A new social contract for a post-pandemic world

by Warren Krafchik and Paolo de Renzio*— Aug 19, 2020

Just months ago, in a distant pre-COVID-19 time, protesters were taking to the streets across the world, provoked by underlying issues of economic hardship, blatant inequality, and corruption by political elites. The pandemic has exacerbated these tensions, further widening the gap between the haves and have-nots, and amplifying concerns with inequality and public accountability. It’s no surprise, then, that despite the ongoing health emergency many people are back on the streets.

Can this global crisis be a critical juncture towards realizing more equitable and inclusive societies? Can citizens and civic actors mobilize to push governments in that direction? Or will we too quickly revert to a new version of the old austerity normal?

There is reason for hope. Governments have stepped up. The IMF’s Policy Tracker reveals a range of countries in the global north and south that have mobilized support to vulnerable households through cash transfers, unemployment benefits, subsidies on utility prices and support to informal sector workers and street traders. Many are also extending support to businesses through subsidized loans, grants and tax relief.

These responses could be the beginning of something powerful. An opportunity to rethink and strengthen the role of the state, after decades of gutting state capacity in the name of market-led development, in critical areas like health and education. A new demonstration that fiscal austerity is not a technical necessity but a political choice, and that addressing inequality is something that governments can and need to find the resources for. A moment where a new social contract between citizens and government might emerge for the benefit of all, rather than a privileged few.

The first real test will come soon, as governments prepare their post-emergency budgets

Within the next few months, governments will be deciding how to rebuild their economies and start paying their overdue bills. Most countries will be hit by a massive triple whammy. Spending needs will remain high, given the need to maintain social safety nets and provide economic stimulus; rising debt costs and repayments will put further pressure on public accounts; revenues, on the other hand, will be hit by sharply declining growth rates. The battle over scarce resources will be fierce – and the trade-offs will be particularly stark in developing countries.

At the core, this will be a battle over competing visions for our societies—and competing approaches to public finance. At one end, a vision of strengthened public institutions, financed by additional revenues, tackling the root causes of inequality, and building greater resilience in the lives of poor people. At the other end, a return to fiscal austerity and reliance on market-led growth, where the first instinct will be to slash social spending and lower deficits, allowing inequality to continue to rise.

Let’s be honest. In such difficult circumstances, the fragile gains towards more vigorous spending made through COVID responses may well be short lived, as government fiscal policies revert to type.  But what governments do also depends on us, citizens and civic actors. If we want to turn this catastrophe into a long-term win for inclusive development, we’d better begin designing a viable fiscal contract and building the kinds of coalitions and partnerships that can help us achieve it.

Progressive policies and inclusive processes: essential for an effective new social contract

An agenda to advance inclusive development must center on strengthening basic social safety nets and inclusive and accountable policy processes. What does this entail?

Rethinking policies on spending and taxation. Most developing (and many developed) countries do not have the basic social programs that will allow people, especially those living in poverty, to weather this and future crises.

On the spending side, the ultimate goal must be to secure sustainable, productive employment opportunities for all. The immediate priority should be to maintain and expand measures that boost the incomes of the poorest households to guarantee basic living conditions. A further urgent priority should be investing in strong public health systems that can deliver quality services to all—and ensure preparedness for the next emergency.

These ambitious targets will require additional resources. Progressively taxing those that can afford it now, especially the very wealthy, is essential, as is improving the capacity of countries to enforce compliance and tax collections. This opens a range of policy options, including making taxation on income, wealth, and property more progressive; eliminating tax loopholes for multinational corporations; reducing costly tax exemptions; as well as introducing climate change-friendly taxation.

Tax and expenditure combinations will look different in each country, but together they might jointly set out a new progressive fiscal policy standard and build the resilience of the most vulnerable to future calamities.

Doubling down on transparent and accountable policy processes. The immediate public response to the health emergency was introduced quickly and with limited consultation. The pandemic exposed a massive hole we need to close – there are currently no comprehensive standards for managing public finances in an emergency. Critical gaps remain in budget transparency: government budgets frequently lack information on budget execution, making it difficult to ascertain whether public spending reaches targeted beneficiaries and has impact. And the lack of public information on government debt and contingent liabilities prevents an accurate assessment of governments’ fiscal position, while lack of procurement transparency creates huge opportunities for corruption and inefficiency.

Going forward, greater openness and accountability can help drive inclusive development and strengthen social cohesion and democracy, and indeed could be a precondition for them. Open processes ensure that governments take all information and viewpoints into account, leading to policy outcomes that are more equitable and efficient. Open processes also improve macro-economic management and help countries access easier and cheaper international credit, expanding fiscal space.

How do we move forward in the current environment?

Redistribution of public resources will face stiff resistance from powerful actors, which is why innovative and strong reform coalitions will be key to leveraging and sustaining a progressive response.

A growing number of powerful civic movements are taking back civic space and driving advocacy from the bottom-up for inclusion, equity, and accountability. With mass membership and well-developed campaigning skills they are hard to ignore especially in situations where elected officials are vulnerable. Forging alliances between these actors and specialized NGOs working on fiscal policy and open government is a potential game changer and essential to shifting government incentives. An additional push could come from unusual alliances with private sector actors, professional associations, and academic institutions that might support a more progressive agenda under these extraordinary circumstances.

There are also potential new allies within governments – empowered social welfare and health officials that will join the push for more spending, tax officials joining tax justice activists determined to increase collections, and activist auditor-generals motivated to fight with civil society for stronger anti-corruption measures and spending oversight.  And finally, as multilateral and bilateral donors are stepping up aid and loans, we need to encourage them to accompany their support with requirements for increased accountability and reduced inequality.

This is an unprecedented moment for new kinds of coalitions with the breadth and depth to challenge deeply vested interests. Coalitions that can knit together state and non-state actors, across national and international dimensions are going to be the most likely to make a decisive difference and secure real gains.

Out of the devastation of COVID might still grow a global consensus for public accountability and inclusive development that can underpin a new social contract. Do not take this outcome for granted, as it will need an enormous, deliberate and creative effort to take hold. We will have to help the arc of history bend towards justice.  The time to act is now.

*Warren Krafchik is the Executive Director of the International Budget Partnership (IBP). Paolo de Renzio is a Senior Research Fellow at IBP.

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