be seen alike to the perverted system of state control which was later imposed (in the 1920s and 1930s) by Franco’s regime in Spain, Salazar’s in Portugal and Mussolini’s in Italy, to evade class conflict. In the present context corporatism is a system in which social economic policy, with regard to wages and working conditions, is coordinated by the social economic partners themselves (see also Spithoven, 2002). Katzenstein (1993, pp. 30-37) has qualified this system as democratic-corporatism. Corporatism is likely to flourish in The Netherlands because it is a small country. Its smallness makes it dependent on international trade. In the period 1960-1995 imports and exports, in percentages of gross domestic product (GDP), were 28.8 per cent for all OECD countries taken together, and 82.5 per cent for The Netherlands alone (all measured in prices of 1990) (OECD/DSI, 1997; see also Maddison, 1995, p. 38). The corporatist instruments of domestic compensation include income policy, a large public sector and generous welfare expenditures (Katzenstein, 1993, pp. 49, 57). From the perspective of managing transaction costs of complex exchange relations between labour, capital and the state, corporatist institutions create a recommendable device for small countries to improve the competitiveness of enterprises. Although Canada as a small open economy and Germany as a larger economy seem to counter the argument that corporatism is a characteristic of small open economies, the empirical data for (a selection of) OECD countries support Katzenstein’s hypothesis that corporatist arrangements are rooted in the smallness of industrial countries. The rank orderings of countries according to their degree of corporatism as elaborated by different researchers, and the rank ordering of countries according to their dependence on international trade (measured by their import and exports in percentages of GDP in 1960/1964), are positively correlated. The values are all statistically significant (see Table I)[1].
Industrial relations and distribution of income between households According to Teulings and Hartog (1998, pp. 36-41) dispersion of wages “is inversely related to corporatism, about doubling from the most to the least corporatist economies” Freeman’s (2000, p. 28) empirical research resulted in the conclusion that “the institutions associated with collective bargaining and other forms of institutional wage-setting substantially reduce the dispersion of earning”. As different researchers have shown these findings are in consonance with the statistical analysis on the correlation between the rank orderings of countries according to their degree of corporatism and the rank ordering of countries according to their level of income differentials (measured by the GINI coefficient). Table II reveals that higher degrees of corporatism coincide with smaller income differentials.
Distribution of income between households in The Netherlands Finding of a positive relation between corporatism and distribution of income does not imply that the distribution of income between households is stable. Corporatism, and with this as one of its goals, the distribution of income is not static. Corporatism responds to changes in society and economy and adjusts its goals and strategies. Since the 1950s Dutch industrial relations are embedded in a system in which government shares its political power with trade unions and employers organisations
Name of researcher(s)
Correlation
n
Value
Asymptotic standard errora
Approx. T b
Approx sig.
Calmfors and Driffill Calmfors and Driffill Schmitter Schmitter Cameron Cameron Blyth Blyth Bruno and Sachs Bruno and Sachs
Gamma Spearman Gamma Spearman Gamma Spearman Gamma Spearman Gamma Spearman
17 17 14 14 16 16 16 16 17 17
20.441 20.571 20.416 20.623 20.567 20.759 20.400 20.588 20.452 20.641
0.120 0.152 0.073 0.103 0.114 0.117 0.133 0.149 0.131 0.144
23.686 22.694 25.652 22.762 24.959 24.359 23.000 22.722 23.462 23.237
0.000 0.017c 0.000 0.017c 0.000 0.001c 0.003 0.017c 0.001 0.006c
rs rs rs rs rs
Notes: a Not assuming the null hypothesis; b Using the asymptotic standard error assuming the null hypothesis; c Based on normal approximation; n ¼ the number of countries incorporated in the analysis. The different researchers confine their analysis to a selection of the following countries: Austria, Norway, Sweden, Denmark, Finland, Germany, The Netherlands, Belgium, Australia, France, the UK, Italy, Switzerland, the USA, Canada, New Zealand, Japan Source: Author’s own calculation based on Calmfors and Driffill (1998, p. 18) and OECD/DSI (1997)
Name of researcher(s)
Correlation
n
Value
Asymptotic standard errora
Approx. T b
Approx. sig.
Calmfors and Driffill Calmfors and Driffill Schmitter Schmitter Cameron Cameron Blyth Blyth Bruno and Sachs Bruno and Sachs
Gamma Spearman Gamma Spearman Gamma Spearman Gamma Spearman Gamma Spearman
15 15 14 14 15 15 14 14 15 15
0.712 0.831 0.614 0.789 0.538 0.774 0.644 0.801 0.359 0.531
0.111 0.090 0.077 0.066 0.099 0.068 0.109 0.086 0.140 0.170
6.497 5.388 7.889 4.455 5.446 4.406 6.085 4.633 2.572 2.261
0.000 0.000c 0.000 0.001c 0.000 0.001c 0.000 0.000c 0.010 0.042c
a
rs rs rs rs rs
Notes: Not assuming the null hypothesis; b Using the asymptotic standard error assuming the null hypothesis; c Based on normal approximation; The Gini coefficient for the different countries is for the following years: Austria (1987), Norway (1995), Sweden (1992), Denmark (1992), Finland (1995), Germany (1994), The Netherlands (1991), Belgium (1992), Australia (1994), France (1989), the UK (1995), Italy (1995), Switzerland (1982), the USA (1994), Canada (1994); missing values for New Zealand and Japan Source: Author’s own calculation based on Calmfors and Driffill (1998, p. 18) and ILO (2000, pp. 290-2)
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Table I. Some statistics on the correlation between the rank orderings of countries according to their degree of corporatism as elaborated by different researchers and the rank ordering of countries according to their dependence on international trade (measured by their import and exports in percentages of GDP in 1960/1964)
Table II. Some statistics on the correlation between the rank orderings of countries according to their degree of corporatism and the rank ordering of countries according to their level of income differentials (measured by the GINI coefficient)
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in exchange for their cooperation in realising its goals. Government, the Central Bank, organisations of employers and trade unions agree on wage moderation. They assume that a policy of wage moderation is necessary to create jobs and to keep the welfare state payable. Wage policy is characteristic of Dutch economic policy and income compensation is the crowning piece of the Dutch welfare state. A policy of job creation started only in the 1980s. Until then, Dutch society was strongly pillarised along religious and ideological lines. The dominance of the religious pillars explains the primacy of an income policy above an employment policy. Starting from the family as the cornerstone of society, the clergy embraced the breadwinner-principle in preference to the principle of each individually earning his or her own income. Through the pillarised organisation of the polity the clergy was able to impose its ideals on society. Since the secularisation of Dutch society from the 1970s onward the breadwinner principle lost influence. In a growing number of households both partners took paid part-time or full-time jobs outside the home. This led to changes in industrial relations. Since the 1980s, individualisation and tailor-made arrangements, democratisation and worker participation, differentiation and decentralisation became key terms characterising the changes in industrial relations. However, this does not imply that the Anglo-Saxon model, in which shareholders are the dominant actors, pushed aside the Dutch corporatism that takes stakeholders into account. The mentioned changes made Dutch corporatism more flexible. Cooperation between employers’ organisations and trade unions continues to be the cornerstone of Dutch industrial relations and the government continues to facilitate this cooperation and to correct possibly negative effects. In the 1990s the Dutch approach to industrial relations received the name Polder model. This is a term borrowed from the culture of protecting the low-lying lands (the polders) behind the dykes where cooperation among all concerned is absolutely necessary to prevent flooding – “to keep feet dry”. The Polder model may be seen as the Dutch manifestation of the “Rhineland-model”. This is the model elaborated by Albert (1991), the former director of the French planning agency, in his book Capitalisme contre Capitalisme. “Through consultation, the participants in the economic process (the stakeholders) try to achieve a harmony of interests, not just with regard to macroeconomic but also concerning meso- and micro-economics” (Bolkestein, 1998, p. 1). The re-employment of marginally efficient labour is possibly one of the reasons why productivity has slowed down since the early 1980s. A second reason is possibly the policy of wage restraint and wage-cost moderation agreed on between the socioeconomic partners in the autumn of 1982. The new centre-right government that came to power in 1982 advocated a policy of severe cuts in public spending in which there was no room for half-hearted measures or side-payments, i.e. concessions in the same or other policy fields, to the unions. The government soon withdrew some of the legislative proposals (the Wage-Earner Fund, and Union Representation in Firms) of its predecessors, and discontinued the voluntary income guidelines. Reducing public debt was seen by the government as a prime condition for restoring private sector profitability and investments. It welcomed the two reports, published in 1981 and 1982, by the Advisory Committee on Industrial Policy which was chaired by (former) Shell company’s President, G.A. Wagner. In sharp contrast to past policies
these reports stressed the need for re-industrialisation and for a less conspicuous role for the state in economic affairs. The Wagner Committee particularly recommended that the government should stay out of collective bargaining, that all automatisms (cost-of-living adjustments, minimum wages, linkage for social benefits and public service salaries) should be removed, and that the minimum wage be lowered and income differentials be encouraged (Visser, 1990, p. 213). A severe drop in union membership in the early 1980s made it impossible for the unions to resist these proposals. Eventually the new arrangements had far reaching consequences for Dutch income distribution (as can be seen from Table III) and for overall social security, and particularly for social assistance. The minimum wage, introduced in 1969, was the cornerstone of the Dutch social security system. Since 1974 the minimum wage has been mandatory for all work except for work of less than 12 hours per week. In the same year it was linked to the net benefit level under the General Assistance Act (ABW) and the General Old Age Pensions Act (AOW)[2]. According to the ABW, school-leavers and the unemployed, whose unemployment exceeds the length of time during which the statutory unemployment payment lasts, were entitled to claim social assistance. The social assistance is the ultimate safety-net for people who do not have access to benefits under any other social security arrangements. Social assistance benefits amount to 70 per cent of the official net minimum wage for a single person, and for a couple to 100 per cent. Where necessary rent subsidies supplement social assistance payments. This linkage resulted in savings on social security expenditures because since the mid-1980s Year
Minimum wage
Inflation
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2.99 5.26 2.24 22.98 0.00 0.00 0.00 0.46 0.00 1.77 3.05 3.06 0.70 0.00 0.00 1.41 1.75 2.68 3.01 2.80 6.02 4.44 3.00
6.8 5.9 2.9 3.4 2.3 0.0 21.0 0.5 1.1 2.5 3.1 3.2 2.6 2.7 2.0 2.0 2.2 2.0 2.2 2.3 4.5 3.5 2.3
Source: Author’s compilation on CPB (1999; 2000, 2002, Tables A6 and A10)
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Table III. Gross minimum wage and inflation in The Netherlands, percentage change from previous period
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Table IV. Distribution of disposable household income (that is gross income minus paid pension premiums, social insurance contributions, wage and income tax, wealth tax, and health insurance premiums) in The Netherlands
the minimum wage was “frozen”. Consequently, between 1981-1999, the purchasing power of the minimum wage diminished by 27 per cent (see Table III). The changes in social security and wage policy resulted in wider income differentials in the 1980s and 1990s in The Netherlands as becomes clear from the Dutch data given in Table IV. One of the explanations for the widening of the income differentials is the growth of the number of households and a change in their composition. The national income has to be divided among a growing number of households. The increasing number of one-person and one-parent households resulted in the 1990s in a rise in the number of households. Because a two-person household does not need twice the income required by a single-person household the income per household has, to be correctly comparable, to be corrected for the number of persons in the households. This correction results in a so-called standardised income. The development of the distribution of the standardised income of households in the 1990s was as constant as that of gross income or disposable income (Pommer et al., 2003, p. 48). This does not mean that there were no problems. Besides a discussion about large company managers’ rapacity poverty since the mid-1990s became a political issue. Income recipients, who were dependent on social assistance and the elderly who were dependent on benefit by the AOW, came into real problems with their ability to remain Year
Theil
Gini
1959 1962 1964 1967 1970 1973 1975 1977 1979 1981 1983 1985 1987 1988 1989 1990(O) 1990(N) 1991 1992 1993 1994 1995 1996 1997 1998a
0.260 0.264 0.248 0.220 0.196 0.163 0.149 0.146 0.149 0.146 0.139 0.152 0.164 0.160 0.165 0.174 0.192 0.187 0.189 0.190 0.187 0.187 0.198 0.204 0.203
0.375 0.375 0.367 0.344 0.326 0.301 0.288 0.284 0.283 0.280 0.276 0.290 0.300 0.299 0.303 0.312 0.327 0.326 0.325 0.326 0.326 0.327 0.334 0.334 0.336
Notes: a Provisional data; (O) ¼ old definition (period 1959-1990); (N) ¼ new definition (period 1990 and later) (for the change in definition see: CBS (1994, pp. 44-52)) Sources: CBS (2000a, pp. 50, 52, 2000b); Pommer et al., 2003, p. 48
fully-fledged participating in society. With individual poverty, social poverty also entered the political scene since the end of the 1990s, i.e. the inadequacy of social provisions such as the care for the elderly in nursing homes. The policy to cut government expenditure, to lower taxes and to reduce the wage wedge, can be regarded as causes for the decay of the Dutch welfare system. Income distribution and per capita production Kuznets was one of the first to analyse the relation between distribution of income and per capita production. In 1963 he postulated an inverted U-curve, implying a rise in income differentials in developing countries and a fall in income differentials in developed countries. In Table V income differentials and per capita production is given for 15 developed countries. Distribution of income between households and per capita production are weakly correlated, as is revealed in Table VI. The correlation is not statistically significant. The “Least Trimmed Squares Robust Regression”, a method introduced by Peter J. Rousseeuw in 1984, reveals that the data concerning the relation between income distribution and GDP per capita contain significant outliers, namely the data for the USA, Austria, Finland and Switzerland are the most extreme. Not only the least square regression correlation value arose, but also the level of statistical significance when the four mentioned extreme values were left out of the analysis (see Table VII). The USA and Switzerland are both countries that belong to the lower end of Calmfors and Driffill’s ranking of corporatism. Austria and Finland are relatively high on their ranking of the degree of corporatism. Probably the extreme values of Austria and Finland are caused by the data going back from the 1980s while the data for the other countries are from the mid-1990s.
Income distribution Gini Year Austria Norway Sweden Denmark Finland Germany The Netherlands Belgium Australia France UK Italy Switzerland USA Canada
0.231 0.242 0.250 0.217 0.226 0.282 0.315 0.272 0.317 0.327 0.346 0.346 0.361 0.369 0.286
1987 1995 1992 1992 1995 1994 1991 1992 1994 1989 1995 1995 1982 1994 1994
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GDP in 1990 Gheary-Khamis dollars Per capita Year 15,189 18,372 16,927 18,293 14,779 19,097 16,784 17,165 17,107 17,457 16,371 16,404 18,379 22,569 18,350
1987 1994 1992 1992 1994 1994 1991 1992 1994 1989 1994 1995 1982 1994 1994
Note: The selected countries are the countries analysed in Table I of this article, exclusive of the countries for which the necessary data are not available Sources: ILO (2000, pp. 290-2) (Gini coefficients); Maddison (1995, pp. 195-7) (GDP per capita)
Table V. Income distribution and gross domestic product
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Table VI. Some statistics concerning the relation between income distribution and GDP per capita in Austria, Norway, Sweden, Denmark, Finland, Germany, The Netherlands, Belgium, Australia, France, the UK, Italy, Switzerland, the USA, Canada
Table VII. Some statistics concerning the relation between income distribution and GDP per capita in Norway, Sweden, Denmark, Germany, The Netherlands, Belgium, Australia, France, the UK, Italy, Canada
Comparing Table VI with Table VII suggests that there is no unilateral correlation between distribution of income and productivity. Small income differentials seem to correlate with relatively high levels of productivity in countries with a relatively high level of consultation between social-economic partners. At the same time large income differentials seem to correlate with relative high levels of productivity in countries with a relatively high level of market coordination, i.e., with a relatively low level of consultation between the social economic partners. Probably this also explains why: “In contrast to the near ubiquitous finding that institutional wage-setting significantly affects the distribution of pay, the evidence that labour market institutions have substantial effects on economic efficiency is frail [. . .] Analyses of firms that operate with different institutional forms shows that these forms have modest [hard-to-uncover] impacts on productivity” (Freeman, 2000, pp. 17-18). This finding challenges the well-known hypothesis of a trade-off in economic policy between equity and efficiency. A unilateral correlation between distribution and productivity is not found in the above given comparative analysis of data concerning the 15 countries for a selected year. It is not found either in a time series analysis for The Netherlands (see Table VIII). Moreover, the statistical relation between changes in the distribution of income and the changes in productivity per man-year of labour as given in Table VIII is not statistically significant. The development of income distribution is a biased indicator for the development of the distribution of purchasing power of the mass of consumers. The falling real prices of imports and energy in the period 1996-1998 were one of the causes of the falling rate of inflation in the industrialised western world. It contributed to a temporary restoration of purchasing power, which allowed economies of scale to be exploited and
Value (Intercept) GDP per capita
Min
1Q
Median
3Q
Max
2 0.08374 Std error 0.0964 1.1171
2 0.03532 t-value 0.1260 0.7144
20.01541 Prð. jtjÞ 0.7651 1.5636
0.03333
0.06671
0.4579 0.1419
Notes: Residual standard error: 0.04921 on 13 degrees of freedom; Multiple R-squared: 0:158288 ¼ 0:16; F-statistic: 2.445 on one and 13 degrees of freedom, the p-value is 0.1419 Sources: ILO (2000, pp. 290-2) (Gini coefficients); Maddison (1995, pp. 195-7) (GDP per capita)
Value (Intercept) GDP per capita
Min
1Q
Median
3Q
Max
2 0.05723 Std. error 0.8031 0.0000
2 0.02558 t-value 0.2184 0.0000
0.01504 Prð. jtjÞ 3.6773 22.3481
0.02296
0.03833
0.0051 0.0434
Notes: Residual standard error: 0.03582 on nine degrees of freedom; Multiple R-squared: 0.3799; F-statistic: 5.514 on one and nine degrees of freedom, the p-value is 0.04344 Sources: ILO (2000, pp. 290-2) (Gini coefficients); Maddison (1995, pp. 195-7) (GDP per capita)
gave new impetus to economic growth. In the USA it gave rise to the belief that the Solow productivity paradox was obsolete (Gordon, 1999). The improved purchasing power of private consumers came not only from falling import prices of energy, but also, among other things, from a rapid decline in computer prices, from the implementation of government policies to reduce state expenditure, and from capital gains (“profits” realised on stocks). With the exception of the decline in computer prices, the improvement of consumers purchasing power was not structural and may therefore have only been short lived and reversible. A much bigger fallacy in the measurement of purchasing power is the exclusion of changes in the value of the store of property rights (stocks and dwellings), the tax deductibility of interest paid on mortgages, and the legal instruments used by the wealthy to transfer their wealth to their children. Although the standardised income distribution between households proved to be stable in the 1990s in The Netherlands (Pommer et al., 2003) it is plausible to assume that the share distribution of purchasing power of households widened during that period. First of all, the wealthiest people gained from their rise in wealth because of the illusionary booming stock exchange in the 1990s. Further they gained most from the rise in house prices during this period. In The Netherlands’ average sales prices of dwellings more than doubled in the 1990s (CBS, 2002, p. 351). Both rises in wealth are not included the taxable incomes. Furthermore the distribution of income after taxes misrepresents the distribution of purchasing power because interests on mortgages are tax deductable in The Netherlands. As the poor can hardly afford to buy a house and the richest people can buy the largest houses, it is the latter who can best reduce their taxable income. Finally, the distribution of purchasing power is biased because prosperous parents (partly) transfer their wealth to their children in order to avoid or reduce death taxes. All this is legal, but it introduces a bias in the distribution of purchasing power between households. Parents are allowed by law to give their children yearly a certain amount of money without those children being obliged to pay taxes on this gift. The purchasing power of children with parents who do not have wealth which they can transfer does of course depend on the childrens’ own earnings alone. For children with a low social-economic background it is much more difficult to escape from poverty than for children with wealthy parents. Sometimes it seems as if children inherit their parents’ poverty.
Distribution of income
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Some theoretical notes on income distribution and productivity A rise in productivity can be realised by process innovation as well as by product innovation (Brenner, 1991, p. 219). That productivity was realised by process
Value (Intercept) d Gini
Min
1Q
Median
2 5.028 Std error 0.4428 2 113.7090
2 0.9259 t-value 0.9484 123.3803
20.2622 Prð. jtjÞ 0.4668 20.9216
3Q 1.5
Max 5.109
0.6517 0.3808
Notes: Residual standard error: 2.846 on nine degrees of freedom; Multiple R-squared: 0.08624; F-statistic: 0.8494 on one and nine degrees of freedom, the p-value is 0.3808 Source: Author’s own calculation based on CBS (2000b) and CPB (2000)
Table VIII. Some statistics on the relation between changes in labour productivity and changes in distribution of income measured by the GINI coefficient in the period 1988-1998 in The Netherlands
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innovation was debated in The Netherlands during the 1970s. Den Hartog and Tjan (1974) published a research paper in which it was shown that relatively high wages in comparison with foreign competitors stimulate entrepreneurs to put forward new investment to replace technologically old vintage capital stock. From this the idea slowly gained acceptance that in addition to the creation of new jobs, old jobs should be preserved to fight unemployment in The Netherlands. Politicians focussed their attention on a policy of wage cost moderation as an important instrument in fighting unemployment. However, the short-run protection of employment also makes employment vulnerable. This is one of the main criticisms of Kleinknecht (1998, p. 393) on the continuation of the since the 1980s policy of wage moderation. The policy of wage moderation in The Netherlands not only discouraged process innovations since the early 1980s, but also adversely affected effective demand-led product innovations. The hypothesis that often innovations are pulled by demand rests on the assumption of a hierarchy of needs and wants. Starting from this assumption Pasinetti (1983, pp. 71-5) showed that increases in per capita income do not equally engender a proportional expansion of demand for all goods. This is a more general formulation of “the Engel law” which says that the share of income spent on food declines as incomes increase. Engel’s demand curve shows that the demand for each individual product levels off at some ceiling of per capita income: Obviously demand cannot continually increase at an even rate. If we take foodstuffs for an example, man’s wants are clearly limited by his belly. Gradually, therefore, as incomes rise his food will become more diversified and some inferior foods will make place for better ones. Eventually even the diversification will no longer keep pace with the higher income and the surplus will be diverted to pay for products of other industries. But even then demand cannot grow forever. How many motor cars [or other products] can a man own [. . .]? Finally the surplus will no longer be directly consumed but turned into capital [. . .] If progress in technology could reduce production costs exactly in such a manner as to make up for the losses in disposable income owing to capitalization, expansion in the form of the introduction of ever-new products could continue almost indefinitely (Brenner, 1966, pp. 199-200).
According to Lindblom (2001, p. 134) income distribution and efficiency are closely related to each other but the relationship is more complex than meets the eye. First, the value of commodities is not an absolute value: “There exists no correct value, no correct estimate of costs, no maximally efficient choice, no correct price. It all depends on whose values are to count”. Second, “Efficiency prices will change as people change their minds about what they value. Efficiency prices and costs are also of course greatly influenced by the distribution of income and wealth. As a society grows in wealth one might expect, for example, that the efficiency prices of shore properties in resort areas might rise as wealthy people bid for them” (Lindblom, 2001, p. 137). Consequently efficiency in production rises along with efficiency prices. In other words efficiency rises when inputs are reallocated towards the production of goods and services that are higher valued, that means to goods wanted by the rich. This would imply that rising income differentials would be favourable for a rising share of services in the economy. Nevertheless this does not seem true with a shift to ICT-using services. Assuming fixed costs in providing the internet. These costs seem to be independent of the number of users of the networks, it seems self-evident that improvements in real income of the users of the networks are necessary to raise outlets and productivity rates. Ignoring congestion problems on the internet which may accompany an increase
in demand, and which require investments in the infra-structure, an economy that is based on ICT-using goods and services seems to land in a circular process in which the level of real income is dependant on productivity and in which productivity is dependant on the purchasing power of consumers. To realise a structural improvement in purchasing power for most consumers in order to lower the costs in the production of ICT-using goods and services requires a redistribution of income from the upper layers of earners to the households at the bottom half of the incomes scale.
Distribution of income
145
Income distribution and the demand for ICT-using services Applying “the Engel law” to services, the demand for highly priced ICT-using services, and the demand for services in general, can be seen to be highly income elastic (see also Nogueira and Cavalcanti, 1997). The plausibility of this statement is enforced by statistics on the internet users per million inhabitants and GDP per capita (see Table IX). There is a positive relation between the height of income per capita and the use of telecommunication devices (see Table X). Several bivariate analyses reveal that income is an important predictor of internet use: Family income remains an indicator of whether a person uses a computer or the Internet. Individuals who live in high-income households are more likely to be computer and Internet users than those who live in low-income households (NTIA and ESA, 2002, p. 11). While a predictor of overall Internet use, income level also influences where and how a person uses the Internet. Persons with incomes of less than $35,000 more often use the Internet outside the home, while those making over $75,000 predominantly use the Internet at home (NTIA, 1999a; see also NTIA, 1999b, p. 34).
(Intercept) Internet
Min
1Q
Median
3Q
Max
219,216 Value 729.2836 0.0498
2 1,274 Std. error 454.6779 0.0023
2618.3 t-value 1.6040 21.2941
344.1 Prð. jtjÞ 0.1104 0.0000
24,146
Notes: Residual standard error: 4991 on 184 degrees of freedom; Multiple R-squared: 0.7113; Pearson 0.843413; F-statistic: 453.4 on one and 184 degrees of freedom, the p-value is 0 Source: Author’s own calculation on ITU (2003a, b)
Internet users Mobile users Telephone lines World population Source: Kelly (2001)
Number of persons
High income (%)
300 million 490 million 912 million 6 billion
82 69 58 15
Table IX. Some statistics on the relation of GDP per capita in US$ in 2001 and internet users per million inhabitants in 2002, in 186 countries
Table X. User distribution by income group, January 2000
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Household income is a predictor of home computer ownership and use of networked information services. [In 1989-1993] Individual use of networked information services from home increased at an accelerating rate within upper income groups but grew at a slower rate within lower income groups (Kahin and Keller, 1995).
Across ethnic groups in the USA income even seems to be the strongest predictor of internet use (Walsh, 2000, p. 3). These results are not reproduced by multivariate analyses. Robinson et al.’s (2001, p. 568) multivariate analyses reveal that a combination of factors may determine whether a consumer is online: Education and age . . . emerge as the major predictors of Internet usage, although age becomes far less important in the context of the working-age population. There are important differences by income and by occupation, but the role of income emerge as less central than for education – indicating that social capital may be more important than economic capital in using this new technology.
The relation between income and the use of internet is of course biased because statistics on the number of internet users are not accurate and statistics on distribution are based on current income alone. Statistics of the number of internet users are clouded by issues such as account sharing, where a single user-identity (ID) may be shared by more than one family member. Statistics on income distribution do not give any indication for the distribution of individuals’ permanent income. Individuals with a much higher permanent income than current income, such as college students, may have a greater fondness for the internet. If this is the case, then the expected relationship between internet use and income will be confounded. A further note has to be made about the relation between internet use and consumption: even with the necessary skills and financial assets the emergence of the internet as a medium for household consumption is complex and problematic (Comor, 2000). Although e-commerce and e-information services are growing in economic importance, the internet content itself generates comparatively low revenues. This: [. . .] reflects the fact that direct charges, and thus revenues, for content access -subscription or pay-per-view-are relatively rare. This has resulted from a legacy of free information access; from a lack of payment systems perceived as secure; from the absence of smart card-based micro payment facilities; and from low public trust in financial transactions online. Relatively high consumer access costs have hindered the development of a mass market. The relatively low bandwidth available has compounded these problems and necessitated longer online connection times and charges. These factors have combined to increase the difficulty of establishing viable financial models for content ‘consumption’ on the Internet (DMA, 1998, p. 13).
The fact that investment in the internet and associated services kept ahead of the growth of the mass market for the internet seems to be one of the causes of the so called productivity paradox (Spithoven, 2003). Contrary to the measured productivity gains, the internet still seems to be a potentially considerable source for rising productivity: travel and related overhead expenses (e.g. hotels) can be avoided (e.g. in health care, research, communication and education); administrative operations can be streamlined, and; without any marginal cost a broad range of customers can be reached world wide. At the same time internet research is expensive, time consuming and complicated. Gaining the maximum productivity boost from internet solutions requires a well-thought-out strategy.
Income distribution and production per man-year of labour in the Dutch service sector, 1989-2000 A rise of income per capita is necessary for a shift in the economic structure. Without a rise in income most people would still have been employed in agricultural and in the housing industries. A rise in income requires rising efficiency of production, i.e. a change in the relation of input to output. Only then can people afford to shift their consumption from food to other goods and finally to services. Such a shift will only occur when the latter is valued higher than the former. The process of increasing productive capacity and national income per capita, i.e. the raising of the efficiency of resource utilisation, normally takes the form: . . . of rises in the product of labour per unit of time and in the yields of produce per unit of land and materials, which may be accompanied by an expanding exploitation of previously unrecognized and technologically or economically hitherto not exploitable resources. The result of economic growth is that people are given the opportunity, and no more than the opportunity, to become richer and freer. The reduced labour-time enables them to choose between working less hours for the satisfaction of customary wants or working as long as before for the satisfaction of increasing wants. Similarly, the increasing yields from land and materials makes possible the satisfaction of the needs of growing populations or of desires for greater material affluence or both (Brenner, 1998, pp. 4-5).
A shift in the structure of production towards a rising share of services was taking place in The Netherlands since the mid-1960s (Spithoven, 1988). There are severe difficulties in measuring value added in services. The value of government services is measured by the wages of the civil servants, that is when salaries of civil servants lag behind the private sector the share of the contribution of the public sector also diminishes. Differences in the growth of salaries of employees in the services that are financed by the government such as health care, and the wages of the employees in the private industries, may explain the falling share of the health care sector in the Dutch gross national product in the 1990s, which is indicated, among others, by the decline in the gross value added per man-year labour in health care services (see Table XI). From Table XI it can be deduced that in the year 2001 the value of production per man-year of labour was lowest successively in: private households with employed persons, temporary employment agencies, retail trade, lodging, food and beverage serving, construction and health care. It was highest in: mining, real estate services (renting and trade in imovables), manufacturing of basic chemicals, leasing or rental services without operator, public utilities, oil industry, post and telecommunication services, insurance services and pension funding, water transport services, air transport services, environmental services, manufacturing of final chemicals, manufacturing of basic metals, manufacturing of food products, beverages and tobacco products, financial intermediation (banking), manufacturing of paper and paper products, and wholesale trade services. The rise in production per man-year of labour in the period 1991-2001 was highest in the following branches of industry: water transport services, manufacturing of basic chemicals, air transport services, post and telecommunication services, manufacturing of food, beverages and tobacco products, manufacturing of final chemicals, public utilities, manufacturing of electronic products, manufacturing of transport equipment, manufacturing of textiles, apparel and leather products, transport, storage and
Distribution of income
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Table XI. Labour volume (measured in man-years) and gross value added (basic prices, that is exclusive of subsidies, in prices of 1995), in The Netherlands
Period 1991-2001 (n ¼ 11) III IV V % % %
2001 I £ 1 million e
2001 II £ 1,000
Agriculture, forestry and fishery products Mining Manufacturing Food products, beverages and tobacco Textiles, apparel and leather products Paper and paper products; Publishing and printing Oil industry Basic chemicals Final chemicals Rubber and plastics products Basic metals Fabricated metal products Machinery Electronic products Transport equipment Industry NEC Public utilities (electricity, gas and water)
10,413 7,572 57,597 10,166 1,270 1,684 5,382 852 6,480 3,446 1,893 2,063 4,424 4,616 5,901 2,521 6,988 5,638
228.0 8.0 970.9 135.5 28.3 24.4 94.9 7.0 31.9 41.0 32.8 25.2 104.3 89.5 102.5 61.1 192.5 33.5
20.65 21.55 20.66 21.09 24.19 21.68 20.58 20.50 23.48 20.84 0.17 22.12 0.19 0.79 21.58 20.85 0.70 22.57
1.83 0.96 2.12 3.05 21.15 1.17 2.3 20.19 2.29 3.05 2.41 0.46 1.65 3.23 1.82 2.45 1.65 1.09
2.49 2.55 2.80 4.18 3.17 2.90 2.89 0.32 5.98 3.93 2.24 2.64 1.46 2.42 3.45 3.33 0.94 3.75
Construction services Residential and non-residential construction Cvil engineering Construction services NEC
17,748 6,648 4,103 7,040
489.5 192.3 77.3 219.9
1.55 0.86 1.16 2.35
0.9 21.16 3.42 1.94
2 0.63 2 2.00 2.24 2 0.40
Trade, lodging, food, beverage and repair services Car trade and car repair services Wholesale trade services Retail trade and services Lodging, food and beverage serving services
55,751 5,958 30,063 13,809 6,078
1265 133.7 450.5 487.4 193.4
2.20 1.75 2.29 1.89 3.13
3.38 2.19 4.34 2.55 2.40
1.15 0.44 2.00 0.65 2 0.71
Transport, storage and communication Land transport services Water transport services Air transport services Transport services NEC Postal and communication services
29,456 8,058 1,443 2,598 4,437 13,761
413.1 180.6 153.0 277.0 76.0 113.5
1.77 1.74 23.25 1.12 1.87 2.92
4.83 1.75 2.56 6.90 3.12 8.71
3.01 0.01 6.00 5.71 1.23 5.62
Financial and business services Financial intermediation, Insurance services and pension funding Auxiliary financial intermediation Real estate services Leasing or rental services without operator Computer services Research and development services Legal and accounting services Architectural and economic services
8,4236 11,359 5,114 3,176 24,875 4,051 6,407 1,309 10,187 3,724
1315.5 159.2 46.9 64.9 53.3 23.8 119.0 27.9 197.2 88.3
4.75 1.92 1.86 3.73 3.40 6.67 11.65 3.03 4.08 4.89
4.11 2 0.61 4.05 2.09 1.15 2 0.69 4.37 0.63 2.24 2 1.12 7.45 0.74 11.30 2 0.32 0.56 2 2.39 4.66 0.56 4.42 2 0.45 (continued)
2001 I £ 1 million e Advertising services Temporary employment services Business services NEC Public administration Administration and compulsory social security services Defence Subsidised education services Care and services NEC Health-care services and social work Environmental services Recreational, cultural and sporting services Private households with employed persons Other care services Total
2001 II £ 1,000
Period 1991-2001 (n ¼ 11) III IV V % % %
1,583 7,746 4,789
36.3 345.7 153.0
5.01 6.48 3.84
5.29 8.48 3.65
0.26 1.88 2 0.18
38,267
751.5
0.04
0.96
0.91
22,313 3,255 12,707
372.3 67.0 312.2
0.34 24.79 1.18
1.30 22.46 1.47
0.95 2.44 0.28
35,161 22,902 2,246 4,373 1,268 4,386 341,654
1,066.9 703.5 24.9 111.5 75.5 151.5 6,541.9
2.53 2.70 3.59 3.75 0.33 2.01 1.68
1.96 1.78 472 2.67 2.53 0.96 1.66
2 0.56 2 0.90 1.09 2 1.04 2.19 2 1.03 2 0.03
Notes: Column I: gross value added (exclusive subsidies) in prices of 1995; Column II: labour volume in man-years; Column III: growth in labour volume, in percentages per year; Column IV: growth in gross value added, in percentages per year; Column V: growth in gross value added per man-year of labour, in percentages per year; NEC: not elsewhere classified Source: Author’s own calculation based on CBS (2002, pp. 83, 103)
communication. The rise of labour productivity in among others post and telecommunication was probably caused by the growth in the use of cell phones, the growth of the use of the internet, and the growth of ecommerce, with the consequence that much more parcels were sent by post. The rise of labour productivity in banking in the period 1991-2001, a period of sustained computerisation of the labour process, probably reflects the introduction of automatic teller machines and online banking systems. In the following branches of industry the rise of production per man-year of labour in 1991-2001 was lowest: research and development services, residential and non-residential construction, leasing or rental services without operator, recreational, cultural and sporting services, health care services and social work, lodging, food and beverage serving services and insurance services and pension funding. The development of productivity per man-year of labour is very diversified. On average it is highest in the production of tangible goods and lowest in the production of intangibles, that is in services. Water and air transport services are the exceptions to the rule. In several services labour productivity is even negative in the period of sustained investment in ICTs. Therefore, the proposition that higher incomes coincide with a rise in consumption of services implies that overall labour productivity is downwardly influenced by a rise in income, especially when this income is spent on services that are produced in branches of production with the lowest productivity
Distribution of income
149
Table XI.
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Table XII. Distribution of income and production per man-year of labour in services, in The Netherlands
Table XIII. Some statistics on the relation between changes in productivity of labour in services, in percentages, and changes in distribution of income measured by the GINI coefficient, in percentages
rates. In Table XII the figures are given for changes in income distribution and changes in labour productivity in services. The growth of production in services in The Netherlands correlates (but not statistically significant) with a time lag of one year with changes in the distribution of income (see Table XIII). The correlation between changes in income distribution and the time lagged productivity figures in services indicate that a rise in income differentials has a positive influence on service productivity of labour. This in turn indicates that people with the highest incomes buy more high tech-based services (e.g. air transport services) and people with lower incomes tend more to buy the most labour intensive services. Furthermore, it seems to reinforce Comors’ (2000, p. 115) argument that people with less income and more time may be less likely to shop online and are more likely to use Year
I
II
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
0.300 0.299 0.303 0.327 0.326 0.325 0.326 0.326 0.327 0.334 0.334 0.336
49,938 49,985 50,916 51,318 51,613 51,841 52,045 52,754 52,593 52,660 53,491 54,052 54,550 55,086
III
IV
20.3333 1.3378 0.7921 20.3058 20.3067 0.3077 0.0000 0.3067 2.1407 0.0000 0.5988
0.0926 0.186 0.7883 0.5762 0.4409 0.3935 1.3616 2 0.3042 0.1276 1.5773 1.0489
Notes: Column I Gini; Column II gross production per man-year of labour in services (Renting and trade in immovables; Repair of consumer goods and trade; Transport and storage; Post and telecommunication; Banking and insurances; Temporary employment agencies including domestic services; Other tertiary services; Health care), in 1,000 euros (prices of 2000); Column III change in Gini, in percentages; Column IV change in gross production per man-year of labour in services, in 1,000 euro’s (prices of 2000) Source: Author’s own calculation on CPB (1999, 2002) (table c3 and c4); Gini: CBS
(Intercept) V2
Min
1Q
Median
3Q
Max
20.7598 Value 20.1355 0.8527
2 0.539 Std. error 0.3252 0.3915
20.01093 t-value 20.4167 2.1779
0.421 Prð. jtjÞ 0.6878 0.0611
0.9283
Notes: Residual standard error: 0.6827 on eight degrees of freedom; Multiple R-squared: 0.3722; F-statistic: 4.743 on one and eight degrees of freedom, the p-value is 0.06106; Covers period 1992-1998, in The Netherlands, assuming a time lag of one year Source: Author’s own calculation based on CBS (2000b) and CPB (2000)
the internet for recreational “surfing” than people with higher incomes and less free time who are most likely to use internet-mediated consumption.
Distribution of income
Concluding remarks Higher productivity rates may be the result of small as well as large income differentials. At one time smaller income differentials were the device to raise productivity and at another time it is the larger income differentials. It all depends on the state of development of the production technology involved. The point is that different income groups have different consumption patterns and different priorities in their demand for products. Consumers tend first to satisfy their need for food and housing, then for a satisfactory level of apparel and household goods, and finally for more services. Consequently, it is not only the average per capita growth of income, but also its distribution between the various strata of income receivers that plays an important role in economic growth. This is clearly visible when new products are coming on the markets. Most new products are expensive at dawn and require consumers whose purchasing power is high enough to buy them. Because the new ICTs (especially the internet) provide consumer products as well as systems with the potential to enhance productivity, the story is somewhat more complicated. Investments in the new opportunities are necessary as well as a broad access to the internet and associated services. From dawn onwards to be profitable they require widespread demand. Unless incomes rise and the rise is sufficient widely distributed to create massive demand, such new products have little chance to be absorbed by the market. So, the internet and associated internet services require from its dawn onwards smaller income differentials to enable the mass of consumers to buy the “new” product. Income differentials did in fact widen in The Netherlands together with the expansion of internet services. Consequently it is difficult to make these services really profitable. Since the early 1980s effective demand fell short of creating a higher volume of demand for labour in The Netherlands. This shortfall was disguised by a deliberate social policy to create more part-time jobs (Spithoven, 2002). The shortfall in effective demand was not only caused by wages lagging behind rising prices, but also by maladjustments in the distribution of incomes between households. The surplus income was partly invested abroad and partly was turned into capital that led to costly smart technology projects for example in information services (telephone companies bought Universal Mobile Telephone Service frequencies from governments), and to speculation in stocks and rising real estate prices. Because different sets of coordination mechanisms seem to support the same economic performance one is led to plea for a resurrection of the idea so brilliantly formulated by Gellner (1988) that a society without poverty, oppression and arbitrariness, is not inscribed into any historical plan, and that no principle of distribution is either self-validating or self-enforcing, and that mankind has to make its own social and economic rules (see Brenner, 1966, p. 4). All this implies that governments should once again take their responsibility for structuring the economy and society, that is to enforce a system of reliable justice for the vast majority of citizens.
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Notes 1. Most studies concerning the economic effects of corporatist institutions (e.g. Soskice, 1990, p. 57; Bruno and Sachs, 1985, pp. 228-9) employ a linear regression analysis. The latter requires variables measured on interval level. Consequently here it is no proper instrument. Because the degree of corporatism is a variable measured on ordinal level, as is also recognised by Calmfors and Driffill (1998, p. 18), I have chosen for the correlation measure Gamma and the Spearman r. 2. In 1996 social security is individualised. The ratio between the statutory minimum wage and the minimum social security payment was lowered from 70 to 50 per cent. However, when the recipient cannot share the cost of living with other people, he/she is still entitled to a payment of 70 per cent of minimum wages.
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A socio-economic framework of interpretation and analysis
Framework of interpretation and analysis
Pieter Keizer Economics Department, Faculty of Economics and Business Administration, Universiteit Maastricht, Maastricht, The Netherlands
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Abstract Purpose – Economics and sociology are two different theoretical disciplines dealing with one and the same subject. The aim of the paper is to integrate the two paradigms into one framework of interpretation and analysis. Design/methodology/approach – Economics is presented as a science that approaches human behaviour being subject to the omni-present phenomenon of scarcity, assuming rationality and social independence of human actors. Sociology is presented as a science that interprets human behaviour as group behaviour. Groups are motivated to rank one another in terms of status. Integration must take place by relating the two analyses based on these paradigms. Findings – The basic economic framework is about the relationship between preferences and scarce resources, determining the structure of allocation of goods. The basic sociological framework is about the relationship between the distribution of socially valued goods and the culture that gives goods their social meaning. A socio-economic framework is about the relation between allocation, distribution, culture and preferences. Originality/value – When applying the socio-economic framework to real-life phenomena both the economic and the social motives play a role in the explanation, which is not the case in applied economics and applied sociology. Keywords Social economics, Research methods Paper type Conceptual paper
1. Introduction For a long time a code seemed to exist arranging a sort of labour division between economists and sociologists. Economists were supposed to study the economy, while sociologists were supposed to analyse society. No one bothered much about a careful distinction between the concept “economy” and the concept “society”; it worked like a gentleman’s agreement, leading to a long period of peace[1]. In the period after the Second World War we have observed a growing amount of literature in which the economic approach is applied to traditionally non-economic areas[2]. Some called this development “economic imperialism”. During the last 15 years we have observed a development that could be called “sociological imperialism”: sociologists apply the typical sociological approach to the economy, including market behaviour[3]. Notwithstanding these mutual interventions we observe hardly any co-operation between theoretical economists and theoretical sociologists[4]. Both approaches pretend to explain the same set of concrete human activities. Therefore we must find out whether they are rivals or complements that need each other. This article tries to argue in favour of the second option. Theoretical economics and theoretical sociology must finally be integrated to explain concrete behaviour of people in society, of which the economy is an important subset.
International Journal of Social Economics Vol. 32 No. 1/2, 2005 pp. 155-173 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510575694
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As already said, there is growing mutual intervention, but these developments take place without growing co-operation between persons of each camp. Each group has its own journals, conferences and professional associations. This mutual isolation promoted the development of stringent scientific norms, which deviate significantly from each other. In our case these norms are related to what ought to be the paradigms with respect to content as well as to form of scientific research. This article will show how a more integrated socio-economic approach could be developed. In the following section we will present a short and concise treatment of the orthodox economic approach. In a third section we will do the same for a strict sociological approach. In section four we will discuss the interrelationships between the social and the economic aspect of human activity, leading to an integrated socio-economic framework of interpretation. In the final section we will evaluate the results of our analysis and draw some conclusions. 2. Economic orthodoxy 2.1. Introduction As the history of economic thought shows, the roots of economics are to be found in moral philosophy. Social and political views were developed which led to a philosophical foundation of three modern currents, namely conservatism, socialism and liberalism (Wolff, 1996; Beauchamps, 1991; Norman, 1998). One of the liberal philosophers, Adam Smith, did not stop by analysing the nature of economy, society and polity. He also tried to analyse the functioning of it (Campbell, 1981). In the first of his two famous books, The Theory of Moral Sentiments (Smith, 1982), he analyses the way in which the functioning of moral sentiments hold society together (Smith as a sociologist avant la lettre). Here he analyses the way in which an imaginary neutral arbitrator organises the communication in society on its culture. In the second book, The Wealth of Nations (Smith, 1994), he analyses the functioning of an economy and the role of the government in this respect (Smith as an economist avant la lettre). Here he imagined the invisible hand of an auctioneer, who uses the price level as a means to co-ordinate supply of and demand for scarce goods. Smith and his followers were called the Classical Political Economists (Ekelund and Hebert, 1996). A century or so later, other economists started to blame political economy for not being scientific. According to them economists had not to study the concrete activities of landowners, manufacturers, merchants and workers. Genuine scientists had to look for universal and eternal laws[5]. This meant a shift from the study of the functioning of economies – interpreted as real life systems – to the study of the economic aspect of all human activity. This aspect is supposed to be about the omnipresent phenomenon of scarcity. For an economic actor everything of value is scarce. This means that he must always choose which scarce resources must be spent to satisfy which needs. The economic system that is explained by this approach is not the economy; it is an economic aspect-system. The first economists trying to formulate laws that rule an economic aspect system were John Stuart Mill, Stanley Jevons and Carl Menger (Robbins, 1932). However, before them Leon Walras already formulated a general equilibrium model describing an economic aspect-system (Schinkel, 2001). Austrian economists such as Menger formulated a demand theory and Marshall formulated a supply theory and analysed the functioning of a competitive market by
confronting demand and supply with each other. In other words, by bringing the law of demand and the law of supply together, he appeared to be able to develop a law of the market, or in other words the law of one price. What Adam Smith was doing for the economy as a real-life system, did Marshall for the economy as an economic aspect-system[6]. The paradigm that is focussing on the economic aspect more than on the economy as a set of concrete activities is called the neo-classical paradigm. This approach became the dominant way of thinking. In 1932 Robbins formulated the economics research programme in a way that was recognised by many economists as the genuine economic approach. In the next subsection we will explain this paradigm more precisely. 2.2. The character of economic laws As already said, a number of economists built a theoretical framework to find universal and eternal theoretical laws. Therefore they abstracted from factors that could explain differences in human behaviour in the various real life economies and societies. They focussed on something that all societies have in common, that is their struggle against the omnipresent scarcity phenomenon. By defining carefully what is scarcity they hoped to get that universal picture. Scarcity can be defined as the relationship between needs and the resources that can satisfy those needs. A lower level of scarcity can be realised by decreasing the level of needs and/or by increasing the level of valuable resources. The first option, the decrease in the level of needs, is a Buddhist type of strategy. The second option fits modern Western culture. By increasing our technical knowledge we can improve the relationship between the necessary inputs on the one hand and the level of output that results from a transformation process on the other hand. Part of the goods might be represented by services offered by other people. Howevr, also in such cases these “goods” are only valued in terms of their scarcity. It means that there is no difference between social and economic relationships. All relationships are of an economic character. To isolate the scarcity phenomenon from other kinds of problems, the strategy of the orthodoxy was to construct a perfectly rational and socially independent actor. This is an actor who knows his preferences with respect to all the goods available perfectly well and can rank them in order of priority without any problem of transitivity. This person has reflected on these preferences time and again and now they are stable. So there are three basic axioms that frame the world of economics: (1) There is scarcity, also called the axiom of non-satiation. (2) All goods are perfectly assessed in their capacity to satisfy the needs of the agent, also called the axiom of perfect reflexivity or completeness. (3) The hierarchical ranking is perfect in the sense of absence of any intransitivity. Agents meeting these axioms are called economically rational agents. To understand why the founding fathers of neo-classical economics constructed such picture of man, it is illuminating to see that this economic man is a person without any psychic or social problem. By leaving psychic problems to psychologists and social problems to sociologists, they created a kind of niche in the market of scientific knowledge, focussing their analyses on just the problem of co-ordination between activities of psychically perfectly rational and socially completely independent actors.
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This actor is framed as being surrounded by resources. In this world the state of production technology determines the relationship between inputs and outputs. Thus, given the inputs, technological progress determines the pace of economic growth and the speed with which the scarcity problem can be solved. If we take the physiological-psychological laws determining the satisfaction of needs on the one hand and the physical-chemical/biological laws determining the production of valuable resources on the other hand, the economist can derive his laws about the processes of co-ordination. Pareto and Walras achieved fame as economists by formulating conditions for a maximum of economic efficiency. When all economic agents are free in their decision making an equilibrium system of markets exists that produces an optimal allocation of scarce resources. This framework of interpretation is an isolated abstraction, which means that as long as persons are economically rational, a free market system will induce a perfectly optimal system of allocation[7]. This research strategy presumes a labour division between different sorts of scientists. While economists fully admit that increasing control over physical-chemical/biological processes leads to an increase in wealth, they are at a loss for a reaction on developments in knowledge of a psychosocial kind. The assumption of perfection with respect to the self-control of persons (perfect reflection) and the human understanding of each other (perfect communication) is far from realistic. Recognition has far-reaching consequences for the explanation of the real life economy and society[8]. 3. Sociological orthodoxy 3.1. Introduction When classical political economy transformed into neo-classical economics, other scientists began to search for so-called social laws (Aron, 1965; Ritzer, 1996). While classical political economy analysed the economy, the first sociologists tried to explain society, interpreted as a real life system. Comte, Marx and Durkheim wanted to discover laws of motion, which should give us an explanation of the historical development of society[9]. Now we call their contributions classical sociology, which can methodologically be characterised as collectivist and historical. After the Second World War, however, there was growing discontent with respect to the methodology on which classical theories were based. Sociologists started to analyse human interaction on a micro level. They discovered that small numbers of persons who regularly have face-to-face contact are inclined to develop a common understanding of their situation, also in terms of shared values and norms. In the next subsection we will discuss macro as well as micro theory. Then we will formulate the essential characteristics of a social law. 3.2. The character of a societal law according to classical sociology Comte is generally considered to be the founding father of sociology. He wanted to discover laws of motion. These laws describe the driving forces behind the ongoing change in the structure of society. A distinction was made between the characteristics of the prevailing production technique, the structure of the economy and the structure of society. The problem then was to find a pattern of interaction between these elements.
Most sociologists were of the opinion that for a modern industrial society technological progress was the driving force behind structural economic and social developments. Their explanations were primarily based on the following axioms: . During the early stages of their life children are subject to a process of socialisation. The same is true for the early stages of groups if one starts a firm for instance. They learn how to behave and what kinds of values and norms do belong to which group. For the discovery of the laws of society it is an acceptable abstraction to assume perfect socialisation of all members of society. . Society consists of groups; the institutional structure of society results from group interaction. Given an explanation of group behaviour we can understand individual behaviour by referring to the group to which that particular individual person belongs. This method of analysis is called methodological collectivism. . Individual members of groups have learned to identify themselves with the group to which they belong and have learned to understand the interests of the group. This means that individual interests are identical to group interests. Different groups have different interests. In other words, group relations are always characterised by conflict. In a power game each group tries to serve its own interests. As long as the environment of the game does not change a stable pattern of group interaction might emerge. It is a common interest to maintain the status quo as long as the parameters of the game do not change. Rules of behaviour are developed to convince people not to try to change the status quo. The values and norms that are necessary to serve this common interest are called culture[10].
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When taking these axioms as a whole we have a picture of society as a group of groups[11]. Technical economic developments highly affect the outcome of group inter-action. Political developments might function as a countervailing power. In Figure 1 we have presented a scheme of the basic relationships between knowledge, economy and society. All classical (political) sociologists have in common that they tried to formulate laws of motion with respect to society in terms of these relationships. They differ with respect to the significance of different feedbacks and feed forwards. Moreover, some stressed the relevance of conflict, while others stressed the relevance of consensus between the different interest groups as a necessary condition for societal progress. Behind these historical motions a group motive is supposed. Every person has learned to act according to group interest. We can also formulate this as follows: every
Figure 1. A societal system as a real life system
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person has learned that it is in his own interest to serve group interest. For everyone the group interest is known and every person is perfectly motivated to act in compliance with the interest of the group. By means of this framework of interpretation more specific analyses are developed that could be used to explain actual developments in society, of which the economy is an important part. In this view classical political economists are specialists in one part of sociology. Marx, Malthus and Ricardo, for instance, developed laws of motion ruling economies[12]. In conclusion we must say that classical sociology is about the laws of societal development more than about the social aspect of human life. The laws of motion refer to society as a real life system. However, they are based on a particular idea of the social character of human beings. By using extreme assumptions with respect to processes of socialisation, they made it possible to talk about the mega trends in society. However, two main problems were not tackled: (1) The way in which the economy is constantly adjusting to the irreversible trend of growing technical knowledge – while belonging to the subject-matter of classical sociology – was completely left to classical (political) economists, who were a separate group of people. (2) The way in which society is constantly adjusting to changes in knowledge and economy was not analysed; actually this problem was “solved” by assumption[13]. In the next subsection we will discuss some principal developments within sociology after the Second World War. 3.3. The character of a social law What is “social”? After the Second World War an increasing number of sociologists felt uneasy with the complete absence of any role for individual persons. The dominant methodology gave only room for theoretical tools that implied complete adjustment on micro-levels to trends on macro levels. Therefore they started to study behaviour of persons in their mutual inter-action on the micro-level. Homans (1961) found that especially small numbers of people who are quite similar or homogeneous tend to develop codes of behaviour, that are increasingly respected by the people involved in a process of inter-action. Different kinds of rules emerge, dependent on duration and kind of inter-action. Micro-interaction leads to the evolution of groups and their culture. This approach is called micro-inter-actionism and it aims to explain the way in which communication between people takes place. By using the term “communication” we mean social interaction. The term “social” has a specific meaning in this context. It refers to interaction between beings who are recognising each other as humans. The study of micro-interaction must make it possible to derive a type of logic of social action meant as a counterpart of the logic of economic action[14]. According to Homans’ law a process of group formation is characterised by the emergence of a common understanding of the situation[15]. The communication is about values and norms. When values are interpreted as morally coloured goals and norms as morally coloured instruments, a common understanding of the situation consists of a set of social maps, including final destinations and roads that led to these destinations. If goals, instruments and maps are perfectly the same for all group members the situation is characterised by perfect communication. The group is stable
as long as the environment of the group does not change. A socially stable group implies a stable hierarchy. The position of a person in the ranking is defined as his status. The prestige of a person is directly linked to the status and can be interpreted as a flow of social recognition or social utilities. Besides social processes between persons in a small group, we can also analyse social processes between groups. Group interaction leads to social structures, which are characterised by common norms and values and a more or less stable ranking. Within the cultural boundaries groups rival with each other (Bauman and May, 1999). Perfect communication between persons within a group and between groups on a higher level in society creates perfect solidarity and perfect rivalry. The analysis can be made less abstract by the introduction of the assumption of imperfect communication. Now rivalry can also take place within groups, while solidarity can also be realised between members of different groups. In such case the degree of group-internal solidarity appears to be inversely related to group-external rivalry (Bauman and May, 1999). In the evolution of groups and group structures there is a common culture rising and declining; and so with the solidarity and rivalry between members of groups. Norms of behaviour that are necessary for the survival of the group are getting a stronger or weaker moral character, depending on the extent to which survival is threatened[16]. Other groups can be shown to have built their cohesion on different norms. This is perceived as a threat to the survival of the group. This threat turns other groups into rivals (Bauman and May, 1999). What is a social law? So if we define society as a set of groups which are related to each other in a positive or a negative way, the social structure of that society can be interpreted as the outcome of a permanent power struggle within and between groups. This “game” is about the distribution of everything of value, decision-making power. The most important rules are about the question which person or group has the authority to establish rules. Although social rules are meant to dampen rivalry being a matter of interest, it is evident that the way in which rivalry is dampened is not neutral in its outcome. Now an important question is what we mean by social structure. Most typically it is the hierarchy as perceived by higher as well as by lower ranked groups in terms of status. As already said, the position in the ranking is called status. In the picture as sketched, the factor determining the ranking is the relative power of the groups involved in the struggle, that is the relative amount of resources that can be used in this respect. Imagine the battle starts as a free fight: there are no limiting rules, except the rule that tells the fighters who is highest in the social ranking. During the fight the relative positions are constantly announced. Then, to survive, the players begin to communicate about rules that should limit the number of instruments. There is a morality growing defining what is sports-like and what is unfair: culture. Now there are two forces that affect the outcome of the status battle. In the first place, persons are supposed to dispose of a restless desire to rival with each other (Hobbes, 1651)[17]. This force inside people keeps them in motion to maximise status, also by constantly trying to change the rules of the game in their own benefit[18]. We will call this force moral resentment. In the second place, there is a countervailing force inside people. Persons are supposed to have the capacity to develop moral sentiments (Locke, 1689; Hume, 1751; Smith, 1982). These sentiments make that people are inclined to look down the
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hierarchical ranking and develop feelings of sympathy with the lower ranked. So the mechanism that steers the drive towards maximisation of status consists of two forces: moral resentment fuels status battles and moral sentiments dampen the rivalry. By explaining the mechanism behind the social process of grouping and rivalling we had to open the black box of a person. This is exactly what the micro-inter-actionists were doing. Meade, Cooley and others borrowed from analytical psychologists like Freud and Jung. Freud’s analysis of the psyche, in which he distinguishes between the ego, the superego and the sub-conscious, has become famous, also in sociological circles. The function of the ego is to keep balance between the opposing forces of the superego or conscience and of the subconscious (Bauman and May, 1999; Turner, 1998). Now we can imagine two sorts of ties between persons and between groups. On the one hand there are ties between the superegos of persons and groups reflecting the presence of solidarity. On the other hand there are ties between the subconscious of persons and groups reflecting the presence of rivalry. Both types of ties are “fed” by the assumed existence of a collective conscience and of a collective subconscious[19]. The collective conscience is located in the individual superegos and represents a stock of moral sentiments. The collective subconscious is located in the individual subconscious and represents the stock of moral resentments. Now we can say that social laws are about processes of solidarity and rivalry within groups and between groups; processes that are fuelled by moral resentments and are dampened by moral sentiments, creating some common set of values and norms. Now we have basically answered the most important question: what do we consider as the typical social aspect of human life? The question can function as the counterpart of the typical economic aspect of scarcity and answered as follows[20]: . Every person or group is everywhere and always aware of the fact that there are other human beings and groups in their neighbourhood. . This awareness means that social relationships are omnipresent like the phenomenon of scarcity. Social ties can be weak or strong and positively or negatively loaded. . Processes of socialisation strengthen the positively and negatively loaded ties. . Social relations have a moral aspect, which means that they are never morality-free. . There is a positive moral force, which is fed by the stock of moral sentiments, located in the superego. . There is a negative moral force, which is fed by the stock of moral resentments located in the subconscious. Social laws must formulate conditions that determine the social process to become more or less rivalling. In this “model” the stocks of moral sentiments and resentments are decisive in the determination of the course of social processes. In Figure 2 we have presented a simple scheme with the relationships just sketched. This picture represents the social aspect of society. The implicit assumption is that the resources necessary for social action are abundant and form no restriction in the battle. In other words, there is no scarcity in the sense of economics in our social world.
The social world is ruled by forces, like the gravitational force in physics, setting people in motion. It is the task of sociologists to find social laws, which describe the functioning of the forces that shape the ideal-typical social world. In the next section we will bring the economic and social forces together to get an integral picture of forces determining human behaviour. 4. A socio-economic approach 4.1. Introduction In section 2 we have sketched what must be considered as the typical economic aspect of things. In section 3 we have formulated what must be regarded as the typical social aspect of things. Both approaches presume to deal with economy and society interpreted as real life systems[21]. It is very important to be clear about the distinction between aspect-systems and subsystems made in systems theory. Therefore we will define these concepts in more detail in the next subsection. We will present two schemes of interpretation: one typical for the economic aspect-system; and another, which is typical for the sociological aspect-system. In a third subsection we will integrate these two frames of interpretation. This must give us a socio-economic framework that makes it possible to analyse real life processes of human action (see subsection 4.4).
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4.2. Aspect-systems versus subsystems In clarifying different types of abstraction the language of the systems approach is very helpful (In’t Veld, 1988). The following distinctions play a role in this respect. In the first place, we can distinguish between reality and a real life system. The first concept refers to what people experience as real and must be explained. By explaining it we hope to gain control over our reality to make life more meaningful. Reality itself is only an unstructured thing. To obtain control over it we must make a simple structure of it. This structure must reflect the most important relationships. This simple structure reflecting the essence of reality is called a real life system. Now we can distinguish between two different strategies of specialisation. In the first strategy the whole system is called a general system, which can be divided in a number of subsystems, each of them structuring more specific sectors of our life. Thus, we can consider society as a real life system and the sector “ families” or the sector “firms” or the sector “economy” as a subsystem. Being a subsystem of a more general system means that specific actors of the general system are taken into account and that
Figure 2. Status maximisation within moral constraints
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Figure 3. Aspect system and subsystem
other actors are ignored. However, all aspects of the relationships that are accounted for in the general system are included in the analysis of the specific sector. In a second strategy a whole system is called an integral system, which can be divided into different aspect-systems. In an aspect-system all actors of the whole system, but not all aspects of the relationships are taken into account; only one aspect, i.e. one ideal-type of relationship. Thus, a real relationship is considered too complex to be analysed integrally. To make a simple start we must first distinguish between different aspects of a particular relationship. For instance, we can distinguish between the economic aspect and the social aspect. An economic aspect-system frames the scarcity dimension, while a social aspect system focuses on the status aspect. In Figure 3 we have presented a picture that clarifies the difference between an aspect-system and a subsystem. The analysis of an aspect-system is called a partial analysis. When we have integrated all relevant aspects we call the analysis an integral analysis. When we have developed a series of aspect-systems, we must find a way to integrate these systems. As long as we are not able to construct an integral analysis, it is impossible to have a real life system that can form the theoretical basis for empirical research. If we, however, have a satisfactorily integrated analysis, we can apply it on a more general or on a more specific level, leading to a more general or a more specific analysis. The choice depends on the degree of heterogeneity of the real life system with respect to the phenomena to be studied. In the history of science we see a large number of specialisation fields. Most of the fields are a mix of aspect- and subsystem. For instance, agrarian economics is a subsystem (agriculture) of an aspect-system (economics). When we look at this field as it functions in practice, it appears not to be a perfect aspect-system. Social and political factors play a role, although mostly ad hoc. So with industrial economics, development economics, industrial sociology and family sociology: they are all mixes of different kinds of systems with a large proportion of ad hoc solutions. For the development of a sound scientific foundation, however, knowledge of the character of our systems is of the utmost importance.
4.3. Paradigmatic integration As already said, economics is about the scarcity aspect of everything. It is focussed on an explanation of the relation between man and nature. It does not make any further distinction between different sorts of things – human beings, animals, plants and other natural things. Scarcity is defined as a confrontation between human needs and the resources that can satisfy those needs. To focus on this relationship, it is necessary to abstract from the psychic and social influences on the given needs and resources. The isolation of the economic problem from psychic and social problems is achieved by assuming a rational and independent unit of decision making. Every typical economic process is always a confrontation between preferences and resources by potential buyers and sellers. The abstract location where sellers and buyers co-ordinate their decisions, is called market. The result of all co-ordination taken together is called allocation. The allocation of scarce goods has an effect on the total amount of resources in the beginning of the next period. In Figure 4A we present the economics frame of interpretation. As stated earlier, sociology is about the social structure, which reflects the hierarchical ranking in society. The position or status can be determined by everything that is valued by people: material richness, artistry, intelligence and beauty. In other words, sociology is about the distribution of what is socially valued. Sociologists interpret individual persons always in terms of group “membership”. Status battles always run via group characteristics. Because there are no objective yardsticks, it is necessary to develop a common understanding of the criteria that determine the social ranking. The dominating yardsticks are defended by the highly ranked insiders and by those lower ranked insiders who expect to have chances to gain prestige in the established setting. Outsiders challenge the dominating groups, in an attempt to gain prestige along this way. Social interaction is a matter of communication. Via many different ways people tell other people about their ranking. Some instruments of communication are quite subtle; other instruments can be very rough and violent.
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Figure 4. Scheme of economic and social processes
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Within groups especially solidarity is communicated; between groups especially rivalry is communicated. As explained in section 3, social man possesses a drive to be solidary with members of the same group and a drive to rival with members of an antagonistic group. The first drive means that every person knows in general what are the basic needs of a person and that every person must help every other person if necessary and possible to fulfil his/her basic needs. During a process of upbringing and socialisation, every person is taught on a more specific level the behavioural implications of this golden rule. Because circumstances differ highly between people the content of the consciences of people can differ significantly. The second drive leads to ongoing rivalry between antagonistic groups. The process of socialisation also makes clear in which ways people can rival with each other in a non-disastrous way. Cultures define the basic values and norms that must keep society intact. These prescriptions are internalised in members of groups and of society. The rules, including the moral ones, are (collective) resources in the social process. They must guarantee the basic values of social life. The basic values are a matter of taste, that is, they have the character of preference. In the course of time social subjects discover that their ranking might not be in compliance with what is justified. This creates social dissatisfaction and/or stocks of frustration or resentment[22]. These stocks are the motivational basis to: . spend more resources on the status battle; . change the instruments used; . change the objectives that were aimed at; and . change the map. So strategies are, as a matter of control, constantly evaluated and eventually adjusted to the situation. In Figure 4B we have presented the sociology frame of interpretation. Now we are going to integrate both schemes, we must realise that every concrete activity is the result of combined functioning of two forces. In the first place, we have the economic motive of maximisation of (economic) utility derived from the possession of resources. In the second place we have the social motive of maximisation of (social) utility derived from the status that people attach to each other as member of a prestigious group. In Figure 5 we present these two mechanisms that force people to behave in a particular way.
Figure 5. Motivational forces
4.4. A socio-economic framework of analysis The hard core of economics is about the activities of people, assuming that there is no social aspect. It is like a real macro model that assumes a perfect accommodation of the amount of money in circulation. In such model money neither stimulates nor restricts economic activity. So in a strict economic analysis activities are not socially motivated; in other words, these activities are neither stimulated nor limited by social considerations. The same holds true for the hard core of sociology. It is about the activities of people, assuming that there is no economic aspect. In this model activities are not economically motivated; in other words, these activities are neither stimulated nor limited by economic considerations. When connecting these two hard cores, we must realise the following: . In reality, described by a real life system, human activities always have an effect on the allocation as well as on the distribution of valuable things. Allocation and distribution are two sides of the same coin. While allocation is about the division of scarce inputs over valuable outputs, distribution is about the division of valuable outputs over the owners of scarce inputs. . A second important thing is that preferences as well as resources in the economic core model are socially affected. In other words, decision makers are always bi-motivational. Moreover, the restrictions actors face are partly social, in this case, of a cultural character. . Both core models have a political component. Economists are accustomed to distinguish between analyses under the assumption of perfect and imperfect information. In the case of perfect information nobody makes mistakes and any control function is superfluous. Now we must remember that economists always implicitly assume that property rights are perfectly guaranteed. But as soon as we assume imperfect information, the decision-maker must always evaluate the outcome of the economic process and eventually change its strategy to keep control over the process. Sociologists consider the political component as an extension of the social element. Actors must constantly evaluate the effects of their actions and change their strategies if necessary. Actors can also decide to transfer authority to another person or organisation. In that case another subject is authorised to take measures to regain control over social processes if necessary. . In economics control is about preferences and resources; that is about ends and means. Because the neo-classical picture of the economic aspect-system has always been the only frame of the economic aspect of life, imperfectly informed decision makers are always assumed to use the typical neo-classical model that relates target variables to instrumental variables. Expressed in sociological terms it means that economists always let economic subjects use the neo-classical frame or map. In sociology, however, different frames of control are used. The political function is about the control over the effects of social action on the distribution of status. If the results are not in compliance with the intentions or plans, social strategy must be adapted. This means that the social actor can try to change its culture, implying that objectives, instruments or maps are subject to change. When we integrate both paradigmatic schemes, we must take into account that the new socio-economic man uses a typical socio-economic map to outline new policies. Given
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Figure 6. Scheme of socio-economic process
the fact that there is not just one sociological map, we cannot assume that there is just one socio-economic map. It implies that changing maps is a possible strategy in a typical socio-economic approach. In Figure 6 we have presented an integrated analysis schematically. The right panel presents the economic or co-ordination stage and the left panel shows the social or communication stage. The scheme as a whole shows the relationship between the social and the economic aspect of every act, that is every unit of action. We can distinguish our historical time into a series of periods. At the beginning of every period the actor evaluates the results of his/her actions. This evaluation takes, by assumption, no time. The actor is supposed to be rational in the sense that he/she has perfect control over the self and is able to weigh costs and benefits in whatever way within his/her framework of interpretation. This framework represents the relationships between the targets and the instruments that are chosen. In the evaluation the social and the economic aspect are taken into account. After the evaluation eventual change in targets, instruments and maps will change the patterns of action. The scheme shows the logical stages of the evaluation process and the effects on allocation and distribution. The next period starts with the following evaluation and eventual adaptation of strategy and the effects on allocation and distribution. In this way we can describe the actions of people as an evolutionary process on the basis of two aspects or motives of life, namely status and wealth[23]. In the human drive towards a position in the hierarchical ranking as high as possible, people accept rules of the game that are based moral sentiments. In the human drive towards a level of prosperity as high as possible people must accept the scarcity of their resources. When describing real life systems we assume that people always act on the basis of a mix of these two drives, making actual action to be the result of two vectors. In Figure 5 we have presented a picture of the vectors. We must be aware that the strength of the drives – in the picture reflected by the length of the vectors – are not constants over time.
A final remark must be made about the impossibility of a reduction of different categories of utilities to one and the same denominator. We can distinguish between three sorts of utilities: economic, social and moral utilities. Especially the moral utilities are of a different kind and cannot be substituted by other kinds of utilities. Just try to imagine the outcome of one unit of moral utility plus two units of social utility plus three units of economic utilities. Because the different sorts of utilities are categorically different, the calculation is impossible. In practice, however, every person is making these calculations consciously or unconsciously all the time. 5. Conclusions The basic message of the article is that human action is always the result of different motives driving people to act in particular ways. When studying the economy two motives play a dominant role, namely the economic and the social motive. The first motive explains economic action – which is not the same as economy. The second motive explains social action – which is not the same as society. Observable action then is the result of the simultaneous working of the economic and the social force. These forces are intertwined and cannot be observed separately. The economic motive originates from the omnipresent needs of a biological and psychological character, which can be satisfied via consumption of valuable goods. It means that people want to maximise their prosperity under the constraints of the stock of resources available. The social motive originates from the omnipresent desire to “dominate other people”, which can be satisfied by challenging higher-ranked and by distinguishing from lower ranked people. It means that people want to maximise their status, although under the constraint of moral sentiments. The economic world is ruled by the condition of efficient allocation, while the sociological world is ruled by the condition of an acceptable distribution. Inefficient allocation can start a process of social and economic reactions that makes the imbalance larger, economically as well as socially. However, a distribution that is considered unfair by powerful groups can also be the beginning of a series of economically and socially motivated actions that might bring the economy out of balance. If we study systems of behaviour based on one motive only, the analysis can only deliver semi-finished products. To make our analysis of the economy more realistic we must integrate the two motives. Then we can analyse the checks and balances of the real life system “economy”. The main objective of the socio-economic approach of the economy is to improve the quality of economic analysis; not to substitute it by a completely different alternative. The sociological part must be a complement of the orthodox approach because the economic motive matters very much when studying the functioning of the economy and because the analytical techniques of orthodox economics are quite sophisticated. Hopefully this article is a contribution to the synthesis that is so urgently needed. Notes 1. A number of exceptions were accepted like industrial sociology. However, a large number of sub-disciplines like financial sociology, the sociology of markets, the economics of religion or the economics of crime hardly existed. 2. Familiar examples are public choice, family economics and the economics of marriage.
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3. The article of White (1981) might be considered as path breaking. Here he argues that the economic theory of markets is actually a theory of exchange, not of markets. See also Smelser and Swedberg (1994). 4. Empirically-oriented economists and sociologists have been co-operating with each other for a very long time. Up to now it has led to a vast amount of research that tries to establish stable and predictable relationships between different types of variables reflecting concrete activities of people. Without paradigm and analysis, however, it is impossible to reach the level of explanation and understanding. 5. The so-called institutional economists disagreed with this research strategy. They developed a different methodology and focussed their research on the development of empirical data that could be of interest in a better understanding of the institutional richness of the different economies. A familiar nickname was low-brow economics as against the high-brow economics of the neoclassical economists. 6. Marshall was well aware of the difference between the economy as a real-life system and the neoclassical aspect approach. He advocated more realism and his publications about real life trade and real life labour markets show this awareness clearly. 7. Pareto was fully aware of the partial character of his optimum criteria. He also became a well-known sociologist, analysing society from a social point of view; and so with Walras (Aron, 1965). Walras called his system “economie pure”, to distinguish it from a real-life system “economy”. His famous law is about the general equilibrium of a system of markets. General economists are used to call an analysis of one market a partial analysis, while calling an analysis of all markets taken as a whole a general analysis. They deviate in this respect from the use of the systems language used in other sciences. If we apply common usage, economic analysis is a partial analysis. Within this partial analysis we can distinguish between a partial specific analysis (one market) and a partial general system of markets. So the general equilibrium analysis based on Walras’ law is still a partial analysis. To make this analysis more integral we have to introduce systematically psychological and social factors into this partial general system. 8. See Lawson (1997) for a sophisticated treatment of the methodological discourse on realism in economics. 9. Notice that the classical sociologists developed their theories in more or less the same period as the institutional economists. Both presumed to deal with real-life economy and society. Nevertheless they were different groups in the sociological sense of the word. 10. As soon as the parameters of the game are going to change culture becomes a valuable asset for those whose interest is the maintaining of the status quo. 11. Actually society is an extremely long chain of groups of groups of groups . . . The modern network approach is based on this insight. 12. Malthus made an analysis in which he linked the growth of the population with the level of the wage rate. This made it impossible to achieve higher levels of prosperity per capita. Ricardo assumed that a growing population made it necessary to use land of decreasingly low fertility. Continuingly rising food prices would make it impossible to reach higher levels of prosperity per capita. Smith’s idea of progress was less gloomy. He considered a process of ongoing specialisation as the source of increasing wealth of a nation, also in terms of prosperity per capita (Ekelund and Hebert, 1996). 13. The solution by assumption is also applied by the equilibrium theory part of neoclassical economics. 14. The term “social action” must not be confused with the term “collective action” as is used in economics, nor with the term “social action” in economic game theory. The players are
15. 16. 17.
18. 19. 20. 21.
22.
23.
differently framed compared with the players in our social game! Of course there are significant differences between the various types of sociologists studying social inter-action. Besides micro-interactionism, micro-sociology also consists of the exchange and the rational choice approach. In terms of language these approaches are quite different; in terms of content the differences are smaller than they look at first sight. Other terms that are regularly used in this respect are framework of interpretation, conception of control and (social) map. Modern empirical research confirms the results of Homans (De Cremer, 1999). The Greek Heraclitus has become famous with his “panta rei”. He wanted to show the impossibility of describing (social) life in terms of equilibrium. The factor time makes everything constantly changing. See Copleston (1985) for a more detailed treatment. This is in line with Bauman and May (1999) where he describes processes of survival, enhancement and aggrandisements. For economists these concepts are easily interpreted as collective goods. Parsons (1937) made a clear distinction between social and societal. In his later work he elaborated on his societal system (Parsons, 1951). At the moment institutional economics revives. From economics as well as from sociology there are impulses to study the functioning of institutions in a more theoretical way compared with the original institutional economists (OIE). Important theoretical contributions of especially an evolutionary kind are from Hodgson (1988 1996) and Williamson (1991 1996) and methodological contributions are from Lawson (1997). The terms dissatisfaction and frustration indicate psychic disequilibrium. Without digging deeper into psychic structures and mechanisms, we need this concept as soon as persons are going to play a role in the explanation of social mechanisms. In economics we have the same problem: rational economic agents make the wrong choices because of imperfect information. In our social world the same happens. As soon as communication is imperfect, rational social agents make mistakes. Morally motivated frustration leads to behavioural adjustment in case rivals do not stick to rules as was expected. Because flows of income and prestige affect stocks of sentiment and resentment and the strength of the two drives the model has an evolutionary character; not just a dynamic one.
References Aron, R. (1965), Main Currents in Sociological Thought, Vols 1 and 2, Penguin Books, Harmondsworth. Bauman, Z. and May, T. (1999), Thinking Sociologically, 2nd ed., Blackwell Publishers, Oxford. Beauchamps, T.L. (1991), Philosophical Ethics: An Introduction to Moral Philosophy, 2nd ed., McGraw-Hill, Maidenhead. Campbell, T. (1981), Seven Theories of Human Society, Clarendon Press, Oxford. Copleston, F. (1985), “The word of Heraclitus”, A History of Philosophy, Volume I: Greece and Rome, Ch. 5, Bantam Doubleday Dell Publishing Group, New York, NY. de Cremer, D. (1999), “Trust and fear of exploitation in a public goods dilemma”, Current Psychology, Vol. 18 No. 2. Ekelund, R.B. and Hebert, R.F. (1996), A History of Economic Theory and Method, 4th ed., McGraw-Hill, New York, NY. Hobbes, T. (1651), Leviathan, Fontana, London.
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Hodgson, G.M. (1988), Economics and Institutions, A Manifesto for a Modern Institutional Economics, Polity Press, Cambridge. Hodgson, G.M. (1996), Economics and Evolution, Bringing Life Back into Economics, The University of Michigan Press, Ann Arbor, MI. Homans, G. (1961), Social Behavior, Its Elementary Forms, Routledge, New York, NY. Hume, D. (1751), Enquiry Concerning the Principles of Morals, A. Millar, London. In’t Veld, J. (1988), Analyse van organisatieproblemen, 5de druk, Wolters Noordoff, Leiden. Lawson, T. (1997), Economics and Reality, Routledge, New York, NY. Locke, J. (1689), An Essay Concerning Human Understanding, William Tegg, London. Norman, R. (1998), The Moral Philosophers, An Introduction to Ethics, 2nd ed., Oxford University Press, Oxford. Parsons, T. (1937), The Structure of Social Action, McGraw-Hill, New York, NY. Parsons, T. (1951), The Social System, Free Press, Glencoe, IL. Ritzer, G. (1996), Sociological Theory, 4th ed., McGraw-Hill, New York, NY. Robbins, L. (1932), An Essay on the Nature and Significance of Economic Science, Macmillan, London. Schinkel, M.P. (2001), Disequilibrium Theory, Universitaire Pers Maastricht, Maastricht. Smelser, N. and Swedberg, R. (1994), Handbook of Economic Sociology, Princeton University Press, Princeton, NJ. Smith, A. (1982), The Theory of Moral Sentiments, Liberty Fund, Indianapolis, IN, (originally published in 1759). Smith, A. (1994), The Wealth of Nations, The Modern Library, New York, NY, (originally published in 1776). Turner, J.H. (1998), The Structure of Sociological Theory, 6th ed., Wadsworth Publishing, Cincinnati, OH. White, H.C. (1981), “Where do markets come from”, American Journal of Sociology, Vol. 87 No. 5, pp. 14-47. Williamson, O.E. (1991), “Strategizing, economizing and economic organization”, Strategic Management Journal, Vol. 12 No. 8, pp. 75-94. Williamson, O.E. (1996), “Efficiency, power, authority and economic organization”, in Groenewegen, J. (Ed.), TCE and beyond, Kluwer Academic Publishers, New York, NY. Wolff, J. (1996), An Introduction to Political Philosophy, Oxford University Press, Oxford.
Further reading Becker, G.S. and Stigler, G.J. (1977), “De gustibus non est disputandum”, American Economic Review, Vol. 67 No. 2, pp. 76-90. Collins, R. (1994), Four Sociological Traditions, Oxford University Press, Oxford. de Cremer, D. and Van Vlugt, M. (1999), “Social identification effects in social dilemmas: a transformation of motives”, European Journal of Social Psychology, Vol. 29 No. 7, pp. 871-93. Hodgson, G.M. (1999), Evolution and Institutions, Routledge, New York, NY. Hollis, M. (1994), The Philosophy of Social Science: An Introduction, Cambridge University Press, Cambridge.
Kramer, R.M. and Wei, J.C. (1999), “Social uncertainty and the problem of trust in social groups: the social self in doubt”, in Tyler, T.R., Kramer, R.M. and John, O.P. (Eds), The Psychology of the Social Self, Lawrence Erlbaum Associates, Mahwah, NJ. Sargent, T.J. (1979), Macroeconomic Theory, Academic Press, New York, NY. Sargent, T.J. (1993), Rational Expectations and Inflations, 2nd ed., HarperCollins, College Publishers, New York, NY. Williamson, O.E. (1998), “Transaction cost economics: how it works: where it is headed”, The Economist, Vol. 146 No. 1.
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Book review Entrepreneurship: New Perspectives in a Global Age Edited by Anne de Bruin and Ann Dupuis Ashgate 2003 235 pp. ISBN 0 7546 3198 2 Price: $US79.95; £46.50 Keywords Entrepreneurialism, Social economics, Innovation It has often been said that the importance of a work can be measured by the number of previous works it makes superfluous or duplicative to read. De Bruin and Dupuis’ new book turns this around. They whet the appetite for a whole literature broadly characterised as the sociology of entrepreneurship, a field which management education normally neglects. The book is useful in that it cites more than 700 previous works of everything from feminist economics, sociology, and management, to finance, marketing and social policy – all as they relate to entrepreneurship. It would serve as a useful textbook for Master’s-level students in the sociology of work, economic sociology, entrepreneurship and society, and entrepreneurship research methods. However, though its insights are timely, it is doubtful whether a practising entrepreneur would benefit from the theoretical and conceptual propositions. Professor Anne de Bruin is Professor at Massey University’s School of Commerce, where she specialises in entrepreneurship and regional development. Dr Ann Dupuis is on the staff of Massey’s School of Social and Cultural Studies where she teaches sociology, gender, and economic sociology. Together they provide a fresh, daresay unconventional, perspective to entrepreneurship research through their non-managerial approach. The book’s theoretical focus is inspired by Mark Granovetter, who in 1985 urged economists and sociologists to theorise economic action through its links with social structure: “Economic action is embedded in structures of social relations” (Granovetter, 1985, p. 481). The economy, just like all human activity, is structurally embedded in social networks that affect its functioning. Not a new observation, this focus on “context” has deep roots in social science, tracing back to Polanyi, who argued “the human economy . . . is embedded and enmeshed in institutions, economic and non-economic. The inclusion of the non-economic is vital” (Polanyi et al., 1971, p. 250). The authors thus add to this school of thought by offering a diverse set of theoretical and empirical analyses of how embeddedness relates to entrepreneurship. After a discussion of explanatory concepts and themes, particularly of “constrained entrepreneurship”, the book goes on to present various perspectives by the two primary and seven other co-authors about topics as diverse as ethical entrepreneurship, entrepreneurial capital, electronic entrepreneurship, familial entrepreneurship, community entrepreneurship, municipal-community entrepreneurship, state
entrepreneurship, indigenous entrepreneurship, elder entrepreneurship, and youth entrepreneurship. The embeddedness approach (one can hardly say it is a theory) sees entrepreneurship as part of a larger institutional structure. Granovetter (1985) uses the term in a more specific way to mean that economic action takes place within the networks of social relations that make up the social structure. One might criticise this orientation as limiting since culture also has a direct bearing on entrepreneurial opportunity (DiMaggio, 1990, 1994; Frederick and Henry, 2004). Indeed, the book does not acknowledge the extent to which existing cultural norms encourage, or do not discourage, individual actions that may lead to new ways of conducting business or economic activities and, in turn, lead to greater dispersion in wealth and income. Many authors, including other economic sociologists, have focussed on how culture has constrained (or promoted) entrepreneurship. The book’s major contribution, in the reviewer’s opinion, is the extension and elaboration of the concept of “constrained entrepreneurship”, which aims to provide an alternative to the literature’s emphasis on atomised, profit-driven, self-maximising, ego-centred, wealth-accumulating entrepreneurs of the ideal type. In this view, entrepreneurial activity is shaped by factors (or constraints) that influence the conditions that lead to new venture start-ups and business growth. These would normally have included financial support; government policies; government programmes; education and training; research and development transfer; commercial and professional infrastructure; market openness/barriers to entry; access to physical infrastructure; and cultural and social norms. However, De Bruin and Dupuis go beyond this to propose a framework for contextual study of entrepreneurship by looking at the macro- and micro-level constraints. The dilemma that the authors face, and do not successfully overcome, is that they define entrepreneurship simply as “running a business”. “The constrained entrepreneurship framework. . . enables the incorporation of entrepreneurial elements which are integral to the successful running of a business” (p. 26). Or “we acknowledge [running a business] as entrepreneurship” (p. 34). Certainly there is a huge difference between an entrepreneur (who exploits innovative venture opportunities and creates new markets) and a small business person (who exploits existing equilibrium opportunities and optimises supply and demand in established markets). Notwithstanding the literature’s difficulty in defining precisely what we mean by entrepreneur, this emphasis on those who merely “run a business” is unnecessary and limiting. Given that limitation, however, the authors go on to illuminate a great number of constraints that limit entrepreneurs. The book includes a variety of very interesting cases that illustrate the authors’ viewpoints. The emphasis on New Zealand cases does not limit their general applicability. These cases include Maori-run whale watching, youth entrepreneurs, a business high school, sister cities, urban economic development, incubators, indigenous self-employment schemes, and entrepreneurship education programmes. All of these draw on secondary sources and there are few primary empirical data. Most of the argumentation is theoretical/conceptual and is aimed at the professional or graduate student audience. Entrepreneurship: New Perspectives in a Global Age accomplishes what it sets out to do: to provide a fresh and innovative approach to entrepreneurship within the
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economic sociology literature. The themes of embedded entrepreneurship and constrained entrepreneurship are central to a number of chapters. Of special value is the repeated observation that entrepreneurs are more than just the “ideal-type” self-maximisers, rather real human individuals who actually operate within organisational and economic contexts. Howard Frederick Unitec, New Zealand References DiMaggio, P.J. (1990), “Cultural aspects of economic action and organization”, in Friedland, R. and Robertson, A.F. (Eds), Beyond the Marketplace, Aldine de Gruyter, New York, NY, pp. 113-36. DiMaggio, P.J. (1994), “Culture and economy”, in Smelser, N.J. and Swedberg, R. (Eds), The Handbook of Economic Sociology, Princeton University Press, Princeton, NJ, pp. 27-57. Frederick, H. and Henry, E. (2004), “Innovation and entrepreneurship amongst Pa¨keha and Ma¨ori in New Zealand”, in Stiles, K. and Galbraith, C. (Eds), Ethnic Entrepreneurship: Structure and Process, Elsevier Science, Oxford. Granovetter, M. (1985), “Economic action and social structure: the problem of embeddedness”, American Journal of Sociology, Vol. 91 No. 3, pp. 481-510. Polanyi, K., Arensberg, C. and Pearson, H. (Eds) (1971), Trade and Market in the Early Empires: Economies in History and Theory, (originally published in 1957), Henry Regnery, Chicago, IL.
Note from the publisher Emerald structured abstracts have arrived! Well, it’s finally happened and all the first issues of the 2005 volume of Emerald journals will contain structured abstracts. Have a look at an article title page in this issue. That’s how they will look from now on. The look will be slightly different in the electronic version on the web site but this is only a cosmetic variation and takes account of the different media and the way people use the information. The idea took hold at the beginning of 2004 and a small team worked on the design and introduction of structured abstracts throughout the year. Thanks to all the hard work of authors, editors, editorial and production staff at Emerald we can now showcase them for the first time. We believe they provide real benefits to our readers and researchers and that they answer some of the key questions people have about a paper without having to scan or read the entire paper: . “What research has been conducted on this topic?” . “How was the research approached – what methods were used?” . “What were the main findings?” . “Are there any literature reviews on this topic and are they selective or inclusive?” . “So what? They have shown this but what does this mean in my work/organization?” . “I want to conduct research in this area but what questions still need answering?” . “Has this work got any relevance and value for me?” . “What did the writer set out to show?”
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Structured abstracts supply the answers to these types of questions without the researcher having to go any further. Authors can be more confident that their paper will be noticed and read by others with a real interest in the topic or research. As far as possible, all our past authors and editorial team members (editorial advisory boards, etc.) have been alerted to this change. Authors who have been asked to rewrite their abstracts in the new format have readily obliged. The response from all parties has been most gratifying: Structured abstracts are increasing in popularity among the social and behavioral sciences. There’s overwhelming evidence that readers (and indexers) glean more from structured abstracts (Jonathan Eldredge, MLS, PhD, AHIP, Associate Professor, School of Medicine, Academic & Clinical Services Coordinator and Author, Health Sciences Library and Informatics Center, Health Sciences Center, The University of New Mexico, USA).
To read more on structured abstracts and their value for researchers and writers, read this short paper by Liz Bayley and Jonathan Eldredge outlining their benefits at: http:// research.mlanet.org/structured_abstract.html
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Everyone has problems in the digital environment when weighing up the value of any piece of information – information overload is discussed endlessly in the media. Structured abstracts go some way towards a remedy. Emerald is the very first publisher in the management field to introduce structured abstracts. We know this means change for the author and researcher but the fact that other journals don’t do it shouldn’t stop us from making the advancement. It’s wonderful to be first in the field with a good idea! We have only two regrets! We didn’t think of it before and we are unable to go back through more than 40,000 papers already in the database and change the abstracts into structured ones. Having said that, nearly 5,000 new papers will be deposited in our database this coming year and all will be accompanied by a structured abstract. Let us know what you think. E-mail Sue de Verteuil, Head, Editorial Developments, with your views at:
[email protected] 
