I was happy to see that my blog post “Who needs a safety net?” stimulated a lively debate, which was exactly its purpose. However, so many points have been raised that I have decided to write a new post on the topic rather than answering each one of them separately.

Johannes Jütting (Head of the Poverty Reduction section at the OECD Development Center in Paris) argues in an article recently published by The Georgian Times in its online version that “rising inequality, lack of civic participation, political apathy, and a dearth of good jobs, particularly for the young, comprise the Achilles heel of emerging-market countries' current development model”. Jütting’s view of the future is optimistic, but with a caveat. He sees the potential for the beginning of a new period, in which the emergence of a new – global – middle class, could “transform the world's social, political, and economic landscape” for the better, BUT ONLY if governments will manage “fostering cohesive societies - in which people feel protected, citizens, trust one another, and efforts are rewarded …”.  Unfortunately too many governments around the world seem to be taking this for granted. They should not.

In many parts of the developing world, where safety nets are either absent or insufficiently developed, poverty is still a concrete risk for many individuals belonging to this “new global middle class” on which so many hopes are placed. An illness in the household, a natural catastrophe, or simply a period of economic stagnation can always happen and turn an apparently rosy picture into a bleak one. This is not just a risk for the individuals that might be affected. It can easily spread to entire countries, with the initial shock triggering a dangerous and vicious circle of growing poverty, inequality, and underdevelopment.

Growth by itself may not be sufficient to take away this risk. The extent to which growth leads to true and sustainable development and helps reduce individuals’ and households’ vulnerability to negative shocks depends crucially on the characteristics of the process and on how benefits from growth are distributed across the members of society. The only way a country can take the path towards sustainable development is, therefore, setting up an institutional framework capable of minimizing the risk that a substantial part of the population falls into poverty when negative shocks hit. The cornerstone of most societies that have managed to achieve this around the world is, arguably, a well-functioning welfare state.

Of course, devising a well-functioning welfare system (which does not necessarily mean turning a market economy into a socialist economy) can be difficult, and maintaining it can be costly. However, these difficulties and costs have not prevented the countries we define now as "developed" from adopting one, nor from developing. One might even argue – in the same line of Jütting - that their welfare systems helped those countries achieve their level of development in several ways (for example by increasing social cohesion and mutual trust, encouraging risk-taking and the accumulation of human capital, reducing social conflicts and political instability to cite a few). As a matter of fact, the welfare state has constituted for these countries a crucial component of the “social contract” between governments and their citizens of the sort wished by Jütting for developing countries.

It has been argued that even the “best” countries  (take Germany for example) have to adjust and revise their welfare state from time to time. This is certainly true, and for sure more adjustments will be necessary in the future. Should developing countries then, simply give up the idea of building a welfare state and let free markets take care of everything? This can hardly be the solution. The need to be adjusted and revised is not a distinctive feature of the welfare state and of modern societies. All human institutions have always required revisions and adjustments, exactly because of human nature and of the changing environment in which societies and economies live and develop. Even the market is an institution created by humans and, as such, is not perfect. Also, markets (while very effective most of the time) can fail and cause problems at least as serious as those associated with a “big government”. The choice to ignore this, hoping that some invisible force will take care of everything, is not only conceptually wrong. It is a recipe for disaster.

So, should developing countries accept that they are bound to fail whatever path they choose and give up on their hope to develop? Not necessarily. Recognizing that there cannot be any development if a substantial part of the population is left behind and under the constant risk of falling into poverty is already a first (crucial) step in the right direction. Governments must work to make sure that development will be inclusive and based on the creation of opportunities for the whole population. Only in this way will it become sustainable. For all these reasons, despite the existing difficulties, they should not renounce a priori to the development of a well-functioning welfare state. They should rather try to understand how to design one that will be optimal (and sustainable) for them. In doing this, they should take advantage of the lessons learned thanks to developed countries’ past experiences (and mistakes). Afterward, success will require continuous monitoring of the economic, social, and political environment, and the willingness and the possibility to intervene when necessary.

Will increasingly small governments, with more limited functions and smaller budgets, be able to take up this challenge? There are good reasons to doubt this is the case. That’s why we need a rethinking of the development model currently adopted by most emerging-market countries. Economists could and should play a big role in this. They have the huge responsibility of making sure that the potential costs and benefits of different alternatives are clear to the public. It will be then up to the people (or societies if you prefer), to decide what path they prefer to take.