Wednesday, 25 January 2012

How charities and religion (should) solve the problem of social spending

Note: This post was also published at the Adam Smith Institute blog

A few weeks ago I noticed an inequality index I wasn't aware of before. It is a report called the World Giving Index, published annually by the Charities Aid Foundation. The aim of the report is to show which countries are most likely to give donations to charities and therefore, which nations are most open to a privately offered system of fighting poverty. It is done by a set of surveys that ask citizens worldwide whether they have in the last month donated money to charity, volunteered or helped a stranger in any way. One would expect that the outcome would see countries with strong welfare states topping the list, as they have a much better sense of social capital developed than the 'ruthless' US, where self-interest and greed allegedly drive the incentives of individuals. 

Well, surprisingly, or not surprisingly at all, the US tops the list, followed by other Anglo-Saxon countries. Ireland, Australia, New Zealand, UK, Netherlands and Canada are the top 7 in the list. And even though countries like Denmark (17), Sweden (40), Norway (32), Germany (26) are ranked high enough, countries like France (80), Spain (83), Italy (104), Portugal (127) or Greece (151) apparently don't have any sense of social capital at all. 

Source: World Giving Index, CAF


How does one explain these obvious differences between the Anglo-Saxon countries and the welfare state continental European countries? One paper provides a particularly interesting insight. The paper by Scheve and Stasavage from Yale and NYU, uses religiosity to explain the difference in social welfare spending and redistribution between countries. Using a cross-country analysis they conclude that countries with higher levels of religiosity have lower levels of state welfare spending. They use this conclusion to explain the differences in between-country levels of redistribution.

Source: Scheve K., Stasavage D. (2006) “Religion and Preferences for Social Insurance”, 
Quarterly Journal of Political Science: Vol. 1:No. 3, pp 255-286. 
As they show in Figure 1. (pg 259 of the paper) European welfare states (such as Sweden, Denmark, France, Germany, Norway etc.) experience traditionally high levels of social spending (measured as a % of GDP) while simultaneously religious beliefs (measured by the importance of God in a person’s life) are not very high (averaging between 4 and 5 on a 1 to 10 scale). On the other hand, countries in which religious beliefs play an important role (between 7,5 and 8,5 on the same scale) in an individual’s everyday life (such as the US, Ireland, Canada, Portugal) the level of spending tends to be much lower, 5 to 10 percent on average, thus strengthening their initial hypothesis. Therefore religion could act as a substitute for an inadequate level of social insurance.

The next interesting thing to measure here would be by how much do the churches increase the levels of welfare spending, i.e. how much resources that are diverted towards the provision of these services would increase the total relative level of social spending. Perhaps in this case we could obtain a threshold level of social spending needed in one country. If the argument of religion as a substitute for social spending stands, an optimally desired level of social spending in all of these countries could easily be calculated.

But why are then churches and charities so much more involved in countries with lower levels of welfare spending? Does the importance of God influence people to be more cooperative and thus engage in charitable activities? 

Consider the implication of inter-church competition to explain the reasons behind why churches in some countries offer more services to replace government welfare programs. One should look at the difference between countries with one dominant religion and one dominant church and those with many churches (with same or different religious beliefs) and observe that in countries with multiple churches there exists a certain level of competition between them. In these cases offering services such as child day care may be a way to attract more people to their church. Observing this the government has less incentive to invest into the provision of these services. There may exist a reverse causality in this case – it’s not due to the fact that the government decided to lower social spending that the churches have increased the level of services they offer, but quite the opposite – it is due to the competition between churches to lure more and more people in that signals to the government to lower their social spending levels.

If this is indeed true, this should act as a signal to countries such as the UK or Ireland to lower their welfare spending, since private incentives and charitable organizations are likely to take over from the government and provide services such as child day care, private schools, hospital care, retirement homes, homeless shelters, soup kitchens etc. The Salvation Army does just that - a Protestant church well known for its charity work. Perhaps it isn't quite sure how much the private sector can 'offload' the government in its welfare spending, but it should be given a chance to do so, particularly in the Anglo-Saxon countries where social capital is undoubtedly very high.

5 comments:

  1. that is a very good point, countries relying on charities or churches for various social services should be able to decrease the size of their welfare states.

    But what about countries like Italy, Portugal or Greece - they're all very religious but this doesn't make them especially charitable - maybe because of this they need a bit higher welfare state than the anglo-saxon countries? What is the optimal level of the welfare state anyway?

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    1. The optimal threshold would differ from one country to another based on the preferences of its people and its institutional setting. My argument is that due to a high level of donations and a developed social capital, the Anglo-Saxon countries obviously solve the problem of social spending in a more efficient way than the rest of the world, which is why I would like to see the state intervene a bit less in the area of social spending.

      As for the Scandinavian countries, they probably prefer more welfare spending, as their mentality differs. But they certainly don’t have a mentality of laziness, which is why they are unlikely to misuse such a system and make it more efficient than for example South or East Europe.

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  2. I would say that the charities index and the role of the church don’t help explain social spending at all. Take UK for example; it's a country full of differences and full of particularities – a high welfare state (it may be beyond optimal, but still efficient I would say), a lot of charity donations, but with a very low level of religious influences on people’s lives – more than 50% declare themselves as atheists. As for the charities, sure they’re high, but this can be explained through different historical patterns of why for example people in the UK and the US tend to donate more money. It can also be because of good media campaigns or due to having many rich philanthropists. And let’s not forget that the charity donations could be biased as many of these tend to be international, going to programs in Africa and so on. Therefore I wouldn’t agree that this is all it takes to reduce the levels of social spending, particularly to the most needy. If the UK private initiatives really do substitute for social spending, then there wouldn’t be a need for state social spending, but it’s obviously not enough, so the state needs to step in and ensure equality. It's correcting for one of the market failures.

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  3. I see your point, but perhaps the state is already invested too much into social spending and is crowding out private solutions? We cannot claim that it is interfering because there is no adequate market solution available. Who is to say that the private initiative wouldn't emerge spontaneously? The government didn't create charities, they were founded privately - precisely because there was a demand for this. And all I'm saying is that if we reduce the government's social spending, the demand for the private solution would enable the creation of new charities to take rich people's income and redistribute it towards the neediest.

    After all, isn't help for the homeless coming precisely from private organizations like the aforementioned Salvation Army? Or the Red Cross? Who is more likely to help out a homeless person, the state or the privately supported, volunteer-driven homeless shelters?
    On heath care is the same issue – in the UK, many health services are offered via the private sector to those with malign illnesses, and they are all funded by, as you’ve said, rich philanthropists.
    The problem of poverty, at least in the Anglo-Saxon world is much more likely to be solved via the private sector, especially due to the high level of social capital.

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  4. This is a nice post.
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