Reforming the Welfare State – Balancing Efficiency and Equity

Globalization is a prime source of economic and social change throughout the world. The dynamics of increasingly global markets and geographic competition are profoundly changing the international division of labor. At the same time, many societies have to cope with dramatic demographic changes that are increasingly endangering national welfare systems. In the developed world, these challenges are often perceived more as a threat, nurturing defensive and protectionist attitudes, than as an opportunity to induce effective changes. Well-functioning welfare systems are indispensable to effectively cope with these challenges and to mitigate the pressures that arise: “safety net policies should be in place so as to assure voters that the gains and pains of any new opportunity will be shared. This is essential to maintaining a political consensus in favor of change in general and globalization in particular. Political support for change is essential since growth requires change” (Richard Baldwin). In short, we need functioning welfare systems to reap the full benefits of globalization.

The market economy needs safeguards against the largest risks that the competitive process presents to individuals. Without such safeguards, it is highly unlikely that market processes will gain democratic acceptance and work efficiently. Social safeguards and measures for social equalization are not fundamentally extraneous appendages to the market economy. They are instead essential, constituent elements, contributing to the realization of the market system's potential. The function of welfare systems thus resembles, to use Schumpeter's metaphor, the brakes on an automobile: their purpose is certainly not to make the vehicle slower, but rather quite the opposite — to permit travel at a higher speed.

Nobel Laureate Prof. Robert M. Solow (MIT)

Dennis J. Snower (Kiel Institute)

Arye L. Hillman (Bar-Ilan University)

Ruud de Mooij (Erasmus University Rotterdam)

Karl-Heinz Paqué (Otto-von-Guericke University Magdeburg

Martin Weale (National Institute of Economic and Social Research, London)

Rick van der Ploeg (European University Institute, San Domenico di Fiesole)