Do Welfare Benefits Act As A Brake On Economic Growth?

Will India emerge as the leader in terms of economic growth in this global economy? Or will it be China? Or the US, ahead of the 25-nation EU?

Having just spent two weeks as a patient in the university hospital, I believe I have part of the answer as far as the EU is concerned. I was rushed to the hospital, where I was operated on at midnight. It was a major operation. However, at no point during my two weeks in hospital did I worry about the size of the bill. In fact I walked out of the hospital without opening my wallet.

I could afford to be relaxed, secure in the knowledge that Belgium?s national health service will pay a substantial part of the bill. And it will do the same for the retired Belgian beer merchant, with whom I shared a room in the hospital.

This country of some 10 million people has a national health service that many economists, especially of the free market persuasion, will tell you is generous to a fault. The Belgian social security system is just as generous when it comes to pensions, unemployment and other welfare benefits.

Belgium is a prosperous country, after all. It has a gross national income of some $250 billion, which translates into a per capita income of $23,000. The corresponding figures for India are $500 billion and $480. Total per capita health expenditure in Belgium was just under $2,000 between 1997 and 2000, as compared to $23 for India.

So far, so good. But can Belgium afford such generous healthcare provisions for its ageing population? To reduce unemployment, Belgium is offering early retirement, again on relatively generous terms. Can it keep it up?

British prime minister Tony Blair told the press earlier this week that Britain can enjoy both economic growth and social justice. And the message throughout the EU is much the same at the political level. But the message from across the Atlantic is a different one. The late Ronald Reagan chastised the Europeans for their elaborate and generous social security systems when he was US President. He singled out Belgium as a country whose welfare benefits were acting as a brake on economic growth.

Europeans are beginning to take a more critical look at their social security systems. Welfare benefits are being eroded, partly because governments are reluctant to raise taxes, for political as well as economic reasons.

But is the European vision of a social market economy viable? A Belgian magazine recently asked a professor of economics whether, given its ageing population, the country can afford its current system of pensions. Yes, he answered, provided the economy continues to grow over the next 20 to 30 years.

But Prof David de la Croix, of the Catholic University of Louvain, thought that sustained economic growth over the coming decades was unlikely. This is because growth throughout much of the developed world has been largely due to increases in productivity over the last 40 years. But this was a relatively exceptional period, when viewed against the background of thousands of years when increases in productivity were largely unknown. Such incre-ases are unlikely to continue over the next 20 to 30 years, especially at the rate needed to safeguard Belgium?s welfare benefits ? 2.5 per cent a year.

But Prof de La Croix was optimistic. One solution was to allow people to work longer. The State could give the self-employed, in particular, additional tax benefits, so that they would find it more profitable to continue working than to retire.