The flip side of any economic or emotional entitlement is commensurate accountability. Shakespeare, describing childish behaviour, wrote: “and then the whining schoolboy ... creeping like snail, unwillingly to school.” Currently, adults in several countries are displaying a collective lack of accountability. This article ponders upon the more-than-expected levels of this malaise among countries with high per capita income and in affluent circles in India.
Europe’s extensive entitlements include social protection benefits. These benefits can be broadly categorised under the following headings: sickness/healthcare; old age plus pensions; unemployment; housing; and disability and social exclusion. In the last few years, in the 27 European countries (EU-27) expenditure on benefits amounted annually to over 26 per cent of GDP. On the funding side, governments contributed 38 per cent, employers contributed 37 per cent, and about 21 per cent was provided by those who were protected. In the EU-27, expenditure on pensions was around 12 per cent of GDP. France and Austria spent the most on pensions, at 14 per cent of GDP. Germany and the UK allocated 12 per cent and nine per cent of GDP, respectively. The eligibility criteria for social benefits vary widely across Europe; for example, the retirement age is 60 in France and 67 in Germany. Of the total expenditure on social benefits in the EU-27, the two top components are 39 per cent for old age including pensions and 30 per cent for sickness and healthcare.
Incumbent parties have been voted decisively out of power in Greece, Portugal, Ireland and Spain in the last two years and Italy has an interim technocratic government. Clearly, the sentiment in the euro zone is against any further dilution of social entitlements. Specifically, as Greece moves to another round of national elections on June 17, it is fighting a losing battle to contain the flight of capital. The Greek government is at present dependent on meeting its debt service and expenditure commitments on the second financial assistance package provided by the troika — the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF). The mood in Greece is that the current generation is not responsible for the parlous state of the Greek government and local banks. If a post-June 17 Greek government seeks to renegotiate the conditionalities of the adjustment agreement with the troika, it runs the risk of not receiving any more assistance. As Greek tax receipts are less than committed government expenditure, if troika funds are withheld, Greece would default on its sovereign debt service and also fall short on public expenditure on salaries and benefit payments.
Investors in debt issued by euro-zone governments and private European banks have also fallen woefully short on the accountability front. Under the “voluntary” Private Sector Initiative (PSI) agreement between the Greek government and holders of its bonds, which was effectively counter-guaranteed by the troika, investors have been assured nearly 50 per cent of the value of their holdings. The dismal fact is that, based on secondary market interest rates, Greek sovereign debt is worth less than five per cent of face value. In Ireland, the government has needlessly extended its accountability by guaranteeing repayment on the debt of private banks that had speculatively overinvested in the housing sector. On June 9, the Spanish government sought euro 100 billion of EU funds, about seven per cent of Spain’s GDP, to recapitalise its irresponsible banking sector including savings banks that have been nationalised under an umbrella “bad” bank called Bankia.
I was startled to hear last week from the head of a London-based think tank that the EC and the ECB should withdraw from the troika and leave it to the IMF to enforce the conditionalities under which the last package of financial assistance to Greece was agreed. Surprisingly, the IMF is perceived to be more able to resist Greek demands for a relaxation of the mutually agreed austerity measures. The implication is that European political leadership baulks at explaining the ground realities to the electorate: that the full scope of European entitlements is not affordable in a few euro-zone countries in the near term and in several more in the medium term at current levels of productivity, with shrinking proportions of those employed to overall populations.
Central banks in the euro zone and the US feel that sharing of accountability with their national governments is off-balance. For instance, on June 6, ECB President Mario Draghi remarked: “I don’t think it will be right for monetary policy to fill [in for] other institutions’ lack of action.” Draghi was referring to the ECB’s decision not to lower its repo rate again. In December 2011, the ECB had reduced this interest rate from 1.5 per cent to one per cent. On a similar note, on June 7, US Federal Reserve Bank Chairman Ben Bernanke said: “Monetary policy is not a panacea, it would be much better to have a broad-based policy effort in addressing a whole variety of issues... I’d be much more comfortable if, in fact, Congress would take some of this burden from us and address those issues.”
Turning to India, the Reserve Bank of India (RBI) cannot be held accountable for containing inflation on its own. The RBI raised interest rates repeatedly in the last three years except for a rate cut of 50 basis points to lower the repo rate to eight per cent on April 17, 2012. Of course, hindsight is always 20-20. Anyway, it should now be abundantly clear that high rupee interest rates choked investment and did comparatively little to address inflation. It is logical, therefore, for the RBI to cut interest rates by 50 basis points at its forthcoming mid-quarter review on June 18.
More broadly, the middle classes and higher-income levels in India have repeatedly demonstrated their lack of accountability by subverting due process in the allocation of scarce natural resources and by addiction to unwarranted subsidies. It behoves Indian leadership to explain that this is inconsistent with an environment that is conducive to long-term investment.
Expectedly, many in India are cynical about any talk of addressing wrongdoing or reduction in subsidies. Consequently, it is high time for government departments and all PSUs to post exhaustive accrual-based budget numbers plus balance sheets and income statements, as available, over the past 40 years on their websites. Statute-based regulations that provide for regular and precise information would lay bare the extent of subsidies and exactly who the beneficiaries were — and, thus, engender a greater buy-in of the Indian electorate for reforms.
The author is India’s High Commissioner to the UK.
These views are personal