Both people and businesses are dependent upon the state for needed provisions to function and thrive (Gough, 1979; Glasberg and Skidmore, 1997; Farnsworth, 2012). Citizens need social welfare to help them ‘socialise’ the expenses of both innate and exceptional types of risks that can occur throughout the lifespan such as unemployment, sickness, workplace injuries, and old age (Titmuss, 1976). However, equally, corporations benefit greatly from the provision of services from the state known as ‘corporate welfare’ that help firms socialise the risk associated with business operations (Farnsworth, 2012, p.6). Glasberg and Skidmore (1997, p.2) define corporate welfare as:
…those efforts made by the state to directly or indirectly subsidise, support, or rescue corporations or otherwise socialise the cost and risk of investment and production of private profits and capital accumulation of corporations.
Examples of direct corporate welfare include decreased tax rates or tax loopholes, subsidies for specific industries and financial bailouts (Glasberg and Skidmore, 1997; Nader, 2000) while other indirect provisions include public education and health systems, housing and public transportation provisions which assist with productivity and can help subsidize lower wages (Kwon, 2014; Ghosh, 2004; Farnsworth, 2012). Farnsworth (2012, p.3) remarks that it is helpful to contemplate welfare provision as a “continuum of need satisfaction” whereby social and corporate welfare are located at the extreme ends. How host governments balance the needs of business and its citizens will provide insight into the impact of FDI to the citizens of a host economy.
Issues of social and corporate welfare are applicable to both developed and developing countries but developing countries are situated in a different context as international governance can be more prescriptive for developing countries in how they ‘should’ engage in the global economy (Kwon, 2014; Farnsworth, 2010; Thomas, 2011). Furthermore, developing states can have increased economic and managerial constraints to implementing welfare programs (Mkandawire, 2004; Dreze and Sen, 2013). Although social welfare policies are helpful to business, economic growth and the competitiveness of state’s economies (Gough, 2000; Kwon, 2014; Dreze and Sen, 2013); mainstream development agendas continue to prioritise the needs of business and economic growth over social welfare (Marques and Utting, 2010; Farnsworth, 2010; Utting et al, 2012) which is conceptualised as an ‘add on’ to future economic development (Mkandawire, 2004).
This section is divided into two parts. The first part will examine the interdependence between the state and the market. It will explore the welfare continuum, as utilised by Farnsworth (2012) which has both corporate and social welfare aspects to demonstrate the interrelationship between the needs of the state, business and citizens. The second part will briefly explore the history, policy legacies and ideologies of the role of welfare in development thinking. It will concentrate on the rise of neoliberalism and its downward pressure on social welfare provisions. It will also examine the current alterations in the neoliberal development prescription, often termed the post Washington Consensus (Marques and Utting, 2010), sustainable human development (UNDP, 1995; Gore, 2000), or new growth theories (Mkandawire, 2004) that, it will be argued, while giving voice to a need for social policy in development endeavors, continue to prioritise the needs of business and undermine the proactive role of social welfare and development (Mkandawire, 2004; Utting et al, 2012).
3.6.1: The state-market nexus: The role for social policies within economic development
Researchers in various fields have often rejected notions that the state and the market are distinct and opposing forms of economic activity and that the two are interconnected and mutually dependent (Chang, 2014; Evans, 1995; Fligstein, 2001; Yeates, 2001; Block and Evans, 2005). On one side is the dependence of the market or business, on the state and on the other is the dependence of the state on the market and private business (Thomas, 2011; Block and Evans, 2005). This mutual dependence ensures that welfare provisions of the state have components of both corporate and social welfare and that both need to coexist with a degree of cooperation to fulfil the needs of business and its citizens (Farnsworth, 2012).
The dependence of the market and business on the state is contested by free market and neoliberal theorists (Hayek  1976; Friedman, 1989) who argue capitalist economies function more efficiently without government intervention or interference (see section 2.2.2). However, opposing viewpoints highlight the dependency that business and markets have on the legal and political structures provided by states without which markets could not function (Weber  1978; Polanyi,  2001; Yeates, 2001; Chang, 2003, 2014; Block and Somers, 2014). Weber ( 1978) remarked that the type of capitalism dominant in Western Europe depended from and relied upon on the effectiveness of its property and contract laws. In a similar vein, Polanyi ( 2001) argued market economies were reliant upon land, labour and capital which cannot be derived by the market forces alone. Chang (2004) observes that markets are based on institutions that regulate who can participate, the legitimate objects that can be exchanged, the rights and obligations of participants involved, and the rules that regulate the process of exchange. All of these elements are constructed and determined by the state and necessary for business to function (Chang, 2004). Yeates (2001, p. 75) succinctly captures this line of argument:
Indeed, despite neo-liberal fantasies, markets do not spontaneously arise fully grown from nowhere by some form of economic immaculate conception.
Furthermore, it is argued, that the state is mutually dependent upon markets and business (Thomas, 2011; Bell and Hindmoor, 2013; Gough, 1979, 2000; Tilly, 1990). As explained above (section 3.2), the state is dependent on the economy and the revenue from business to fund its operations and this ties its policy-making to the needs of private capital (Thomas, 2011; Bell and Hindmoor, 2013; Culpepper, 2011; Offe and Ronge 1984). Termed economic structuralism, these theories explicate how the systemic needs of capitalism drive and shape social welfare policies (Farnsworth, 2012; Tittenbrun, 2013). This direct connection between the state, economy and social welfare outcomes was explored clearly in Karl Marx and Friedrich Engels’ Communist Manifesto originally published in 1848 (Wetherly, 2005; Farnsworth, 2012). Considered in this light, the state is neither neutral or invisible in serving the needs of private capital and, in doing so, preserves and maintains an economic system that is otherwise unstable (Poulantzas, 1973; Wetherly, 2005; Tittenbrun, 2013). Other theoretical disciplines such as elite pluralists (Dahl and Lindblom, 1976) and neo-Marxists (Block, 1977; Offe and Ronge, 1984) similarly emphasise the need for future investment by private business to ensure continual state revenue as well as legitimacy of authority (Farnsworth, 2012).
Thus, capitalist states need and depend upon business and vice versa and explored in this way welfare policies can be seen as a mechanism to ensure profitable conditions for business are created within an economy (O’Connor, 1973; Gough, 1979, 2000; Tittenbrun, 2013). One line of reasoning termed ‘the logic of industrialism’ (Huber and Stephens, 2005, p.552) argues that the original determinants of welfare state expenditures resulted from the process of industrialisation and urbanisation that undermined traditional modes of social protection such as families and communities and propelled the state to assume more responsibility for the industrial worker (Wilensky, 1975; Pampel and Williamson, 1989; Huber and Stephens, 2005). A related point of view holds that the liberalisation of markets causes workers to become vulnerable to external economic shocks for which the government must provide protective provisions (Rodrik, 2000; Huber and Stephens, 2005). Social welfare states, in turn, have become a contributing factor in the creation of the global economy and have facilitated the shift from a closed economy to an open one as Yeates (2001, p.26) explains:
By mitigating the economic and social impact of restructuring on the welfare of individuals, social policies provide the necessary ‘political space’ to relax closure vis-à-vis foreign markets and make a major contribution to social and political stability.
Thus, social welfare provisions have been influenced by the outcomes and resulting needs that arise from the markets, businesses and liberalised economies upon which the capitalist state is dependent (Farnsworth, 2012; Morel et al, 2012). Furthermore, welfare provisions provided by the state support not only its citizens but also markets, businesses and economies. However, for neo-Marxists such as O’Connor (1973), these imperative expenditures which service business, the state and citizens are often competing and incompatible. According to O’Connor (1973) in order to maintain a profitable system of capitalism, the state has to pursue two forms of expenditure that are often contradictory: social capital expenditures and social expenses. Gough (2000, p.65) explains the notion of social capital:
Expenditures on social capital are required for profitable private accumulation. They in turn consist of two categories: social investment expenditures which increase the productivity of a given amount of labour, and social consumption expenditures, which lower the reproductive costs of labour power. Either way these state activities are indirectly productive of surplus value and hence profits.
Social expenses, on the other hand, include social and military expenses that are utilised to maintain social harmony and provide legitimation to the state and are not productive of surplus value and profit (O’Connor, 1973; Gough, 2000).
Farnsworth (2012) aligns the concepts of social capital and social expenses with corporate and social welfare respectively; however, he envisions the relationship as more of a continuum as opposed to dual opposites described by O’Connor (1973). For Farnsworth (2012, p. 9):
…social and corporate welfare can play complementary roles in economic management, affecting the strength of the economy and the overall quality of life within nations.
Corporate welfare can stimulate investment and production, rescue industrial sectors and reduce the price of goods and services for consumers (Farnsworth, 2012).These measures can help curb firm closures, wage cuts and curtailment of occupational provisions such as pensions all of which serve to assist citizens (Farnsworth, 2012). Equally, and as described above, social welfare policies can assist both, as unemployment benefits soothe economic downturns and public provisions for education, training and transportation costs assist with productivity and reduce employment costs as a portion of the wage basket is subsidised by the state (Morel et al, 2012; Ghosh,2004; Farnsworth, 2012).
In sum, there is clear link between economic and social realms within market based economies whereby welfare provisions assist with the needs of business, the economy, the state, and its citizens (Morel et al, 2012). However, the balance and equitable provision of corporate and social welfare within and between states varies considerably (Farnsworth, 2012). While the needs of both business and citizens necessitate a fair provision for both, there are political and ideological factors that can complicate and skew the proportional distribution of the two (Block and Somers, 2014; Glasberg and Skidmore, 1997; Farnsworth, 2012). Furthermore, there are common perceptions that social welfare provisions, in a development context are a luxury that developing countries cannot afford despite arguments of direct positive linkages between social welfare and economic growth in developing countries (Kwon, 2014; Mkandawire, 2004; Dreze and Sen, 2013; Keynes, 1936, 1980; Myrdal, 1984; Esping-Anderson, 1990). These are the issues explored next.
Farnsworth (2012) observes that both history and ideology impact the variation of provision of corporate and social welfare within and between nation states. As explored in Chapter Two, developing economies are heavily impacted by neoliberal ideology. This section will explore the role for social welfare in development theories, the rise of neoliberal ideology and the resulting detachment of social welfare from economic growth theories. It will also explore the more contemporary development strategies that do, in theory, recognise a role for social policy within development.
Mkandawire (2004) underscores that most of the forerunners of economic development were interested in examining the social dimensions of development, principally because it addressed issues of poverty. Elimination of poverty was seen as a critical step in the attainment of economic growth for many early development theorists (Morel et al, 2012; Meier and Seers, 1984). Karl Gunnar Myrdal (1984) who worked closely with free market advocate and neoliberalism pioneer, Friedrich Hayek, argued in the 1930’s that social expenditure was not solely for the benefit of public consumption but a necessary instrument for development. The treatise that social progress is necessary for the development process is widely associated with John Maynard Keynes or Keynesian macroeconomics (Townsend, 2004; Morel et al, 2012). Keynes (1936) emphasised the need for government intervention in the operation of the markets and underscored the direct positive correlation between social welfare and macroeconomic prosperity. Keynesian economics directly facilitated the development of comprehensive social welfare programs (Townsend, 2004) and, as Farnsworth (2012, p.11) argues, helped to lay the foundations for the “modern corporate-social welfare state” as well.
However, the decade of the 1970’s began to see the decline in Keynesian economic principles (Townsend, 2004; Block and Somers, 2014). The occurrences of twin international economic crisis caused by sharp rises in oil prices and high levels of inflation coupled with low demand gave birth to the ascendance of neoliberal ideology (Chang, 2002, 2014; Chang and Grabel, 2004) until the post 2008 world economic crisis (Farnsworth, 2012). Townsend (2004, p.37) observes the rise of neoliberalism and its widespread reach and permanence:
Yet by the 1970s Keynes’ steadying influence on world social development and the global market had faded, and monetarism and conservative political forces were in the ascendant. For more than three decades disciples of free market have dismissed his ideas and successfully changed, but also shaped, the institutions of trade, communication and government as well as those of the market itself.
Neoliberalism eviscerated social policy from economic strategy and created a thesis that there is a trade-off between social policy and economic development or between social equity and market efficiency (Mkandawire, 2004; Marques and Utting, 2010; Block and Somers, 2014). This trade-off theory is a hallmark legacy of the Washington Consensus which assumes that diverting resources to social policy while softening the blow of the structural adjustments for “weaker sections of society” was “buying short-run palliatives” at the cost of long term development as it would only slow down the “necessary ‘adjustments” (Chang, 2004, p. 246).
The argument that economic growth is a trade-off for social welfare is ensconced in a general critique of the welfare state as being inefficient in several respects: it crowds out a more efficient private sector solution; it distorts labour markets and introduces various rigidities, and negated incentives for people to seek work or create productive livelihoods (Hayek, 1944; Peck, 2010). Thus, neoliberal development prescriptions called for cutbacks or curtailment on social spending, privatisation of basic public services, deregulation of labour markets and the abandonment of social planning (see section 2.2.2) (Peck, 2010;Rodrik, 2011; Gore, 2000; Stiglitz, 2002; 2006; Chang, 2007, 2014). Furthermore, addressing social needs whilst in earlier stages of development, neoliberalism argues, fails to address the pre-existing issue of the resource constraints and, thus, social expenditure is seen as self-defeating and inefficient as it deploys needed resources and reduces the level of national savings and investment (Mkandawire, 2004). In this light, social policy is seen as an end result to development, something to occur after economic growth and, thus, not relevant for developing countries (Mkandawire, 2004).
However the staunch opposition to the incorporation of social welfare for development and economic growth has been relaxed since the days of the Washington Consensus. Several researchers (Morel et al, 2012; Gore, 2000; Chang, 2002; Mkandawire, 2004; Stiglitz, 2006; Farnsworth, 2010; Marques and Utting, 2010) explore the paradigm shift in development prescriptions on behalf of the Bretton Woods institutions that occurred, in particular, since the mid-1990s, which began to express the recognition of poverty alleviation and support for social sectors on development grounds (UNDP, 1995a, 1995b; IMF, 2000; World Bank, 2004). The shift occurred partly in response to the widespread criticism that the structural adjustment programmes brought persistent poverty, skewed and perverse distributional and social effects as well as failed to generate the level of investment and economic growth promised (Marques and Utting, 2010). The shift began with UNICEF, the children’s rights organisation’s critique of the dominant reform approach and called for ‘Adjustment with a Human Face’ in its annual report in 1987 (UNICEF,1987). It continued forward as the introduction of metrics of development other than gross domestic product such as Human Development Reports issued by the United Nations Development Programme commencing in 1990 (UNDP, 1990).
Mkandawire (2004, p.8) explains that the “new growth theories” that arose following the Washington Consensus placed human development high on the strategic agenda through social policies affecting education, health and equity tend to enjoy higher rates of growth (Mkandawire, 2004). However, Mkandawire (2004) goes further to argue that recognition of the importance of social development does not necessarily lead to its implementation into public policy. There are impediments such as ideological and political barriers as social policy is a highly political process that concerns arrangements of power, political bargains, and conflicts. Mkandawire (2004) concludes that social policy continues to be perceived as a residual category of safety nets and not something fully integrated with economic growth strategies.
In a similar vein, Marques and Utting (2010) explain that the response to the massive failures of the neoliberal development approach resulted in paradigm challenges, one of which is termed the post-Washington Consensus. However, the post-Washington Consensus merely added good governance and poverty reduction to the original neoliberal agenda which prioritises the needs of business which, it is argued, will reduce poverty (Marques and Utting, 2010).
In sum, even though development prescriptions have recognised a place for social policy in the years following the Washington Consensus, the needs of business to create economic growth continue to be prioritised (Marques and Utting, 2010) and the role of social welfare continues to be viewed more as a category of residual safety nets rather than a critical ingredient for growth (Mkandawire, 2004).
So while corporate welfare and social welfare are needed to produce stable and growing economies and societies, striking the right balance between the two may prove difficult for developing countries. However, as explored above, social welfare is often profitable to business and endorsing the type of welfare that selectively promotes ‘taken for granted’ business needs with minimal government intervention and regulation may hurt both economic and social development (Farnsworth, 2010, p.84).
Given the arguments made in this chapter thus far, an important question arises. How can the state implement social policies that best mitigate for corporate damages and extract potential benefit given the uphill battle with corporate power, IGO prescriptions, and competition between developing states to attract investment? The next section will explore state investment strategies and the power of the state to get the most from TNC investment while mitigating for risk and harm.