The Social Market Economy and Africa

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This article first appeared in my weekly column with the Business Daily on November 6, 2016


The social market economy is an economic system based on a free market operated in conjunction with state provision for those unable to sell their labour, such as people who are elderly, incapacitated or unemployed. The concept was originally promoted and implemented in Germany in 1949 designed to be a third way between laissez-faire economic liberalism and socialist economics. The foundation of the social market economy is a free market with the provision of a social safety net. Often the social element is conflated with socialism but as analysts point out, social market economics rejects the socialist idea that states can replace markets.

The social market economy is a model of economic structure and redistributive nature from which Kenya and Africa can learn. This is largely because economic structures in Kenya and Africa tend to be defined by economic dualism where there is a limited middle class and a growing chasm between rich and poor. The social market economy is a key means through which this chasm can be straddled, providing support to and pulling millions out of dire poverty. However, for an effective social market economy to work, specifically the social protection portion, three elements are required.

Image result for welfare (source: http://watchdog.org/wp-content/blogs.dir/1/files/2014/01/welfare-sign.jpg)

The first is robust revenue generation; in order to deploy effective social protection, the government must generate sufficient revenue to not only meet its direct needs but have enough money to allocate funds to welfare programmes. Social market economies cannot function via debt or credit financing as the welfare component is not directly economically productive but rather economically redistributive. Secondly, sound fiscal management is crucial. A social market economy can only truly work in the context of fiscal management where public finances are managed competently, efficiently and transparently. Finally, wealth redistribution must be done via a transparent and just redistribution model. The redistribution of funds via the welfare elements of the social market economy must be clearly guided by the concept of redistributive justice, fairness and the promotion of basic equity.

However, as it stands Kenya and indeed much of Africa cannot truly deploy social market economic social protection because all three components mentioned above are weak. Kenya does not have truly robust revenue generation partly informed by levels of poverty in the country which make tax extraction from a significant portion of the population difficult if not impossible. In terms of fiscal management, Kenya has well-documented weaknesses in this area with numerous massive public financial mismanagement scandals. Financial mismanagement renders intentions of social protection impotent. Sadly the third element, just and fair redistribution, is still weak in Kenya and much of Africa; most have not developed robust systems and formulae for wealth redistribution.

Image result for fiscal management (source: http://inthedriversseat.org/wp-content/uploads/2014/08/fiscalmgmt.jpg)

However, it must be pointed out that while the concept of the social market economy has its strengths it has weaknesses. The first of which is that it is a type of ‘first aid’ where one part of the system, free markets, create negative externalities such as income inequality that are then sought to be corrected by the other part of the system, social protection. Additionally, social market economies can engender dependency in some and if not, often those who are on public social protection programmes are stigmatised and labelled lazy, unintelligent and ‘living off those who work hard’. Thus another conundrum arises where the intention to promote human dignity through social protection is erased by the lived social stigma associated with being on welfare.

However, in my view the biggest risk the social market economy poses to Africa is its potential to destroy social capital. It can be argued social capital is generated through the culture of dependency that defines Kenya and Africa at the moment. Saving up to lend money to your brother or take your niece through school creates social ties and bonds that arguably improve the quality of life of all involved. Would the implementation of a social market economy make such relations unnecessary and destroy this social capital?

Anzetse Were is a development economist; anzetsew@gmail.com

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