Conflict management is at a low point

Click to see the Index
Click to see the Index

In today’s post, Rosa Gosch interviews the team responsible for the latest edition of the Bertelsmann Stiftung Transformation Index (BTI), launched in cooperation with Deutsche Welle, Germany’s international broadcaster

What exactly is the Bertelsmann Stiftung’s Transformation Index, the BTI?

Hauke Hartmann (Senior Project Manager at BTI): The BTI team is interested in observing transformation processes from authoritarian systems to democracies based on rule of law and socially just market economies—and learning from what we see at the global level. To achieve this, the BTI analyzes and assesses the progress being made by 129 developing and transition countries with respect to political and economic transformation and governance quality.

Sabine Donner (Senior Project Manager at BTI): Our Status Index looks at these countries’ current state of development in terms of democracy and the market economy. We believe that we need to examine both the political and the economic transformation to get a complete picture of societal change. Since quality of democracy is more than free and fair elections, our indicators also examine the extent to which citizens can participate politically and freely express their opinions. They also investigate the extent to which an independent justice system provides equality before the law and how parties, interest groups and NGOs act as liaisons between policymakers and society. Of course, a sustainable market economy needs more than growth and fiscal stability; creating and maintaining social balance is essential. So we look into the quality of a country’s social safety nets, its investment in education and the environment, and whether there is a framework that enables economic participation for all people. Our Management Index examines how successful governments are shaping the change towards a democracy based on the rule of law and a socially just market economy. Key aspects of this are whether political players are able to set strategic priorities and implement their policies, whether they are successfully fighting corruption, and whether they are managing to create consensus between all parts of society about the path of transformation.

What are the findings of the newly published BTI 2014?

Robert Schwarz (Project Manager at BTI): We are seeing an increase in protests around the world. These protest movements are by no means limited to underdeveloped and hopelessly mismanaged dictatorships—Chile is a case in point. In many places, a well-connected, self-confident civil society is putting up more resistance against growing social inequality, bad governance, despotism and corruption. Governments need strategies for how to enter into constructive dialogue with protesters and how to moderate their interests without hurting the national transformation process, as appears to be happening in some countries right now.

Is developing such strategies one of the goals of the BTI?

Robert Schwarz: One of the goals of the project is to identify successful strategies from the trove of data and analyses that we have collected on transformation management. And to stimulate a learning process for decision-makers in other countries.

Hauke Hartmann: If there’s anything we’ve learned from the work we’ve been doing during the ten years since the BTI began, it’s that we can only develop those kinds of strategies through dialogue. It only works when we meet with scholars and decision-makers in politics and society to discuss the BTI’s findings.

Sabine Donner: The basic premise of our work on the BTI is that transformation processes can only succeed if there are clear strategies for how to promote social change. And this strategic approach has to take into account that a very broad consensus needs to be reached regarding the direction in which the country is to develop.

What did each of you find to be the most remarkable finding in the BTI 2014?

Hauke Hartmann: I am impressed by how pervasive, intense and numerous the protests against despotism, mismanagement and corruption have been. It’s remarkable that so many people are going to the streets for very similar reasons and saying, “No way! We don’t want this kind of government! We don’t want this kind of system!”

Sabine Donner: We are observing that many governments around the world seem to be helpless, inadequately dealing with these protests. Everywhere, including in Western European democracies, people are obviously asking similar questions, like, “Is this system capable of finding solutions to the burning questions of our time?” In democracies and autocracies alike, no one seems to be able to answer this question with a clear “yes” right now.  I don’t exactly find that encouraging, but it does raise other questions, like, “Where can we find new ideas or even old ideas to help strengthen democracy and democratization?”

Does the BTI give answers to those questions?

Hauke Hartmann: The BTI offers suggestions on where one might look for answers. I’m thinking of countries like Benin, Uruguay and Taiwan, which according to our findings are doing a very good job at getting civil society involved in political decision-making processes. In Uruguay they discuss education and security questions in a group that includes decision-makers from civil society. Benin is a very ethnically diverse society but the government keeps the country together by fostering consensus. As a result, Benin has a very clear national identity, unlike many other countries in West Africa.

How are transition countries doing in the realm of conflict management in 2014?

Hauke Hartmann: They are still limited in terms of their ability to moderate and de-escalate. This has always made it more difficult for them to steer transformation processes. But the new BTI shows their conflict management abilities reaching a new low. No other management indicator in the BTI showed a sharper decline. And the countries that take a moderate, balanced approach to dealing with forces that polarize and create conflict are located in regions that are not particularly prone to conflict. In other words, the regions where good conflict management is missing—in the Sahel, North Africa and the Middle East—those are the regions that need it more than ever. That is alarming. Governments feel very helpless right now because there is such extreme mistrust within these societies and everyone is so dug in. The people have experienced too many human rights abuses and crimes to see things differently.

Robert Schwarz: And in those very same regions, which have inadequate conflict management to begin with, the influence of religious dogma on national legal systems and political institutions has increased. When the state is usurped by religious dogmas or fundamentalism, it is even more difficult to enter into dialogue with the opposition.

Hauke Hartmann: In most cases, especially in polarized societies, there are two opposing sides that have a pretty clear idea of what they can gain at the polls, on the streets, and through an escalation of violence. And they often back different positions depending on which side they are on. For example, Thailand’s current government knows very well that it will get all of the “red-shirt” votes from the rural areas and win the next election hands-down. Of course, the opposition in Bangkok won’t play along. On the other hand, the opposition has absolutely no mandate to demand the resignation of a democratically elected government. It’s counting on an escalation and the possibility of military intervention. Neither side has any interest in listening to the other side’s mediation strategy.

Who uses the BTI?

Sabine Donner: To start, other organizations use our data to compile their own indices. The World Bank’s Worldwide Governance Indicators and the Ibrahim Index of African Governance are two examples. Transparency International uses our data to fight corruption in its Corruption Perceptions Index (CPI), as does the Basel Anti-Money Laundering Index (AML). In addition, many foreign ministries and development ministries use our data and country reports as an additional source when they assess their partner countries. In particular, the BTI’s qualitative evaluations appear to be helping them by opening the door to political dialogue with governments in developing countries and transition economies. And those countries in turn can use the BTI as an additional, independent source to help them identify areas in which they are doing very well and areas in which they need to improve.  We are delighted to see that more and more civil society organizations in developing and transition countries are using the BTI as a way of holding a mirror up to their governments and demanding accountability for social change.

Translated from the German by Douglas Fox

Useful links

OECD work on peacebuilding, statebuilding and security

Emerging middle class blues

Exit, voice or loyalty?
Exit, voice or loyalty?

Today’s post is by Helmut Reisen, former Head of Research at the OECD Development Centre and author of the Shifting Wealth blog.

How is life? You might have expected the urban middle class in Brazil and Turkey to answer that well-known OECD slogan with “We can´t complain”, to paraphrase a recurring refrain in Hans Magnus Enzensberger’s 1964 poem Middle Class Blues. After all, the recalibration of the world economy toward the emerging countries, mostly as a result of superior prolonged growth in the Asian giants China and India, has since 1999 helped move roughly half a billion people above $2 a day, the median income poverty threshold in developing countries. Homi Kharas´ estimates for the OECD Development Centre projected almost 70% of the world´s middle class consumption – $56 trillion by 2030 – to be outside the OECD. No wonder then that the term “emerging country middle class” has been driving big dollar signs into many eyes.

Yet, the urban middle class youth is in revolt in Brazil, Turkey and other fast-growing countries. The controversy around Easterlin Paradox, a key concept of happiness economics, suggests that happiness grows more slowly than incomes. Leaders in many emerging countries are today confronted with a dilemma that reflects the dual rural-urban structure of their large societies. While the internet-savvy young urban middle-class has left poverty behind and demands voice, participation and efficient public services, there still coexist the poor in the rural hinterland striving to leave individual poverty behind.  

Exit, voice and loyalty, the late Albert O Hirschman´s intriguing basic categories that drive societal change, can be used to better understand the current conundrum. Loyalty, through adherence to a political party or to religion, can block change but is waning. Exit and voice have different potential in a rural-urban context: exit from the rural to the urban sector is a preferred option for the rural poor but is mostly a one-way street; whence voice as the preferred option for the urban middle class.

Much of the emerging-country middle class is fragile. Lousy education, poor health and urban congestion are the biggest risks to the lower strata of the middle class, by way of social and economic exclusion. A higher proportion of middle-class citizens translates into higher prices for private schools, hospitals and transports or, alternatively, overcrowding. The private provision of quality public services is a socially dividing, hence limited, costly option. In other words, exit to private education and health services – an option for the “happy few” – will raise prices to the point that it triggers voice while the size of the middle class rises.

“First-world soccer stadiums; third-world schools and hospitals”, was one of the slogans advanced by Brazil´s protesters. Brazil has already spent more than $3bn, three times South Africa’s total four years earlier, and only half the World Cup stadiums are finished. Public health spending occupies a mere 4 per cent of GDP in Brazil (despite a constitutional declaration for universal health care rights), compared to 6 in Turkey and 7 in the OECD on average. The latest PISA test scores rank Brazil 57th out of 65 survey countries for mathematics, Turkey is ranked 43rd. These numbers suggest that there is a political and social premium on best practices in the governance and allocation of public spending of tax receipts. Apparently, that premium has not been reached.

Emerging-country leaders might ignore the insights of the OECD Latin American Outlook 2011 at their peril. The policy recommendations put forth there rightly emphasize the need for “fiscal legitimacy”. To avoid the emerging middle class blues, public finances need to strengthen the social contract, provide better opportunities for the vulnerable people and better quality public services. Middle-income citizens are more willing to pay taxes for services, such as transport, health care and education, if they perceive them to be of high quality and if “white elephants” – trophy public investments with little social value – are avoided.

It is quite likely that the current protests, while destabilizing and weakening the affected governments in the short term, will be the start to stronger democracies and strengthen, rather than weaken, the rise of the emerging countries. As Susanna Vogt reminds us, Aristotle reflected “that the best political community is formed by citizens of the middle class, and that those states are likely to be well-administered in which the middle class is large […]; for the addition of the middle class turns the scale, and prevents either of the extremes from being dominant.”

Useful links

What the BRICS need: Education, employment, equality, and soft infrastructure by Helmut Reisen on OECD Insights

Economic Policy and Social Affairs in the BRICS  by Helmut Reisen, SGI and the Bertelsmann Foundation

OECD Development Centre work on poverty reduction and social development

OECD shows how to fight inequality and boost growth at the same time

Join the dots and get a fright

If your sovereign debt was soaring and you were locked into a costly war, what would you do if, for various reasons, default and surrender had to be excluded from the policy package? Raise taxes and cut public services? But imagine there are practically no public services anyway and you’ve got as much as you can expect from taxes. Well, you could invent a temporary tax to be applied until things get better.

That’s what British prime minister William Pitt did in 1798 when he announced certain “duties on income” to be gathered starting in 1799 to finance the war against Napoleon, inspired perhaps by the eisphora, a temporary tax on capital to finance wars used by Athens and other Greek cities from around 430 BCE on.

Income tax, as it came to be known, was abolished briefly during a lull in the fighting, and again following Napoleon’s final defeat at Waterloo, when Parliament decided that all documents connected with it should be collected, cut into pieces and pulped, although duplicates had already been sent to the King’s Remembrancer. (By the way, I got these details from what must be one of the most unlikely celebration sites on the web: Her Majesty’s Revenue & Customs Bicentenary of Income Tax  page.)

The tax was soon back, joining the excise duties and other taxes that still form the basis of government income. What should this money be used for? The day to day running of the country obviously, but new OECD research as part of the Going for Growth programme argues that “countries should fight rising inequality with policies that simultaneously curb the income gap between rich and poor while boosting economic growth.” 

The World Economic Forum is worried about inequality too. Its annual survey of global risks warns about economic imbalances and social inequality, with respondents afraid that “further economic shocks and social upheaval could roll back the progress globalization has brought”.

The OECD policy mix focuses on tax, labour markets and education. The reduction or elimination of “welfare for the well-off” – tax breaks that primarily benefit the rich would create space for growth-friendly reductions in taxes for all taxpayers.

Reducing the gap in employment protection between temporary workers and those on permanent contracts would reduce the average 25% wage differential between these two types of employees while boosting employment and growth. Provision of more affordable child care would similarly improve labour force participation rates and incomes for women.

Improving educational outcomes, particularly for immigrants and socio-economically disadvantaged populations, would have long-term impacts on their employment opportunities, incomes and inequality.

The OECD report also points out that some reforms imply tradeoffs, for instance shifting taxes from labour to consumption might improve incentives to work, save and invest, but would raise inequality.

Useful links

OECD work on new sources of growth

Going for Growth will be released in March. In the meantime, you can download these:

Under shock: How to spread macroeconomic risks more fairly

Risk sharing

Reducing income inequality while boosting economic growth

Less income inequality and more growth – Are they compatible?