Thought Box

Need for a New Social Contract to Guard the Rising Inequality

Need for a New Social Contract to Guard the Rising Inequality

by Sukanya Sudarson September 7 2018, 5:54 pm Estimated Reading Time: 3 mins, 23 secs

Mankind has always been afraid of where its talent for innovation might lead. John Maynard Keynes warned in 1930 of widespread unemployment arising from technology. And yet innovation has transformed living standards. Life expectancy has gone up; basic health care and education are widespread; and most people have seen their incomes rise.

The nature of work is constantly changing – new ways of production are adopted, technological progress is seen, markets expand and societies evolve. But some changes provoke more attention than others, in part due to the vast uncertainty involved in making predictions about the future. The World Bank produces the World Development Report on an annual basis and each year it focuses on a particular aspect of development selected by the Bank's president. The 2019 World Development Report studies how the nature of work is changing as a result of advances in technology today. The report will also look at the need for a new social contract to smooth the transition and guard the rising inequality.

Social insurance coveragein developing countries is generally low (Source- World Bank pension database)

Michal Rutkowski, Senior Director for Social Protection and Jobs, overseeing the World Bank Global Practice responsible for protecting poor and vulnerable from shocks through improving their job opportunities, earning capacity, and social insurance and social assistance (safety net) coverage, writes in his blog, “Around the globe, the traditional, payroll-based insurance system is increasingly challenged by working arrangements outside standard employment contracts. In the U.S., pension plans are becoming a thing of the past. In developing countries, traditional social protection systems are seldom adopted at a significant scale. In India, Indonesia, Pakistan, Bangladesh and Nigeria — which combined account for about a third of the world’s population — coverage of social insurance is single digit or almost so, with virtually no change detected over the past decades (see figure).”

Rutowski stresses that new ways of protecting people are needed.  A new social contract and greater investment in people are important today.  He shares some of the significant findings from the 2019 World Development Report, which helps us take a look at how we can better protect people and workers in the new economy. 

  • Informality, which currently engulfs around 80% of labor markets in developing countries, is a premier bottleneck. Most workers — especially the poor — are engaged in informal sector activities with no or little access to social protection. Given the endemic nature of challenge and slow progress against it, most people would be better-off with a social protection system that does not depend on their work situation.
  • Social assistance, which ensures equity in societies, could be enhanced to include larger swaths of informal sector workers. There is a range of options starting with a means-tested Guaranteed Minimum Income (GMI) programs and ending with a Universal Basic Income.  An intermediate option could be a Negative Income Tax that has relatively high threshold and gradual withdrawal of benefits, or a smaller GMI supplemented with other programs, such as universal child allowances and social pensions.
  • The notion of ‘progressive universalism’, borrowed from the health sector experience, may help guide the expansion in ways that benefit the poor and vulnerable first.

As more investments are made in social protection, a balanced approach to labor market regulations could help meet productivity and equity goals. Minimum wage is and should remain a vital tool for balancing power between firms and workers. Just like social insurance, some regulatory measures may benefit only ‘insider’ formal sector workers. For example, it’s hard to enforce the minimum wage in high-informality contexts. Guaranteed social protection can help take pressure out of minimum wages when these are set too high.

The World Bank counts on their valuable global and national partners and believes that together, everyone can shape the future of social protection in ways that ensure broad gains for societies in general, and the poorest in particular.

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of The writers are solely responsible for any claims arising out of the contents of this article.

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