Government, energy & environment

The end of the unconditional welfare state

According to a YouGov poll, 74% of people in the UK agree with the statement: “The government pays out too much in benefits; welfare levels overall should be reduced.” Only 17% disagree. Moreover, reducing welfare has broad support across all political and income groups. Even 51% of people living on less than GBP 10,000 per year still agree the government overpays.

What is going on here? The answer is many people are turning against the redistribution of wealth, especially against welfare other than for older or disabled people. People believe, rightly or wrongly, that governments waste money by giving it to the wrong people for the wrong reasons. Overall value for money, in terms of services provided by taxation, is seriously out of whack.

Further, this anti-welfare sentiment does not seem to be a knee-jerk reaction linked to austerity, but because social security spending keeps increasing. In the 1950s, welfare spending was around 5% of GDP in the UK. In 2012, it’s likely to be 14% and similar increases apply to education and health. Where is the money for this additional spending coming from?

Some is coming from the so-called peace dividend (lower expenditure on defence) but most is coming from higher direct and indirect taxation. Very few people think they are getting good value for their money. The most striking aspect of these statistics is a significant change of direction for income or wealth distribution. As recently as the mid-1980s, most people in the UK felt governments had a moral duty to redistribute wealth. This is now very much a minority view.

To some extent this is cyclical. People favour redistribution when money is tight, but are against it when the economy is booming. However, one non-cyclical shift is the current preference for welfare that is conditional (rather than unconditional). In other words, the Victorian idea of ‘deserving’ and ‘undeserving’ poor is dead. In its place is the thought that all individuals should give as well as receive – that the recipients of welfare have responsibilities as well as rights.

This move against universal benefits could be a reaction to scaremongering by the tabloid press in Britain. But it’s more likely to be connected to increasing affluence and private provision mixed with rising individualism, declining trust and increasing ‘social distance’ or ‘otherness’.

This last trend is especially worrying because, ironically, connecting technologies are making it easier for individuals to exist in digital isolation. National or collective solidarity, along with imagined ideas of a wider community, are being eaten away.

The rise of state capitalism

State ownership is rife: the world’s top ten oil companies (defined by reserves), 80% of companies on the Chinese stockmarket, 62% of companies in Russia and 38% in Brazil are either state owned or state controlled. In almost any industrial sector, giant state-owned, or state-backed companies are emerging and they compete head on with privately run businesses in other countries.

Between 2003 and 2010, for instance, state-backed companies were responsible for around 33% of foreign direct investment in emerging markets. China Mobile has 600 million customers and, together with China National Petroleum, made profits of $33 billion in 2009 – more than China’s top 500 private firms combined. Is it desirable when the state advances while the private sector retreats?

State capitalism can work well when free markets need to be restrained or expensive infrastructure needs to be built. Investments can be more targeted and longer term. However, while state firms can be good at copying others, they are less well suited to innovation, especially when connected insiders block innovative outsiders.

State capitalism works when governments are stable and competent, such as in Singapore, but they are no guarantee of stability in themselves. Most worrying perhaps, is that state-owned firms are often plagued with corruption, cronyism and nepotism and this makes it very difficult for private companies to compete or for liberty to flourish.

How does this play out longer-term and internationally? How do you ensure transparency and fairness when one side of a deal is backed by an opaque autocracy, while the other operates in a fully transparent liberal democracy? The short-term answer is that Western nations will increasingly embrace protectionism and even xenophobia to level the economic playing field. In many instances this will mean an interventionist industrial strategy, which is much the same as state capitalism.

Maybe this will be a case of ‘if you can’t beat them join them’. People crave order, security and predictability in a volatile world, so maybe autocracy will increasingly trump democracy and the free market in pursuit of political ends. This isn’t necessarily the same as saying the future will be a battle between democracy and autocracy (again), but the future will be fought over differing views and models of capitalism.

Education in South Korea

In a knowledge economy, education becomes economic destiny but few countries take education as seriously as South Korea. In a recent survey, 100% of South Korean parents wanted their children to go to university. However, in another poll, 20% of South Korean middle school and high school students said the pressure to succeed academically had tempted them to commit suicide. In 2009, 202 students actually did. Yet, as more and more students make it into university, the value of a university degree has fallen.

As the costs of education have risen, the stability of employment for young people has fallen. In 2000, 8% of jobs taken by young people were part time whereas, by 2010, the figure was 23%. Some 28% were working on temporary contacts in 2010, compared to none in 2000. These figures could mirror the fact many young people no longer want a job for life, but it’s more likely they represent a shift towards informal and flexible employment.

The crux of the problem is that, in South Korea, as in many other nations, education can be a very poor investment (especially if you end up with a low-paying job or no job at all). Demographics don’t help much. In 1960 the fertility rate in South Korea was around 6.0; it is now 1.15. If it drops to 1.0, each generation will be 50% the size of the one before it. As South Korean women have fewer children, the opportunity cost of having children has risen markedly. Korean firms offer few incentives for people to take time off and it is difficult, as in other countries, to easily fit back into the world of work after taking time off to raise a family.

So what’s the solution? Apart from having more children and making it easier to have them, one idea might be to persuade potential employers to think more about the person and their personality than their qualifications and their alma mater. In other words, hire the person not the qualification. Merit and future potential should count for more and exam success should count for less.

Other ideas include banning private crammers and tuition (they tend to benefit those who can afford it) and re-evaluation of the schooling system. People who are smart or inventive but no good at exams should not be excluded from the system or the metrics used to deploy education or employment funding.

South Korea’s recent history has been built on hard work and favourable demographics. The education system has played a major role too. But it’s time for the nation to acknowledge things have changed. It cannot remain competitive with a shrinking workforce unless it embraces an educational system that stresses thinking above rote learning, recognises multiple forms of intelligence, opens its door to immigrants and, above all, gives kids more than one narrow shot at the future.

The future of universities

In the UK, applications to universities fell by 9% in 17 months between September 2010 and February 2012. Part of the reason is a marked increase in fees, but the decline could also be because universities are, by and large, stuck in the past. They offer very poor value for money, especially for those who want to enter the workforce. Consider, for example, how the world has changed over the last 50 years then consider universities. They have hardly changed at all. The recent explosion of information and the ways in which people can access it has made little impact on further education. The increase in fees in the UK was supposed to encourage competition among universities, but will probably do nothing of the sort. Instead, it will encourage a round of cost cutting that will further reduce the value of a university education.

This is not all the fault of the further education establishment. Governments have continually failed to understand and appreciate what education is for and continually undermine its identity with endless audits and performance reviews. This is especially true in the UK. Successive governments have expanded universities without increasing their funding and have used universities as instruments of government policy, especially phoney egalitarianism and misplaced social engineering.

The expansion of universities in the UK is especially interesting. In the 1960s, 6% of the UK population went to university. Today it is close to 40% (around 70% of degree-awarding institutions in the UK did not exist as recently as 1990). On the surface this seems positive but, dig a little deeper, and it becomes apparent that expansion of the sector has been paid for by halving financial support for students. It has also reduced academic salaries, teaching time, money towards facilities and squeezed funding for research. This reveals a fundamental misunderstanding of the relationship between education and economic growth. In short, politicians have been looking for quick fixes but there is no simple and direct relationship between further education and national competitiveness.

Despite all this, the UK still has a university system that is well regarded internationally but this may stem more from language and history than current academic excellence. The US, for example, spends twice the percentage of GDP on higher education and is reputed to have the best universities in the world, partly because this spend is focused on a handful of elite institutions.