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Growing Public: Is the Welfare State Mortal or Exportable?

by Peter H. Lindert. Reading for week of May 17, 2005.

The welfare state is not an endangered species among the industrialized OECD countries. There is no race to the bottom. 

OECD experience since 1980 does not show any negative effect of larger tax-financed transfers on national product. There are good reasons for this “free lunch puzzle.” High-budget welfare states feature a tax mix that is more pro-growth than the tax mixes of low-budget America, Japan, and Switzerland. The high-budget states also have more efficient health care, better support for child care and women’s careers, and other features that mitigate the negative incentives on transfer recipients.

Experience from the 1980s and 1990s suggests how population aging and the pension crisis will affect government budgets in this century. The countries with the oldest populations had already begun to cut the relative generosity of their transfers to the elderly per elderly person. They did not, however, cut real benefits or the shares of public pensions or other transfers in GDP. Pay-as-you-go programs for the elderly are sustainable, with parametric adjustments. Historically they have proved as durable as “reformed” or “privatized” systems in the experience of Britain, Chile, and the United States.

Several developing countries already transfer high shares of their national product. Of these, only some formerly Communist countries of Central and Eastern are likely to remain welfare states under democracy. By contrast, few Third World countries will become welfare states anytime soon. Their tax-transfer systems are often regressive, subsidizing public elites. Hopefully, the regressive transfers can be replaced by more egalitarian systems as political voice and prosperity slowly spread.

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