WASHINGTON, September 25, 2018 – Labor, taxation and social welfare policies in countries around Europe and Central Asia must be brought into the 21st century to tackle rising inequality between groups and help workers face increased uncertainty, says a new World Bank study.
Toward a New Social Contract calls for a fundamental rethinking of policies to ease the growing divide between those who benefit from new economic opportunities and those who are left behind in an ever-more flexible economy.
“Although countries in the Europe and Central Asia region have vast experience with social welfare institutions and programs, these were designed for a different economic environment and they no longer provide the same benefits for citizens as before,” says Cyril Muller, World Bank Vice President for Europe and Central Asia. “Long-term wage employment is no longer the norm, especially for younger people, and we need to ensure the benefits of growth and opportunities are more equally shared.”
Despite Europe and Central Asia being one of the most equal regions when compared globally, many citizens are still not experiencing upward mobility, feel stuck in an inequality trap, and are more vulnerable than previous generations. Furthermore, declining financial and job security means that a greater share of the middle-class is vulnerable to falling into poverty – all of which has led to lower trust in institutions, greater polarization, and rising populism within society.
In Kosovo, inequality between urban and rural areas is about the average of Eastern European countries when looking at the urban-rural gap in welfare. Spatial gaps also exist not only in consumption but also in other relevant outcomes like PISA test scores. In fact, the difference in average test scores in PISA 2015 between urban and rural areas is equivalent to almost one year of schooling.
The report also shows that individual birth circumstances are more important determinants of access to tertiary education among the generation that came of age in the early 2000s than among the generation that started education before the transition. In the case of Kosovo, the index of inequality of opportunity in access to tertiary education for the cohort born in the 1980s is more than twice as much as that of those born in the 1940s.
To address the challenges, the report proposes a set of three policy principles: moving toward equal protection of all workers, no matter their type of employment; seeking universality in the provision of social assistance, social insurance, and basic quality services; and supporting progressivity in a broad tax base that complements labor income taxation with the taxation of capital.
“When we ask people about their well-being, we hear concerns about rising inequality and insecurity. This report investigates the causes of these concerns by analyzing the changes in income distribution in recent decades,” says Maurizio Bussolo, World Bank Lead Economist for the Europe and Central Asia region and co-author of the report. “We believe trying to stop globalization or technology is not the solution. Instead, a new social contract, with a fairer way of sharing risks and opportunities, is needed to preserve and expand the impressive economic gains the region has made in past decades.”
The report identifies four types of tension between groups that are eroding social cohesion: disparities between young and old generations; inequalities between workers engaged in different occupations; unequal access to opportunities based on geography; and inequalities based on gender, ethnicity, background and other factors, rather than individual efforts or abilities.
Acknowledging that countries across Europe and Central Asia differ in many respects, this report emphasizes policies aimed at reducing tensions by protecting all workers, improving social services, and making tax systems fairer.