World's Politicians Grope For Ways to Cut Safety Net

THE United States is not alone as it gropes for the narrow passage between continuing high demands for social services and enormous pressures to cut federal spending.

As the world's finance leaders meet in Washington this week for the joint annual meeting of the International Monetary Fund (IMF) and the World Bank, many of the world's governments - from industrialized Europe to even a few in Latin America - are looking for ways to reduce their costly role as provider of a safety net to the people.

The dozens of finance ministers, scores of central bankers, and hundreds of lesser officials attending the meeting are generating some news about the world's financial affairs.

One issue concerns the renewed strength of the US dollar against the Japanese yen; another the design of an emergency bailout fund for countries in financial distress, such as Mexico a year ago. The IMF reported the world economy is improving.

When the talk turns to balancing budgets, political leaders know that their toughest challenge is galvanizing the necessary public support at home for trimming various social expenditures.

Sweeping demographic pressures - the graying of populations in wealthy nations - threaten even greater economic insecurity in the future. Governments could be hard-pressed to honor their promises to support the aging with benefits that are financed by shrinking pools of workers.

In the US, the budget battles have largely been drawn along class lines. Democrats charge that Republican tax-and-spend proposals are efforts to balance the budget on the backs of the poor and the middle class.

In some other countries, even the most entrenched systems of social welfare have run up against a wall of high costs. It is a wrenching experience for the public and the politicians.

Sweden, yesterday's quintessential welfare state, is today undergoing dramatic changes as its government pulls back on a wide range of benefits it can no longer afford. ''People didn't expect the government to cut so far and so fast,'' says Tomme Lowen, who calculates income distribution at Sweden's Ministry of Health and Social affairs. All Swedes now pay higher fees for health and child care, for example. ''The poor are going to suffer the most, especially if unemployment rises again,'' Mr. Lowen says.

Japan an exception

Japan is an exception to this trend. Until now, the Japanese government has not provided its citizens with expensive safety nets. Operating at near full employment for decades and boasting a high savings rate, social-welfare costs have been carried by a strong private sector. But with the worst economic slowdown in 60 years, joblessness at an all time high, and companies shedding costs, the government may soon have to provide broad-based social welfare.

''This could be a considerable challenge, given [Japan's] mounting deficits and the need to draw significantly on its savings pool,'' says John Yochelson, an expert at the Center for Strategic and International Studies in Washington.

Poland, Hungary, Russia, and other former Communist countries, once the guaranteed employers and financial protectors of their citizens, now lack adequate safety nets to catch the number of people falling out from the closure of inefficient state-owned enterprises and privatization of others.

But ask political leaders in many of these countries, asserts a World Bank official, and they'll tell you that they would much rather borrow money for tractors than for the creation of an unemployment-insurance fund.

''They don't want to be blamed for the debt, but if they're going to have it, it better be for something that helps their economy grow,'' the World Bank official says.

In the case of some Latin nations, high fiscal deficits are driving them to ''reduce and better target their social expenditures,'' says Peter Hakim, president of the Inter-American Dialogue. Most benefit programs, rife with waste, are designed for the middle class and rarely reach the poor, he says. ''There is more financial pressure than ever to change that,'' he says. But there is also opposition from those protecting the status quo.

Two troubling developments are unravelling bits of Western Europe's long-established social safety nets: low birthrates and persistently high unemployment rates.

''No one anticipated the growth in the size of the work force slowing down in Europe, where retiree benefit systems have been predicated on populations continually rising and a constant replenishment of the work force financing the older generation's retirement income,'' says Stephen Silvia, professor of comparative political economy at American University's School of International Service in Washington.

A senior official at one of Germany's top corporations echoes an often-heard complaint, but one he is unwilling to put his name to for fear of a backlash from the company's German workers and consumers. The German welfare state, he says, unbridled in its outlays for unemployment compensation, pension funds, health insurance, child allowances, youth assistance and social aid, exacts too high a price on employers, workers, and other taxpayers. All told, these expenditures total one-third of Germany's total output of goods and services.

''Our nonwage benefits in Germany are, on average, higher than the hourly earnings in the US,'' the official says. ''It's a problem of competitiveness for us.'' The result is that a growing number of German firms, once champions of ''Germany-first,'' are moving their operations outside the country where labor markets are cheaper and taxes more affordable.''

Some see a fundamental flaw in the bottom-line business reasoning that whacking away at entitlement programs will relieve employers of costs they say they can no longer keep up with and leave the private sector to better ration benefits. ''There is still a role for government,'' says Joseph Stiglitz, the new chairman of President Clinton's Council of Economic Advisers. Health care for the poor and the elderly, Social Security and other programs designed to ''mitigate the consequences of economic inequalities'' need federal backing or they won't happen, he says.

There may be a beneficial side effect from the deficit reduction efforts in major nations. Michael Bruno, World Bank chief economist and vice president for development economics, says the ''convergence of fiscal austerity among developed countries has been good for the world by bringing interest rates down. That's why developing countries haven't been hurt as badly as they would have been by the temporary recession'' in the US, Europe, and Japan.

During the past four years, Mr. Bruno says, capital flows into developing countries in Asia, Latin America, and parts of Africa have quadrupled. Pension funds managed by US, European, and Japanese firms have invested heavily in emerging economies where the rates of return are higher.

Rushing to zero

Rather than rushing to zero out the deficit, the US, among other countries, could enjoy stronger private investment and job generation by plunking down their savings from reduced welfare costs into sorely needed infrastructure, says Sanjay Mongia, assistant director of the Jerome Levy Economics Institute at Bard College in New York.

''Entitlement spending and rising payments on the debt inhibits constructive, productive investment,'' contends Mr. Mongia. In the US, the increasing share of the pie gobbled up by federally funded health care - growth in Medicare and Medicaid costs are exploding by 10.5 percent a year - impinges on decision makers' ability to prioritize spending, he says. Federal funds to develop roads, tunnels, bridges and other physical assets that, he says, will pay out in the long term.

While Sweden attributes its recent reduction in long-term interest rates to deficit reduction through welfare cuts, for example, no country operates in a vacuum The impact of interest rates and capital flows cut across national lines.

Mervyn King, chief economist of the Bank of England, cautions budgeteers in the US and elsewhere against expecting their own austerity measures, independent of what happens in other leading economies, to automatically lower long-term interest rates and spur investment. What ''influences real interest rates,'' induces investment and generates jobs, he says, will be simultaneous deficit reduction in all the world's top economies.

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