dd ee zz riri oo hh utut AA e e rr uu ss oo clcl ss DiDi c c blibli SOCIAL COHESION, PUBLIC POLICY, AND ECONOMIC GROWTH: uu PP IMPLICATIONS FOR COUNTRIES IN TRANSITION dd ee zz riri oo hh utut AA e e rr uu Jo Ritzen ss oo clcl Vice President for Development Policy ss DiDi The World Bank c c blibli uu Michael Woolcock PP Social Scientist, Development Research Group The World Bank dd ee zz riri oo hh utut AA e e Address prepared for the rr uu ss oo clcl ss DiDi c c blibli Annual Bank Conference on Development Economics (Europe) uu PP Paris, June 26-28, 2000 dd ee zz riri oo hh utut AA e e rr uu ss oo clcl ss DiDi c c blibli We gratefully acknowledge helpful comments from uu PP William Easterly and an anonymous referee. Introduction How do individuals create, change and sustain social order? How helpful is the concept of social cohesion in understanding how different societies manage the transition from one social order to another? How might social cohesion help practitioners, policymakers, and citizens bring about more equitable and effective change? I was a member of the Dutch Cabinet when the Berlin Wall fell and subsequently other Central and Eastern European countries liberated themselves from communism. The general feeling among Western European governments and economists was one of happiness with the removal of oppression, and confidence that the newly won freedom for individuals would soon translate into greater prosperity for all. The mood was especially optimistic regarding the economic aspects of the transition. Some help from the outside might be needed, but most observers presumed it would be a relatively quick and painless process. The Central and Eastern European countries were, after all, relatively advanced in terms of both their physical as their human capital infrastructures. To be sure, there were observers who predicted a slower transition, as market behavior and economic competition had to be acquired after decades of life under detailed plans, stringent quotas, fixed prices, and guaranteed employment. But no-one predicted output falls of more than 50% (as observed in the 1990s in Armenia, Azubaijan, Georgia, Moldova, Tajikistan, Turkmainstan, Ukraine – all parts of the CIS) or more than 20% (as occurred in Bulgaria, Croatia, Estonia, Macedonia, Latvia, Lithuania, Romania). At the end of ten years of reform, the harsh reality is that only Poland (117), Slovenia (104), and Slovakia (100) have similar or higher living standards in 1998 than 1989 (=100). Why were our predictions so wrong? What lessons has hindsight taught us? Perhaps the most important lesson is that a change in the social order is far more complicated than was originally thought. Such changes essentially require new ways of defining relations between groups of people, including the degree of inclusiveness of the 2 society1. Another important lesson is that these shifts in social relations require complementary institutions to manage new forms of conflict, opportunity, rights, transactions, and information, all of which in turn are important determinants of a society’s prosperity. It is this relationship between social inclusion, political institutions, and economic performance in transition countries that we seek to examine through the lens of social cohesion. The idea of social cohesion draws on a fascinating body of literature from across the social sciences that is gradually coalescing into a more or less coherent framework for understanding social order and its effects on economic life. This body of knowledge has been pioneered by academic scholars such as Dani Rodrik, Peter Evans, Robert Putnam, and Amartya Sen. My colleagues in the Development Research Group at the World Bank, especially Paul Collier, David Dollar, William Easterly, Aart Kaaray, and Michael Woolcock, play a prominent role in the current research. An overview of their work is represented in the forthcoming World Development Report 2000, on poverty, and will feature more prominently in WDR 2001, on institutions. Importantly, we are also learning from the voices of poor and marginalized people themselves. A key feature of this year’s WDR on poverty is that it incorporates the findings of a major study undertaken in 63 countries on how the poor understand the causes, experience, and consequences of poverty.2 We have learned that listening attentively to the poor, and forming genuine partnerships with them, can make a big difference in terms of how we respond, and how we evaluate our actions. These formulations may appear at first view to be rather academic and philosophical. Yet the approach and intent is highly practical: our goal is to contribute to effective poverty reduction by making complex notions such as social cohesion more accessible to practitioners and policymakers. 1 Social exclusion, dislocation and the displacement of people and whole communities is not a sub-national, or a “third world” issue; indeed, Europe’s share of the international refugee crisis is almost as dire as that of Asia and Africa. Where protracted social and political conflict in most of the developing world and in central Europe has resulted in an estimated 21.5 million people being rendered “population of concern” for the United Nations High Commission for Refugees, Africa, Asia and Europe are about evenly matched with refugees, asylum seekers etc. (UNHCR Refugee Statistics overview 1998) 2 See Can Anyone Hear Us?, Crying Out for Change, and From Many Lands (Three Volumes in the ‘Voices of the Poor’ Series, The World Bank and Oxford University Press, 2000) 3 This is the second of three papers in which I endeavor to apply the emerging framework around social cohesion to economic development issues around the globe. The first paper concerned itself with the OECD countries (Ritzen 2000), this paper will address transitional countries, and the third the developing countries (Ritzen, Easterly, and Woolcock 2000). I begin by introducing the idea of social cohesion and the various ways in which it has been used (and abused) over the years. I also compare the similarities and differences between its conceptualization in the developed and developing world. I then argue for the importance of adding an institutional context to social cohesion. Next, I provide a summary of the broad evidence in support of the thesis that socially cohesive societies are more likely to pursue pro-poor economic growth strategies. In conclusion, I explore the implications of this evidence for development policy. The practitioner’s point of view, which I like to adopt, is derived from my work at the World Bank. An important and recurring theme of this paper is that social cohesion should not be seen as primarily a developing or transition country concern; indeed, too much is made of the distinction between “developed”, “transitional” and “developing” countries. Social cohesion, like the problem of order it seeks to flesh out, is as important in the Ukraine as it is in the UK, in Canada as it is in Colombia, in the Netherlands as it is in Nigeria. The World Bank’s primary goal is to uproot poverty and effect long-term, equitable and sustainable development in so-called underdeveloped and transition countries. The touchstone of our work is the Comprehensive Development Framework (CDF) and our Poverty Reduction Strategy Papers (PRSP). The essence of the CDF is the understanding that development entails more than just “getting the macro-economic fundamentals right.” Low inflation, balanced budgets, macro-economic stability, etc. are important, of course, but they are not ends in themselves; rather, they are a means to an end, and that end must be to reduce poverty. The CDF and PRSP give countries primary responsibility for devising, implementing, and monitoring development projects; it places individual countries in the driver’s seat. We have learned the lessons of aid effectiveness. Development is only achieved under good governance and with a good policy environment. Good governance and the policy environment cannot be “bought”, but they can be supported by capacity building, and by the transfer of knowledge and resources. 4 But how is “ownership” achieved and developed? I argue that the idea of social cohesion provides important insights into this question. For the purposes of this paper and this conference I want to focus on a conceptual framework of development in the 27 transition countries, one that is both informed by and that shapes the World Bank’s approach to policy and projects. As the title of this paper suggests, I have adopted the term “social cohesion” and placed it at the center of this framework, as I believe it relates closely to the two elements of a country essential for equitable economic growth, namely an inclusive civil society and responsive political institutions. I am aware that many different “social” labels—social capital, capability, exclusion, infrastructure—have recently been coined to capture some of these concerns. My own preference is for the concept of social cohesion, since I believe it comes closer to its relations to these twin features of societal inclusion and political responsiveness. Does the term social cohesion help us in understanding transition in Central and Eastern Europe? Does it help to order our thoughts? And if so, can that reflection be tested empirically? These are important questions for researchers. They also set the stage for policymakers: is the term “social cohesion” useful for the politician in making decisions? A second set of questions immediately follows from positive answers on the first set. If social cohesion makes sense analytically (and empirically), then we would want to know how social cohesion itself develops, how it grows or declines, and how political decisions can influence social cohesion. It is not so much social cohesion in itself that has captured my interest, then, but rather its potential for helping us understand a range of development outcomes. 1. Understanding and Applying Social Cohesion Other contributions to this field—indeed to this ABCDE conference—use the term social capital. I prefer the term “social cohesion” for a number of reasons. First, I find the term ‘capital’ to be confusing when applied to social issues because many of the characteristics of physical capital do not apply (e.g., divisibility, non-negative, and the possibility for establishing ownership). Second, I use the term social cohesion differently 5 from social capital. There is a growing literature emphasizing the “dark-side” of social capital (a good example is the possibility that more social capital leads to corruption or cronyism). Just as more physical capital is not necessarily good for everyone, there is an optimal level of social capital. In the way I define social cohesion, more is better. Third, the term social capital has no inherent ambition to be related to inclusion or responsive political institutions, while social cohesion does so (in my use of the word). Fourth, as a former politician myself, I want to use terms that policymakers and citizens alike intuitively understand and are comfortable with. I also want to refer to broader features of society, whereas social capital is primarily concerned with networks and communities. It is true that the term human capital does not satisfy the characteristics of physical capital either, but at least one of the common elements about human and physical capital—as Glaeser (2000) rightly points out—is that individuals decide on the investments. With social capital it takes always two to tango; indeed, given the number of people often involved in a network, social capital may be more of a square dance than a tango! In the end, however, the use of a particular term over another matters far less than that the issues they all encapsulate are brought to the table and seriously debated. My reflection takes as its point of departure missing clues in the mystery of development. Consider the case of Ireland, for example, which emerged from being a relatively poor OECD country to recently overtake the UK in GDP per capita. The explanations for this rise are quite solid: the Irish combined sound fiscal policy and a strong human development policy, with a commitment to the rule of law and peaceful labor relations in an open country environment (Barry, 1999). We need to look behind these explanations, however, since they tell us nothing about how the Irish were able to organize these good policies. Conversely, consider Argentina, which fell from being one of the world’s richest countries in GDP per capita in 1920 to developing countries status now, doing so largely because of its poor choice of economic policies. We know in general that good policies matter for development, but we are still looking for clues as to why good policies come about in one country but not in another. Interestingly and importantly, these longer historical trajectories of developmental success and failure are mirrored in the recent experience of the transition economies in 6 the ten-year period following the fall of the Berlin Wall. Since 1989, countries such as Poland and Slovakia have done remarkably well, while most of the former Soviet bloc countries (e.g., Ukraine) have declined alarmingly1, enduring an economic collapse longer and deeper than the Great Depression in Germany and the United States in the 1930s (Milanovic, 1998). A third group of countries, represented by Bulgaria, have stagnated (see Table 1 and Figure 1). What explains these three different postsocialist growth trajectories?2 Table 1: Comparative Performance of Postsocialist Economies in the 1990s COLLAPSING STAGNANT GROWING Azerbaijan Armenia Albania Bosnia Belarus Croatia Georgia Bulgaria Czech Republic Kazakhstan Estonia (Eastern Germany) Kyrgyz Republic Lithuania Hungary Latvia* Macedonia Poland Moldova Romania Slovak Republic Russia Uzbekistan Slovenia Tajikistan Turkmenistan Ukraine * Latvia’s economy declined alarmingly from 1990-95, but has since recovered quite strongly. Social cohesion may provide one of those clues. The expectation that it might be the clue does injustice to the complexity of development. Moreover, social cohesion may be no more than an analytical concept: helping us to organize our thinking on the complex processes which lead to social or political choices which may serve better short or long term development. But social scientists and politicians alike who are from a Popperian descendent would like to see whether measures can be developed to test empirically the 1 Poland had a GDP/c of $5400 in 1989, and by 1998 had increased this by more than 40% to $7600. Georgia, by contrast, had a GDP/c of $9650 in 1989, but has endured a growth collapse of more than 60% over the same period to record a level of $3350 in 1998. 7 social cohesion hypothesis. Accordingly, we need to be as precise as we can in terms of providing a definition of social cohesion, and as rigorous as we can, in terms of assembling the available evidence. (This latter task is particularly difficult in the transition economies, where time-series data of any quality is hard to come by. Nevertheless, the preliminary results presented here are suggestive.) Figure 1 Three Development Trajectories in Transition Countries, 1985-98 11,000 9,000 ) P P P 7,000 Bulgaria ( Hungary c P/ 5,000 Ukraine D G 3,000 1,000 5 6 7 8 9 0 1 2 3 4 5 6 7 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Social cohesion has many formal definitions (this is exemplified for OECD countries in (Appendix 1). Pauline O’Connor (1998), of the Canadian Policy Research Network, for example, states that social cohesion refers to “the presence of basic patterns of co- operation, social action and core sets of collective values.” This definition, like much of the work and thinking on social cohesion, is essentially focused at the community level, but in my deliberations on these matters I have found it necessary to incorporate a macro- political component. This is so because the quality of government—at the local, state, and national level—has a major bearing on the capacity of societies to negotiate solutions to their problems, and to advance collective interests. Whether those problems or opportunities stem from domestic or international sources, the broader legal and 2 For detailed empirical discussions of economic growth in transition economies, see, among others, Campos and Coricelli (2000) and Fischer and Sahay (2000). On social cohesion and growth in Africa, see Elbadawi (2000). 8 institutional environment in which they occur shapes and constrains the range of possible actions, and the extent to which any of them can be successfully implemented. A summary of my conceptual framework is outlined in Figure 2. It is my contention that a country’s social cohesion—contributing to the inclusiveness of its communities and responsive political institutions—has a vitally important role in managing the effectiveness of that country’s policy response to the vagaries of the global economy. If social scientists can demonstrate this empirically, then politicians and policymakers should be able to see its significance for their country, and act accordingly. To this end, I define social cohesion in the following way: Social cohesion is a state of affairs in which a group of people (delineated by a geographical region, like a country) demonstrate an aptitude for collaboration that produces a climate for change. Presumably what some people would define as social capital—i.e., the norms, networks and other related forms of social connection—will be an important basis for this aptitude. At the same time it will matter how, with whom, and on what terms these norms, networks and other connections are made. Linking relations that connect people from different socio-economic and demographic groups are presumably the most important of these, compared to bonding (family, friends) or bridging (colleagues, horizontal ties) relations (Woolcock 2000). The definition also implies that people trust that their collective action - which may entail short run losses - generates in the long run benefits (on average). This is what creates “room for maneuver” for Governments. In seeking to unpack this notion of social cohesion, let me stress from the outset that I am fully aware of the fact that some political partisans with a narrow—even sectarian— agenda have had an unfortunate history of invoking “social cohesion”-type arguments as the basis for their actions. The desire to cultivate a sense of national unity and “purity” brought us the holocaust and ethnic cleansing, so I am most surely not arguing that social cohesion equals cultural homogeneity or intolerance of diversity; quite the opposite. Nor am I invoking some naive suggestion that social cohesive societies are always harmonious, or without political conflict. Rather, I use the concept of social cohesion to make the point that—whether the entity concerned is a community, a corporation, or a 9 country—the extent to which those affected will work together when crisis strikes or opportunity knocks is a key factor shaping performance. Graphic scenes on CNN during the 1997 financial crisis in South Korea provided a fascinating case of social cohesion in action, of people tearfully parting with family treasures in the belief that their humble contribution was making a difference. Where this cohesion is lacking—as it was in Indonesia—the response to crisis was far more sluggish, heightening a number of other political tensions. Dani Rodrik (1997) accurately notes that crises of this sort are “not a spectator sport—those on the sidelines also get splashed with mud from the field. Ultimately the deepening of social fissures can harm all.” In OECD countries, discussions about social cohesion are driven by a concern to maintain an inclusive society able to withstand external shocks and the harsh effects of a global economy. In the developing world, social cohesion is discussed more in terms of reconstructing and developing a sense of shared identity. Avoiding civic conflicts, encouraging effective rule-of-law (especially in post-conflict societies), and developing a new set of formal institutions for managing exchange that complement existing informal institutions (political reform), is a high priority. Pro-poor growth presumably feeds back into social cohesion. These are the elements of the conceptual framework of Figure 2. 10