The Distributional Effect of Social Welfare Spending in an Economy: Evidence from Thailand

1. Introduction

Government’s role over the past decades has been to create an enabling environment with equal opportunities to all to ensure equity in all facet of life. Opponents of government direct involvement with market have always had the belief in the self-correcting mechanism of the market towards equilibrium position. However, such believe in sole mechanism of the forces of demand and supply in the market has not worked to perfection, hence the inevitable involvement of government in correcting the market inefficiency. Welfare spending on education, health, unemployment and other social transfers are some of the means government uses in forestalling confidence in the economy and to bridge the gap between the rich and the poor. Literature abound on governments interventions through welfare spending. For instance, there are studies on the effect of social transfers/spending on growth (see Landau (1985), Korpi ( 1985), McCallum and Blais ( 1987), Persson and Tabellini (1994) Agel et al (1999) and most recently Peter Lindert (2004)^[1]. These studies have indicated conflicting results of positive and negative findings on these effects, hence making it difficult to conclude on the specific gains of welfare spending especially when making a generalized conclusion. There have also been instances of some countries where social spending have discouraged productivity and aided in inducing people to be addictive especially in Sweden and Finland in the 1990s.

Thai government has made a strong commitment in bringing majority of the population from the clout of hard core poverty by expanding its social spending in increasing access to education, health care, and other welfare services. Government policy to roll out programs such as the extension of coverage of universal basic education, student loan schemes and social security benefits are among the leading government interventions in fighting inequality and poverty in Thailand. However, such a move has sparked a number of questions as to who the actual beneficiaries of government interventions are. Will government social welfare spending benefit the poor or the rich? If yes, how? Will such move stimulate or decrease economic growth? On the fiscal side, won’t such move cause an increase in public debt? What other counter measures will Thai government put in place to prevent people from developing addictive inclination to these welfare programs? These and others will be the bedrock to this research program.

2. Research Questions

In a nutshell, this research will seek to find answers to the following questions;

-What are the factors affecting the growth of government welfare spending in Thailand?
-Who are the actual beneficiaries of Thai Government social Welfare spending?
-What are some of the counter measures put in place to discourage Thai people from developing social addictiveness to government social welfare spending?

2.1 Research Objectives

This research seeks to achieve two main objectives;

I. To study the factors affecting the growth of government spending in Thailand from the period 1982 to 2007.
II. To test the validity of welfare spending theories in Thailand
III. To make recommendations based on the results of the empirical findings to the Thai Government.

3. Literature Review

Literature on social welfare spending in most research has been built from two different conceptions; the demand side theory and the supply side theory. The demand side-theory is based on traditional democratic theory that is based on the assumption that government tends to act as an agent that carries out the will or demand of the people. Government, by this is considered to be neutral and altruistic agent that responds to the needs of the society. Government spending is skewed to these demands. The supply side-theory is the opposite of the demand side-theory. Under the supply side-theory, government tends to satisfy their own whims and caprices and that spending is based on these self-centered interests of government and not the masses per se. Factors under the supply side-theory includes the ability to raise taxes, the strength of the bureaucracy, elections and parliamentary politics.

Several theories can be classified under the demand side. Most notable ones include Wagner’s law developed by Adolph Wagner (1985), a German sociologist more than one hundred years ago. Wagner believes that there are several reasons why public expenditure including social spending tends to increase over time. Wagner argued that, industrialization; urbanization and increased population density would give a need for more provision of public facilities like roads, housing, hospitals and other infrastructures. In addition, economic growth and income would facilitate certain income-elastic demands such as demand for education and the redistribution of income. To test the validity of this claim by Wagner’s law, three variables have been selected and applied in the estimation model.

Another theory used to explain social spending aside Wagner’s law is the public choice theory with variants such as the Median voter theory and the demand for income distribution developed by Anthony Downs (1957), A.H. Meltzer (1981) and S.F. Richard (1983). The theory believes that in order for government to win election, must try to respond to the demands of the voter. Government spending increases when the franchise is increased to include more voters below the median income (the decisive voter) when the growth of incomes provides revenues for increased redistribution and when the income distribution becomes more uneven. Researchers often use the rate of voter turnout as the measure of median voter participation. However, in this research, due to the unavailability of such data, we made use of a proxy using the ratio of the GDP of the nonagricultural sector to measure economic inequality with the expectation that majority of the poor in Thailand live in the agricultural sector and are active voters.

Interest group theory has also been used to explain the social welfare spending of government. The activities of interest groups such as trade and labour associations through campaign contribution and lobbying can exert influence on legislations concerning taxes, tariffs, price ceilings and regulations. Robert D. McCormick and Robert E. Tollison (1981) in the US for instance found that the state of economic regulation varied directly with the number of trade associations registered in the state. Evidence from the European context have been provided by Tom W. Rice suggesting that interest groups are able to induce governments to introduce social programs to offset the hardship which invariably explains the growth of government expenditure between 1950 to 1980. This study will test the validity of this assertion by making use of data on the percentage increase in the number of labour unions in Thailand as a measure of interest groups.

Proponents of the compensation theory contend that globalisation has an influence on public spending. Studies by Dani Rodrick (1998), and Robert Kaufman (2001), and Alex Segura Ubiergo, and Geoffrey Garrett (2001) have all shown that globalisation have increased government interventions in the economy which have invariable increased government spending on social programs. Globalisation has been defined as the integration of markets (i.e. domestic and international). Countries with high exposure to international trade will experience social dislocation. The fluctuation in export and import creates economic instability, unequal income distribution and unemployment problems. The situation will prompt government to increase spending on those affected and are disadvantaged. The need to retrain affected labour to reposition them in the competitive market will facilitate spending on education and labour training programs. In this study, trade openness (measured as exports and imports as a percentage of GDP) has been used to test the validity of this assertion.

When the argument is expounded from the supply side also brings to the fore a number of theories. James M. Buchanan (1975), Louise Marshall (1986), and Wallace E. Oates (1988) proposed the so-called fiscal illusion theory (which is a variant of public choice theory). The fiscal illusion theory believes that government has preferences for expanding its public spending. These preferences for larger budgets (social budgets) are said to be due to the need to satisfy the increasing demand of the voters. To be able to meet these preferences, government must increase taxes. However, this act may cause dissatisfaction among voters. To reduce this dissatisfaction, government tries to collect taxes that are less visible (indirect) to the tax payer as they may have less information to estimate the burden of such taxes. Succinctly, the fiscal illusion theory argues if tax burden can be disguised in this way, the government can increase public expenditure without causing dissatisfaction among voters. To prove this theory, tax revenue as a percentage of GDP will be used to test the validity of this theory.

Charles E. Lindblom’s (1959) Incrementalism theory views public spending as a continuation of past spending with only incremental modifications. The theory believes that due to constraints such as time, resources and information, policy makers are unable to investigate all available alternatives in existing policy due to countless uncertainties/risks involved. Rather, preference is given to decision made on an incremental basis, where the present will slightly change from the past year(s) as the previous year is used as the base year. Incrementalism provides a good explanation for government spending. The previous year spending is a good predictor of next year’s spending. To prove this theory, one year lagged welfare expenditure as a percentage of total expenditure is used in this research.

Political business cycle theory holds that business cycle can be artificially created by government in an electioneering year as a result of the competition for votes. Evidence to buttress this theory has been provided by Martin Paldam (1997) and Alberto Alesina and N. Roubini (1992). That is during election year, government tends to increase spending which stimulates the economy to drive demand high which induces high economic growth and reduce unemployment to satisfy the electorate/voters to gain advantage. This action tends to cause a business cycle. To test if this theory holds, the year of election (dummy variable, 1 in the year before and the year of the election, 0 in the other years) in a democratic government is used as the predictor of the growth of education, health and welfare spending.

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^[1] Cited from Peter Lindert’s (2004) paper “ Welfare spending hardly affect growth”