Initially, the compulsory pension insurance scheme only applied to employees in companies with more than ten employees. From 1992 on, it covered all employees in companies with more than fve employees. Tis process of expansion continued in 1995 with the inclusion of the rural self-employed, farmers, and fshermen (2.1 million people; Yang 2017, 121) and again in 1999 with the inclusion of the urban selfemployed. Between 2003 and 2006, coverage was expanded even further to include employees at workplaces with less than fve full-time workers. Since 1999, the country's pension law has stipulated that the entire population is to be included in old-age provision at a contribution rate that has now risen to nine percent. Two basic types of mandatory membership exist: one for workplace-based insured persons (contribution shared by the employer and the employee) and one for individually insured persons (contribution completely paid by the insured person), most of whom have to self-report their income. It is also possible for individuals to be insured voluntarily. Exemptions from compulsory insurance are possible in cases of unemployment, business closure, temporary leave, or economic difculties, as well as for students. In addition to subsidies for farmers and fshermen, subsidies for low-income earners were introduced in 2012 (Duru-Nuri programme) to increase old-age pension coverage. Te efect was estimated to be a two percent increase in the number of people insured after four years (Yoo, Kang, and Choi 2016). Since the coverage rate among people under thirty-fve years of age is very low and has even fallen, extending the subsidy to additional population groups is currently being discussed. When it comes to the system's performance, the proportion of insured individuals who have actually paid insurance contributions remained at 68.2 percent of the economically active population between eighteen and ffty-nine years of age (Young et al. 2016), which is low compared to the long-term OECD member states but quite high compared to other Asian pension systems (Hujo and Cook 2012).

Te system has not been very successful in terms of efective coverage and poverty prevention in old age. Although the strategy of involving more and more population groups has been maintained despite problems with its implementation, signifcant non-compliance on the part of employers, low-wage earners, and the self-employed has thus far made it impossible to create an efective universalist system (Moon, 2012). Moreover, one-quarter to one-third of the insured population make extensive use of exemption criteria and do so over longer periods of time (Moon 2015). As a result of low beneft pay-outs, 43.8 percent of older people (sixty-fve+) live in poverty (OECD 2019, 187). Individuals in higher-income professions (Yang 2017, 142) also report signifcantly lower incomes than they actually earn in an attempt to lower their contribution rates. However, the most pressing problem is that low-income self-employed individuals as well as those in irregular employment do not pay contributions at all.

South Korea's strengthening of civil society organisations and unions as well as the single-member district electoral system after democratisation have certainly contributed to the expansion of old-age provision despite the relatively poor performance of the system and the shortcomings in its implementation. But among the political, economic, and administrative elites, combining social policy with the creation of a national capital stock has played a central role. Te development of a capital stock was made possible by one single rule in the pension system: a waiting period before pensions were paid out. In fact, the introduction of the pension insurance system in 1988 was by no means accompanied by a PAYG system. No pension payments were made to people who had already reached retirement age. On the contrary, for twenty years there were only payments into the system. Only then did the earliest wave of employees fulfl the required waiting period. Tus, this provision enabled the state to build a capital stock over twenty years without having to pay out a single pension beneft. Te frst full pension payments were only made in 2008.

Even before the introduction of the pension insurance system in 1988, the building of capital stock through a funded pension insurance scheme played a major role in political decision-making processes (Hwang 2006, 57–64), especially among executives (Kim and Choi 2014) who promoted a welfare state concept that was more focused on economic development than on addressing social problems. Within this framework, social policy was instrumentally oriented towards promoting the national economy. Te creation of a pension fund and the long waiting period before pay-outs led to an enormous accumulation of capital, which resulted in a Bismarckian system with capital funding instead of a PAYG system.

Te fund continues to be administered autonomously but in close cooperation with the state (Yang 2017, 140). Today, South Korea's National Pension Service is the third-largest pension fund in the world with capital equivalent to 516 billion euros. In the period from 1988 to 2020, the fund generated an average return on investment of 4.62 percent, with 34.4 percent currently invested in fnancial assets and development projects outside South Korea. Te fund's commitments to social policy are linked to its investment principle of considering the impact on the national economy and fnancial markets, simply because of the size of the fund (National Pension Service 2020). It owns shares in state-owned companies, is highly involved in the fnancial sector, and follows a shareholder activism philosophy (Choi et al. 2018). Its importance to the state is therefore extremely high. Te fund can support the foreign and fnancial strategy of the state, even if social policy goals have gained signifcance over the years.

### **4 The Employees Provident Fund in Malaysia**

Te Employees Provident Fund (EPF) in Malaysia is another example of the close interlinkages between social policy and international economic interdependence. Within the generally fragmented Malaysian pension system (Asher 2012), the EPF is the central institution, and today it is known to be among the oldest provident funds in the world. Te EPF is a mandatory defned contribution scheme for private-sector workers (and some workers in the public sector not covered by a public sector pension scheme). It is based on fxed employers' and employees' contributions that are accumulated in individual accounts (Asher 2012, 105). While provident funds are thus similar to social insurance systems in that they are linked to employment, they do not run on a PAYG basis and there is no risk pooling. When the EPF was created by the colonial government in 1951, the main rationale was to provide welfare to workers in the private sector through a system that was relatively easy to administer and not overly costly. Clearly, the EPF was initially viewed as a temporary system (McKinnon 1996, 47). However, despite international advice to convert the EPF into a system based on social insurance principles (McKinnon 1996, 48), Malaysia never left the path once adopted, and over the years the EPF continuously expanded to cover all formal private-sector workers. In 1977, the fund was opened to self-employed workers (Employees Provident Fund 2019, 18). In 2016, the EPF was the ffteenth largest pension fund in the world (Price et al. 2018, 7).

Te EPF is supervised by the Ministry of Finance and managed by a tripartite governing board (Employees Provident Fund 2019, 18). Each individual member has two accounts, which, respectively, comprise 70 percent (account 1) and 30 percent (account 2) of the contributions. At the age of ffty-fve, members can withdraw the accumulated money, and both accounts are merged. From the age of ffty, members can withdraw the money accumulated in account 2. Earlier withdrawal from account 2 is possible for purposes related to housing, education, health needs, or the Islamic pilgrimage to Mecca (*hajj*). Earlier withdrawal from account 1 is also possible for approved investments (Ramesh 2005, 193–94; Price et al. 2018, 15). Members do not have to retire and withdraw the money from the EPF when they turn ffty-fve and can instead continue to work and pay contributions.

Te monthly contribution rate to the EPF depends on employees' age and income. When the EPF came into being, the total contribution rate was 10 percent, but over the years it gradually increased to become one of the highest contribution rates in the world. In 2018, the general employees' contribution rate was 11 percent, and the employers' contribution rate varied between 12 percent and 13 percent depending on the employees' income. For employees older than sixty, the regular contribution rate is halved (Price et al. 2018, 13). It is possible to pay additional voluntary contributions to account 1. In recent years, the Malaysian government has increased its eforts to open the EPF to all Malaysian citizens, including those who are not in formal employment. As an incentive, people who contribute voluntarily can receive an additional government subsidy to supplement their voluntary contributions (*i-Saraan*) (Employees Provident Fund 2019; Price et al. 2018).

Current data suggest that roughly half of the labour force is covered by the EPF, which qualifes as more or less universal coverage of formal private-sector workers. Other parts of the formal labour force—for example, civil servants or soldiers—are covered by diferent schemes. However, with regard to self-employed workers and workers in the large informal sector, there is still a huge coverage gap (Price et al. 2018, 42). Besides these coverage problems, the EPF's capacity to provide social security and therefore prevent poverty among its members in old age has been limited. Replacement rates are low, which is due to the possibility of early withdrawals, many EPF members' low salaries, and the relatively low withdrawal age. While annuities have been possible since 2001, the vast majority of members still prefer lump sum withdrawals, which are often fully exhausted a few years after entering retirement age. Finally, the incapacity of the fund to prevent poverty in old age is due to its design as an individual saving scheme that lacks redistributive elements (Ramesh 2005; Price et al. 2018, 40–43).

Although the EPF was created as a convenient way to provide social security for workers, Malaysian policy actors came to realise that it also provided great opportunities for the country's economic development (Ramesh 2005, 192). A key factor in the important economic role that the EPF plays is that the savings accumulated by the fund can be used by the government for economic purposes. Over the years, EPF balances have grown considerably, from 9.1 billion Malaysian ringgit in 1980 (around 17 percent of gross domestic product [GDP]) to 731.1 billion Malaysian ringgit in 2016 (around 60 percent of GDP) (Asher 2012, 109; Price et al. 2018, 10, 28). In fact, the EPF has been described as an "essentially bottomless source of long-term investment capital with which to fnance state-led industrial and infrastructural development" (McKinnon 1996, 50), thus contributing to Malaysia's international competitiveness. Infrastructure programmes have been designed to be complementary to private investments, especially in the export-driven manufacturing sector (McKinnon 1996, 56). However, the ways in which the EPF has been used as an "investment bonanza" (McKinnon 1996, 50) for economic purposes have changed over the years. When the EPF was established, all funds had to be in government securities or bank deposits, and until the 1980s, 80–90 percent of the money from the EPF was in Malaysian government securities. Especially since the 1990s, investment options have been diversifed towards a variety of investments, such as privatisation and joint venture projects, equities and debentures of public companies, and the housing market (Ramesh 2005, 203). Tis diversifcation strategy not only fuelled the Malaysian capital market but further enabled the fnancing of large infrastructure projects (Price et al. 2018, 25). In recent years, the EPF has also intensifed its investments in foreign markets, resulting in a share of foreign investments of 30 percent in 2017 (compared to only 1 percent in 2006). Te rationale behind this new strategy was not only that overseas markets promised solid investments but also that the EPF had become too large for the domestic fnancial market (Price et al. 2018, 28; see also Asher and Bali 2015). In 2018, the EPF's rate of return on investment was 6.57 percent (Employees Provident Fund 2019, 16).

Te EPF's crucial role in Malaysia's economic development is explicitly formulated by the EPF:

In its initial years, the EPF was able to park all of its assets locally in Malaysian Government Securities, Loans and Bonds, Equities, Money Market Instruments and Property. In so doing, *it served to help fnance a large number of major government as well as private sector projects that have contributed towards shaping the nation's development*. More recently, it has had to look at suitable investment options outside of the country, as the local capital and money markets have not kept pace with the growth of EPF's assets (Employees Provident Fund 2013, 3; emphasis ours).

It is therefore probably no exaggeration to say that the EPF's importance to Malaysia's economy today is on a par with its importance to social security.

### **5 Conclusion**

In South Korea and Malaysia, contribution-based pension systems albeit organised in diferent ways—have become a cornerstone of economic development. Trough the accumulation of large amounts of money within their pension systems, the governments of South Korea and Malaysia have been able to use this money for economic investments within their generally export-oriented economies, thus demonstrating that social policy and international economic interdependence are in fact mutually supportive. Whereas creating and expanding the pension scheme took place only within the last thirty years in South Korea, the Malaysian EPF, which emerged during the country's colonial period, celebrated its seventieths birthday. Moreover, although the dual function of serving both social and economic purposes was integral to the Korean pension scheme right from the start, in Malaysia the EPF was initially designed to provide welfare to workers. Only later did the country's government realise that the money could also be used to boost the national economy. Both pension schemes are currently experiencing considerable problems, especially when it comes to efective coverage rates and preventing poverty in old age. Nevertheless, the crucial role of the pension schemes in the countries' economic development makes a fundamental reorganisation of those schemes rather unlikely.

**Acknowledgements** Tis chapter is a product of the research conducted in the Collaborative Research Center "Global Dynamics of Social Policy" at the University of Bremen. Te centre is funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—project number 374666841—SFB 1342.

### **References**

Asher, Mukul G. 2012. Malaysia. Pension System Overview and Reform Directions. In *Pension Systems and Old-Age Income Support in East and Southeast Asia. Overview and Reform Directions*, ed. Donghyun Park, 101–123. London, New York: Routledge.

———. 2015. Expanding Coverage of the National Pension in Korea. Te Efectiveness of the Matching Contribution Subsidy. In *Social Policies in an Age of Austerity: A Comparative Analysis of the US and Korea*, ed. John K. Scholz, Hyungpyo Moon, and Sang-Hyop Lee, 137–161. Cheltenham, UK: Edward Elgar Publishing.

National Pension Service. 2020. NPF at a Glance. Retrieved June 09, 2020, from https://fund.nps.or.kr/jsppage/fund/mcs\_e/mcs\_e\_08\_01.jsp.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/ by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

## **30**

## **The "Great Recession" and Pension Policy Change in European Countries**

**Magnus Brosig and Karl Hinrichs**

### **1 Introduction**

In autumn 2020, the coronavirus disease 2019 (COVID-19) pandemic ravages countries around the world. As yet, the efects on countries' economic growth, unemployment or public fnances are incalculable and will possibly outstrip the consequences of the economic downturn eleven years earlier. Back then, the misery evolved as a kind of cascade, starting with the so-called "sub-prime crisis" in the USA already in the summer of 2007. It also spread to Europe and ended the housing market bubble that had built up in Ireland, Spain and further countries. Ultimately, the "subprime crisis" led to a worldwide fnancial market crisis in autumn 2008 in

Bremen Chamber of Labour, Bremen, Germany e-mail<EMAIL_ADDRESS>
K. Hinrichs University of Bremen, Bremen, Germany e-mail<EMAIL_ADDRESS>
M. Brosig (\*)

the wake of the "Lehman bankruptcy". Te near-collapse of fnancial markets was followed by what is now known as the "Great Recession" in 2009 and which, in several European Union (EU) countries, continued during subsequent years. As a consequence, in almost all European countries public budgets were severely out of balance in 2010, invoking (or aggravating) a sovereign debt crisis and a crisis of the common European currency during which a few members of the monetary union came close to insolvency.

Usually, pensions are the largest item of states' welfare spending and therefore a prime policy area destined for contributing to the restoration of balanced budgets and containing sovereign debt. Tis chapter deals with the reforms of pension systems directly related to the repercussions of the "Great Recession". Specifcally, we are interested in pension policy changes that occurred in the European countries worst afected and forced to turn to external assistance. In all EU countries, pension reforms had taken place since about the early 1990s, most often motivated by considerations of fnancial sustainability in view of imminent population aging. Te changes predominantly meant retrenchments, refnancing or recalibration of pension systems, rarely expansions. Hence, reforms were designed so as to avoid blame for incumbent governments. Te policy instruments applied and the politics of pension reforms during the 1990s and the frst decade of the 2000s have been comprehensively analysed (see for example Weaver 1998; Hinrichs 2000, 2011; Myles and Pierson 2001; Whiteford and Whitehouse 2006; Fernández 2010; Kohli and Arza 2011; Immergut and Abou-Chadi 2014).

In the most crisis-ridden EU countries pension reforms gained additional momentum after 2008. Te magnitude of policy changes was *large*, particularly when adding up the sequel of alterations. Tus, they caused a substantial and immediate negative impact on the living conditions of present and future retirees and contributed to the general decline in purchasing power, revealing *interdependencies* between the economic crisis and reforms. Moreover, the political process that brought about these changes deviated from previous reform eforts: Tere was no lengthy process of consensus-seeking and compromise-building. Rather, the post-2008 reforms in crisis-shaken EU countries swiftly passed parliaments, and mostly they were implemented with a *short time lag*. Hence, they can be considered as "rapid policy changes" (Rüb 2012).

In the next section, we will explain the selection of countries and provide a few facts on the economic situation of these countries after 2008. Te third section informs about the type of old-age security systems in the countries selected, while the fourth deals with the actual changes that were concluded during the crisis or shortly thereafter. Finally, we will assess some impacts of the reforms.

### **2 Eight EU Countries in Need of External Assistance**

In this contribution, eight countries are scrutinised—four from Southern Europe (Greece, Italy, Portugal and Spain), three Central and Eastern European (CEE) states (Hungary, Latvia and Romania) and Ireland. All of them have implemented pension reforms after 2008 in order to ensure the fnancial viability of their public schemes in the short- and long-term or to realise notions of intergenerational equity. Most urgently, however, these countries have sought to regain room for fscal manoeuvre and to obtain fnancial aid from inter- and supranational organisations (International Monetary Fund [IMF], EU, European Central Bank [ECB]). Seven of the eight countries had to seek such aid in the wake of the fnancial market crisis (2007/08), which triggered an economic slump and, as one immediate outcome thereof, a sovereign debt crisis. Te causal relevance of these events for the post-2008 reforms can be deduced from concrete recommendations issued by the European Commission or detailed reform requirements attached to bailout agreements ("memoranda of understanding"). Intensifed reform eforts by deeply indebted Italy were mainly driven by the rising spread over German government bonds' interest rate, meaning that hard external pressure shaped domestic policy-making there as well (Jessoula 2012, 24–25; de la Porte and Natali 2014).

For some selected countries from the three regions, Figure 30.1 illustrates the substantial negative consequences for national economies and labour markets inficted by the successive crises.

Obviously, the economic slump was a drastic one, often reversing years of quite impressive growth in countries on the "periphery" of the European Union (with Italy's sluggish growth rates being a notable

**Fig. 30.1** GDP growth rates (bars) and unemployment rates (lines). (Source: European Commission 2019: Statistical Annex of European Economy Autumn 2019, 14, 28)

exception). As a result, ofcial unemployment rates rose and sometimes skyrocketed—and especially so in welfare states not equipped with comprehensive short-time work schemes that proved to be helpful bufers in countries such as Germany (which only experienced a very limited number of lay-ofs during the economic downturn). Te costs of bailout and rescue packages for banks and industries, additional welfare spending, reduced public revenues and the shrunken economic base almost inevitably led to strong increases in national debt relative to gross domestic product (GDP), as illustrated in Fig. 30.2.

States that had previously managed to reduce sizeable debts to low levels (such as Ireland) quickly found themselves in a situation they knew all too well, while nations that had (re-)attained statehood only a few decades earlier (such as Latvia) were now also forced to issue government bonds on a large scale. Finally, countries that had already built-up high rates of debt (such as Italy) saw those levels rise even further. Consequences would difer, depending on the scale of debt and the trust placed in the afected countries by their creditors, but all these EU member states shared the fate of having to spend more on servicing debt and fnding a smaller share of their—already diminished—budgets available for social spending. It thus came as no surprise that they quickly turned to costsaving measures in this policy feld.

**Fig. 30.2** Gross public debt (% of GDP). (Source: European Commission 2019: Statistical Annex of European Economy Autumn 2019, 164)

### **3 Eight Countries: Three Types of Pension Systems**

Te eight European countries under scrutiny belong to diferent welfare state regimes. Ireland represents the (Anglo-Saxon) *liberal* cluster, whereas Greece, Italy, Portugal and Spain belong to the *Southern Model* (Ferrera 1996) that has much in common with the conservative-corporatist type. Hungary, Latvia and Romania and further CEE countries are *post-socialist* welfare states. Given a substantial cross-national variation in terms of the welfare state make-up, it is problematic to speak of an (emerging) "Eastern Model" (Hacker 2009).

Tere is a specifc arrangement of old-age security attached to these diferent welfare state types. Ireland (like the UK) has followed the *Beveridge* model; in other words, state responsibility is limited to universal basic old-age security, while status maintenance is left to (stateregulated) private provision by employers and individuals. However, coverage with supplementary pension schemes is far from comprehensive. In Southern Europe, social insurance schemes of the *Bismarck* type play a pivotal role. Access to and the level of public pensions depends on prior earnings-related contributions. Te accruing benefts are meant to ensure status maintenance. Before the recent reforms, however, the schemes were institutionally fragmented along occupational lines and varied with regard to beneft generosity and easy access to early retirement. Because old-age security constitutes the central component of these welfare states, the structure of expenditure is strongly "age-biased".

Originally, CEE countries had followed the *Bismarck* model, and certain elements remained intact during communist rule. Te social insurance legacy was revitalised after 1990, before Hungary (1998), Latvia (2001) and Romania (2007) adopted a multi-pillar pension system as propagated by the World Bank. Tey established an additional second pillar that was private, but mandatory for the younger part of the workforce. While the total contribution rate remained unchanged, the share allocated to the pay-as-you-go frst-pillar scheme was reduced (and also the accruing pension level). Te remaining part was transferred into the second pillar and invested in private pension funds. Tis systemic change was expected to deliver a higher total beneft level and to promote domestic capital market development.

### **4 The Post-2008 Pension Reforms**

During an economic downturn, the institutional inertia of pension systems—they bridge long time spans and acquired rights of present and future retirees have to be honoured—may turn out to be a positive trait: When market incomes (wages, profts) decline, an unchanged level of pension benefts (and other social transfers) works as an economic stabiliser. However, containing public pension expenditure would contribute to fscal consolidation and avoid higher contributions from employers and employees which are assumed to be detrimental to increasing employment. Tere is only a limited set of levers to improve the public schemes' fnancial sustainability, namely changing the beneft ratio (the "generosity" in the broadest sense) or improving the system dependency ratio (the quotient of benefciaries and actual contributors). Te concrete options for parametric reforms depend on the established pension system characteristics, and the respective policy changes unfold their objective in the short run or over a longer time span.

*Nominal cuts* of pensions in payment show the fastest efect, and they happened in Hungary (thirteenth monthly payment), Ireland (for public sector workers and abolition of the Christmas bonus) or several times in Greece (although in a progressive manner). However, corresponding legislation in Latvia, Portugal and Romania was declared unconstitutional. Suspended or less favourable *indexation rules*, which came about in all eight countries, also ease fnancial troubles of public schemes quite rapidly and, due to the lower base efect, will ripple through subsequent years, thus yielding further savings.

Mainly long-term savings will accrue from changes to the *beneft formulae*, afecting only future claimants. In some countries, more insurance years are now required to obtain a "full pension" (Spain, Romania) or to qualify for a public pension at all (Latvia). In particular, tightening the contribution/beneft link as in NDC1 schemes (Italy and Latvia) or taking into account more insurance years (up to the whole employment career) leads to lower pensions for newly retired people with a perforated or less than complete employment career. Whereas NDC schemes operate with a built-in life expectancy factor (when converting notional "assets"), all Southern European countries have introduced a *sustainability factor* that automatically changes system parameters (normal retirement age, number of insurance years required for a "full pension" or the initial beneft level) upon longevity developments.

Short- and long-term savings may occur from an improved system dependency ratio when older workers are compelled or incentivised to stay on in employment and, correspondingly, claim their pensions for fewer years. To that end, *early retirement* pathways may be closed, entry conditions tightened or decrements imposed when the pension is claimed prematurely. Such changes happened in all eight countries. In addition, a higher *normal retirement* age, depending on the length of the phasing-in period, contributes to the schemes' fnancial sustainability. While CEE countries have set the target age at sixty-fve, in the other countries the normal retirement age will be sixty-seven or even sixty-eight (Ireland).

<sup>1</sup>NDC is the abbreviation for "notional defned contribution" and denotes a public pension scheme that, although still operating on a pay-as-you-go basis, mimics the working of a fully funded plan with benefts calculated in quasi-actuarial manner in relationship to contributions paid.

Tereafter, it is linked to further life expectancy gains in Greece, Italy and Portugal. Tese diferences between the CEE countries and the rest appear comprehensible in view of further life expectancy at age sixty-fve being shorter by about three years in Central and Eastern Europe.

Moreover, all eight countries have made steps towards the *harmonisation* of pension schemes, either by unifying hitherto fragmented schemes in order to lower administrative costs and/or by removing existent privileges for certain occupational groups (such as a lower normal retirement age or higher accrual rates) (see also Natali and Stamati 2014, 323). Predominantly, these equalising reforms focused on public service workers and on women if they were still entitled to a lower pensionable age (however, Hungary and Romania remain exceptions in that respect). In not a single country was the solvency of public pension schemes strengthened by raising the *contribution rate*—at least, not for employers. On the contrary, with a view to stimulating job growth, their rate was (temporarily) lowered in Greece, Ireland, Portugal and Romania, whereas employees have to pay a higher contribution rate in Ireland, Latvia and Portugal.

Te pension policy changes enacted in the wake of the Great Recession described so far were not altogether new. Te various reform levers had been pulled already during the 1990s and the frst decade of the 2000s. However, in many cases the impact was exacerbated or the implementation accelerated (e.g. by shorter phasing-in/out rules). In addition, two developments were new: Ireland, Portugal, Spain, Latvia and Hungary (see below) attempted to gain immediate relief from their debt burden by utilising *public pension reserve funds* as a "piggy bank" (Casey 2014; Hinrichs 2015, 24). Tese attempts to meet strict defcit criteria imply that—since earned entitlements were not declared void—a larger part of future pension payments is moved to pay-as-you-go funding in all four countries even though exactly the opposite was originally intended.

Te second new development concerns the (partial) *reversal of the multi-pillar approach*: Te fnancial market crisis of 2008 had revealed the risks of fully funded components in the retirement income mix. Moreover, in CEE countries it brought to the fore the specifc challenge of transition costs that is known as the "double payment problem": Te younger cohorts (plus the middle-aged workers who voluntarily joined the second pillar in larger numbers than expected) were also required to build up fnancial assets for the private component of their retirement income out of the diverted share of social insurance contributions (see above). However, for several decades the pension entitlements of present-day retirees and older workers have to be honoured. Te lowered contribution revenues of the frst pillar were insufcient to meet these obligations (Holzmann and Guven 2009, 170, 230–1) while a rising revenue gap could be covered out of the state budget only as long as it was not under pressure itself. However, this was exactly the case after the economic slump in 2009 and forced the governments in Latvia and Hungary (and elsewhere) to take action. Te fnancial market crisis had shaken the public's confdence in fully funded pensions, and high administrative costs of the privately managed pension accounts and low returns added to this. It also furthered a rethinking among political actors in CEE countries, leading to a departure from the multi-pillar model. In Hungary (like in Poland or Slovakia—Orenstein 2011; Drahokoupil and Domonkos 2012), the second pillar was completely abolished: Contribution payments into the second pillar were stopped while the contribution revenues of the frst pillar were increased accordingly. Te already accumulated assets of the second-pillar pension funds were "confscated" and transferred into the state budget, thereby immediately reducing the defcit and the amount of public debt. Te entitlements the participants had earned in the second pillar were shifted to the frst pillar, which increased the public pension scheme's long-term obligations (or rather the "implicit debt"). Latvia and Romania did not go that far. Latvia temporarily lowered the share of the total contribution rate fowing into the second pillar from eight to two percent and increased it to six percent between 2013 and 2016. Since then, the partition remains stable. In Romania, the gradual increase in the second pillar's share was merely delayed by one year.

After a period of often drastic reforms aimed at cost-cutting in the wake of the crisis cascade unfolding since 2007, European countries have often not continued on this track, but halted certain eforts or even took measures to reverse them during recent years. With the economic situation generally improving and political pressure from "reform victims" mounting (and sometimes legal issues arising as well), they saw themselves able and compelled to provide for higher and/or more accessible pension benefts especially for vulnerable groups such as low-income earners (Moury and Afonso 2019). For instance, Greece passed legislation essentially revoking additional cuts decided on in 2016, Portugal and Italy signifcantly eased early retirement, Romania decided to substantially increase the replacement rate of the public pension scheme and Spain postponed the implementation of a "sustainability factor".

### **5 Reform Impact and Outlook**

Comparing projections for public pension spending today and, in the decades, to come (e. g., see European Commission 2009, 2018), it becomes apparent that many countries had been facing substantial increases in the share of GDP to be spent on public pensions, but that these projected increases have often been decreased drastically probably owing to far-reaching reforms. In many cases, this has led to "pension burdens" lying at levels below those witnessed today. Expected pension spending may now again be slightly higher than a few years ago due to interim expansionary reforms (as is the case in Italy and Spain, for instance), but the general tendency remains largely unchanged. Obviously, constant or even decreasing spending on pensions in ageing societies means that adequacy is at risk and old-age poverty may rise, given that compensation by means of funded occupational or private schemes is often not available or depends on highly volatile assets such as stocks. As it became obvious during past economic downturns and may very well be the case in the wake of the COVID-19 crisis, funded pension systems are often hit especially hard in times of economic crises, leading to harsh cuts and often not providing for getting the pensioners afected by them "back on track" in later years. While Organisation for Economic Co-operation and Development (OECD) countries were remarkably successful in reducing the share of the elderly living in poverty during the last decades, in many cases pushing this rate below the general poverty rate (OECD 2015), this tendency now seems far from certain. It is not only due to (prospective) replacement rates generally being lower than they were in the 2000s, but also because theoretical replacement rates often have very little to do with actual pension levels achieved by individuals. With traditional careers continually spent with just one or very few employers becoming less common and some "modern", non-standard types of employment leading to no proper pension credits at all, there is a growing risk of pensioners receiving very low benefts. Tat risk is aggravated by the fact that many welfare states have tightened the links between wages/ contributions and resulting pensions. In consequence, gaps caused by unemployment, low wages and the like now tend to be evened out less systematically than previously. Consequently, countries such as France, Italy or Portugal, despite still ofering rather generous replacement rates, witness about a third of their pensioners receiving a mere minimum pension.

To be sure, inadequate public pensions and frail or non-existent funded schemes may in some cases be counterbalanced by home ownership (which is particularly common in Eastern and Southern Europe) or a growing rate of inheritance beneftting younger cohorts, although these assets do not provide for steady incomes. On the other hand, younger and future pensioners tend to be victims of a tendency towards insufcient beneft indexation which governments have found to be a very efcient tool for cost-cutting that is conveniently unknown to most people afected. While their initial pension benefts received at the time of retirement may very well sufce, this would then change over time through a process of "creeping impoverishment". What is more, medical progress, ongoing population ageing and societal change make medical and care services more expensive and necessary, in turn leading to higher contribution rates or co-payments depleting pension income or even savings.

Overall, pension reforms enacted in the years since 2008 have often made systems more fnancially sustainable, but in many cases also endangered their adequacy and social sustainability, in other words, legitimacy and acceptance. Recent reforms in a range of countries have led to certain improvements, but mostly focused on pensioners immediately or shortly to be afected and not so much on ensuring old-age benefts that will reliably prevent poverty and perpetuate living standards upon and throughout retirement for younger cohorts as well. Whether and how these goals can be reached against the backdrop of the ongoing COVID-19 pandemic cutting deeply into labour markets (and thus pension credit accrual) as well as state and social insurance budgets and devaluating assets essential for funded schemes, remains to be seen. In any case, governments should keep in mind that pension payments not only provide for individual income but also work as "automatic stabilisers" compensating for shrinking demand in times of economic crisis. A lesson learned from the last recession is that immediate and far-reaching pension cuts do harm to both pensioners and economic recovery and should be refrained from.

### **References**

———. 2019. *Statistical Annex of European Economy*, Autumn 2019. Luxembourg: Publications Ofce of the European Union.

Fernández, Juan J. 2010. *Economic Crises, High Public Pension Spending and Blame-Avoidance Strategies: Pension Policy Retrenchments in 14 Social-Insurance Countries, 1981–2005*. Max-Planck-Institut für Gesellschaftsforschung, MPIfG Discussion Paper 10/9. Köln: MPIfG.

———. 2011. Pension Reforms in Europe: Directions and Consequences. In *Converging Europe. Transformation of Social Policy in the Enlarged European Union and in Turkey*, ed. Ipek Eren Vural, 93–116. Aldershot: Ashgate.

———. 2015. *In the Wake of the Crisis: Pension Reforms in Eight European Countries*. Universität Bremen, Zentrum für Sozialpolitik, ZeS-Working Paper No. 01/2015. Bremen.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/ by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

## **31**

## **Trade and Immigration: How International Factors Shaped Social Policy in Argentina**

**Martín Cortina Escudero**

Social policy in Argentina is usually considered to be exclusively the result of political activity. Mesa-Lago (1978) highlights the role of pressure groups as the main drivers of stratifed social security schemes, whereas other scholars describe social policy development in this country as a strategy used by ruling elites to co-opt sectors of the working class (Huber and Stephens 2012; Segura-Ubiergo 2007). Even though these factors are crucial social policy drivers, research so far has paid little attention to international interdependencies, in particular migration. Between the end of the nineteenth century and the frst decades of the twentieth century, demographic pressure combined with an agricultural crisis in Europe prompted mass migration from this continent to the Americas and the Antipodes (Gerchunof and Llach 2018).

In this chapter, trade and migration are considered to be two key factors that shaped social policy development in Argentina. Trade is regarded

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here as an important factor because it had a direct efect on the economy and this, in turn, had an infuence on social policy. Specifcally, I argue that trade shaped both the agro-export model in the late nineteenth century and the import-substitution industrialised economy in the 1930s and that these economic models led to diferent social policy systems. In addition, migration is considered to be a paramount factor for social policy development because, on the one hand, immigrants and domestic migrants had a signifcant infuence on the political arena, and on the other hand, education and health policies were aimed at shaping a society which had been altered by immigration.

Te history of social policy in this country can be divided into two periods. During the frst period, starting in 1880, Argentina shaped its economy in relation to the international division of labour of the latenineteenth century. In other words, the government established an export-led model specialised in agricultural products which formed its labour market with the help of immigration. As a result of mass immigration, no strong working-class party was formed and the political arena remained dominated by the elite and by middle-class parties. Terefore, social policy was not encompassing but characterised by exclusive benefts for occupational groups which were important for the vitality of the state and the agro-export economy. In addition, health and education policies were designed to give coherence to a society afected by mass migration.

Te second period started in 1929 with the interruption of trade fows during the Great Depression. As a result, the country gradually abandoned the agro-export model and followed an import-substitution industrialisation path. At the same time, international immigration, which had already come to a halt, was replaced by internal migration. Te rural crisis and industrialisation after the Great Depression fostered a rural-to-urban migration which resulted in an urban working class. Tis emergence of a modern working class modifed the political arena and paved the way for the formation of a strong working-class party. When this party won the elections, the new government was able to lay the foundations for a modern social security system.

**401**

### **1 The Emergence of a Modern Society During the Export-Led Era**

Te country had gained its independence from Spain in 1816, but for more than sixty years, a period of internal confict between regions was an obstacle to the construction of a solid nation state. It was in 1880 when, under the presidency of Julio Roca, the modern nation state was established by a sector of the landowning elite which blended political conservatism and economic liberalism. Under these circumstances, the government aimed to integrate the country into the global market characterised by the international division of labour. Similar to Canada and Australia, Argentina intensifed its trade with the United Kingdom (UK) by adopting a complementary trade profle: the UK exported manufactured goods and imported agricultural products, while Argentina, specialised in agrarian production, satisfed its need for manufactured goods by turning to the British market (Gerchunof and Llach 2018).

During the civil wars between regions, the absence of a nation state was not a strong hindrance for the export of leather and wool, commodities provided by the regions which had access to the transatlantic trade thanks to their geographical position (Oszlak 1982). However, the new government launched a project to promote cereal production alongside sheep and cattle breeding. For accomplishing this goal, not only inner peace safeguarded by a strong nation state was necessary but also the active role of the state in the incorporation of the three basic factors of production (labour, capital and land) into the country's economy (Gerchunof and Llach 2018).

It was the nascent nation state which actively promoted the massive immigration of European workers through travel agencies and foreign policies, while it also encouraged British investments for developing the key sectors of an export-led economy based on beef, wool and cereals: railways, refrigerated warehouses, infrastructure and communication. Furthermore, the expansion of the national border by conquering new lands from indigenous people was a task driven by the military. Tis military campaign had a twofold objective: expanding the agricultural activities and fnishing, in a violent manner, with the confictual cohabitation between indigenous tribes and Argentinean settlers (Gerchunof and Llach 2018).

Tis state-building process helped to insert the country into the global market and appears to be related to the establishment of the frst pension funds. Esping-Andersen (1990) uses the concept of *etatism* to describe the strategy of the state to ensure the loyalty of civil servants by bestowing exclusive social benefts on them. In Argentina, early pension funds were exclusively targeted to state-related occupations (Mesa-Lago 1978), suggesting that these benefts were granted in order to strengthen loyalties towards a nation state against the backdrop of a recently fnished longlasting civil war between regional powers. Terefore, the frst pension funds were granted to the military (1865, 1895), judicial magistrates (1877, 1903), teachers working for national public schools (1886, 1901), civil servants (1887, 1898, 1904, 1905), the national security forces (1887, 1896, 1898, 1903, 1908) and plenipotentiary ministers (1905).

Moreover, the state-building process was also related to the frst health and education policies. In 1884, public elementary school was established as mandatory, secular and free. Te enactment of this law was crucial not only for the instruction of the labour force but also for the ideological legitimisation of the nation state by the "(institution) of beliefs, values and norms of conduct" (Oszlak 1982, 541). Te creation of a national consciousness and identity through a nationwide schooling system was paramount for a country which was receiving large numbers of immigrants.1 In addition, the majority of health policies were related to the sanitation and urbanisation of the main cities, which were experiencing a steep increase in their population due to immigration. A sanitary service for arriving ships was organised in 1887, the Department of National Hygiene was established in 1891 and sewer systems and water supply networks were constructed in 1903. Two important hospitals were established in Buenos Aires (1883, 1908) and the campaign against malaria (1907) also illustrates the incipient endeavour of a nation state trying to safeguard public health in order to maintain social and economic order.

Te expansion of agricultural production fostered the development of limited local industry in the cities. Tis industry focused on the simple processing of agrarian products (e.g. four, beer, sugar, refrigerated beef, wine, leather and wool fabrics), construction and related activities (e.g.

<sup>1</sup>Te situation was similar in Uruguay where education policies also aimed to integrate immigrants into society (Hentschke 2016). I would like to thank the editor for this observation.

wood and glass), railway workshops and the printing and publishing business. By contrast, other important industries were not extensively developed, and thus, in 1914, most of the consumption of textiles (77 percent) and metallurgic products (67 percent) was satisfed with imports (Gerchunof and Llach 2018).

Urban activities provided employment to immigrants when rural activity plummeted because of the seasonal nature of harvesting. Most of the workers came from Europe, and their socialist and anarchist ideas travelled with them (Gerchunof and Llach 2018). Tese immigrants were also decisive for the creation of the frst trade unions (Mesa-Lago 1978). Due to the anarchist ideas and the recurrent fraudulent elections which limited the parliamentary activity of the Socialist Party, workers manifested their dissatisfaction with labour conditions through general strikes. Te soaring social unrest alarmed the government which reacted ambiguously: on the one hand, in 1902, a law was enacted enabling the deportation of immigrants "involved in disturbance, strikes and union activities" (161). On the other hand, in 1904, some members of the ruling elite presented a draft bill for a National Labour Law, but it did not pass Congress due to business and labour opposition (Mesa-Lago 1978). Nevertheless, some laws aimed at regulating the burgeoning labour market were enacted: the Sunday Rest Act (1905, 1913), the establishment of a National Department of Labour (1912), the regulation of children's and women's work (1907) and protection against occupational hazards and diseases (1915).

An opportunity for the Socialist Party emerged in 1912, when the ruling elite implemented an electoral reform which eradicated fraudulent democracy. However, the Socialist Party was not able to build a strong electoral base among workers and remained a minority party. In 1916, the *Unión Cívica Radical* (UCR), the middle-class party which had been fghting for democratisation, came into power through national elections. Te reasons for the lack of a strong Social Democratic labour movement in Argentina lay in the fact that voting rights were reserved for male native citizens. Terefore, immigrants, who were predominantly male blue-collar workers,2 were excluded from the franchise whereas

<sup>2</sup>Many immigrants were seasonal workers who received the name of *golondrinas* (swallows) because they only migrated to Argentina for the harvesting season (Gerchunof and Llach 2018). Assuming that, at that time, women only migrated with their families to settle down in a new country, this might explain why female immigration was low.

middle-class male voters were overrepresented in the electorate. Between 1890 and 1920, the percentage of immigrants among over-twenty-yearold male workers in the most-populated regions of the countries was 80 percent in Buenos Aires and 50–60 percent in the Littoral region (Torre and Pastoriza 2002, 263). Nevertheless, during the 1920s, when the immigrant workers' local-born children entered the labour market as national citizens, most of them voted for the UCR (Torre 2012).

Te absence of a strong Social Democratic labour movement may explain the lack of comprehensive social benefts for the working class. However, (male) sufrage set of an electoral competition between the UCR, Conservatives and the Socialist Party that enabled the establishment of some occupational-related pension funds and the granting of new labour rights. In this situation, only pressure groups that occupied a vital position in the export-led economy (i.e. transport, infrastructure, communication, fnancial services) could proft from electoral competition. Terefore, pension funds were established for the railway workers (1915, 1919), public utilities (i.e. trams, telephones, telegraph, gas, electricity and radiotelegraphy) employees (1921) and bank employees (1923, 1929). In sum, pension funds were granted to occupational groups related either to the export-led economy or the nation state. Terefore, pension funds were exclusively granted to those who occupied a key role in a society characterised by the interdependence between the construction of the nation state, the formation of an agro-export economy and global trade based on the international division of labour.

### **2 Industrialisation and the Modern Social Security System**

Although industrialisation in Argentina was a gradual process, several international events helped to boost this process. During the First World War, foreign industrial imports stopped fowing into Argentina creating an opportunity for local industry to thrive until the end of the war (Gerchunof and Llach 2018). Moreover, the Great Depression during the 1930s and the following Second World War were two protracted international events which reinforced the industrialisation process.

Nevertheless, these international factors were intertwined with domestic policies. For example, after the First World War ended, the president of Argentina Marcelo T. Alvear raised customs duties in 1923. Tis measure set of a wave of investments from the United States (US) which established the industrial capabilities and laid the foundations for the upcoming industrialisation of the 1930s (Villanueva 1972).

Even though capital exports and other industrial commodities fowed from the US to Argentina, the opposite trade fow was hindered by US protectionist laws. Te exports from Argentina, mainly beef and cereals, were a threat to US farmers who could not compete with them. Terefore, Argentina found itself in a so-called "commercial triangle" (Fodor et al. 1973). In this trade scheme, Argentina exported agricultural products to the UK but received industrial commodities and investments from the US. Bilateral trade was not possible, neither with the US as a consumer nor with the UK as a provider. As mentioned above, the US had high custom duties which rendered the Argentinean exports uncompetitive. In contrast, the UK ofered a good market for beef and cereals, but this country was not able to provide sufcient investments and industrial products to satisfy the new demands of the burgeoning domestic market.

Despite the fact that the First World War and US investments during the 1920s were important drivers of industrialisation, the shift in the Argentine economy was decided elsewhere: the change from an exportled economy focused on agricultural products to a domestic-led economy based on industrial commodity production was fnally settled after the Wall Street Crash of 1929. In the aftermath of the Great Crisis of 1929, trade protectionist measures were implemented in Europe and the US, which led to a fall in the country's exports. Consequently, the Argentine economy fell into a recession, only worsening the fscal defcit to which the government fnally reacted by rising import duties in 1931 (Gerchunof and Llach 2018).

Te scarcity of foreign currency in the country was caused by the steady decline of exports and jeopardised the payment of foreign debt. Hence, in 1931, the government established an exchange control regime which enabled a state-related committee to centralise foreign currencies and distribute them according to the government's preference (Gerchunof and Llach 2018). Although the government used the exchange control regime to ensure sufcient foreign currencies for the payment of external debt, this regime and the increased import duties were benefcial for local industry as they limited the competition from imports of industrial fnal goods.

Furthermore, the exchange control regime was also an important tool for the reactivation of trade with the UK. In 1932, the Import Duty Act in the UK introduced a general tarif for some agricultural products which were exported by Argentina. Some months later, the British Empire Economic Conference that was held in Ottawa established the so-called Imperial Preference. Tis resolution meant that the UK was going to prioritise trade relations with the colonies and dominions of the British Empire. As a consequence, the UK imposed import quotas for frozen beef (65 percent of the total exported in 1931–1932) and chilled beef (100 percent of the total exported in 1931–1932)3 from Argentina, which alarmed the farmers and landowners of this country (Fodor et al. 1973). Te situation even worsened in 1932, when the import quota for chilled beef sufered a reduction of 10 percent as a result of lobbying by British farmers.

Under these circumstances, a bilateral commercial agreement between Argentina and the UK was signed in 1933. Tis agreement, known as the Roca–Runciman Treaty, was more benefcial to UK interests as it provided tangible benefts for British business sectors such as fnancial groups, railways enterprises, coal producers and textile industries in exchange for the guarantee of consultation with Argentina in the case that new reductions in the import quota on chilled beef were needed (Fodor et al. 1973).

As the Roca–Runciman Treaty aimed to reinforce trade relations between these two countries, this agreement included reductions on the import duties for some British products, in particular coal and textiles, and the prioritising of British imports in the allocation of foreign currency dictated by the exchange control regime. After this treaty, the government decided to devalue the national currency, establish import licences and divide the foreign currency market in two, thus setting up an "ofcial" and a "free" market. Te ofcial market was characterised by a

<sup>3</sup> It should be highlighted that exports during 1931–1932 were signifcantly lower than the exports before the Great Depression (Fodor et al. 1973).

lower exchange rate and only importers with a previous import licence were granted access. Hence, British importers, who had these import licences warranted by the Treaty, had a clear advantage as their products became cheaper in relation to imports from the US which did not have any access to the ofcial market (Gerchunof and Llach 2018).

Tis disadvantage for the US had a signifcant consequence on the industrialisation process. All the protectionist measures taken in Argentina, enacted for fscal or commercial reasons, had the indirect consequence of attracting US investments into local industrial production. But it was in 1934, after the Roca–Runciman Treaty, when a new wave of direct investments started to stream into the country (Villanueva 1972). Terefore, as non-British imports of fnal goods were rendered uncompetitive by this treaty, new companies, fnanced mostly by direct investments from the US, began producing locally for the domestic market. In this way, fscal measures and trade agreements unintentionally fostered an import-substitution industrialisation.

Tis gradual industrialisation process combined with the agrarian crisis, that was caused by the fall in exports after 1929, set of an internal rural-to-urban migration. According to Torre and Pastoriza (2002), the annual number of rural migrants arriving in Buenos Aires and its urban periphery rose from 8,000 in 1936 to 70,000 in 1937–1943 and 117,000 in the years from 1944 to 1947; as a result, the population in this region grew from 3,457,000 in 1936 to 4,618,000 in 1947 (Torre and Pastoriza 2002, 262). And because these migrants were attracted into the city by jobs in the industry and services sectors (Torre and Pastoriza 2002), we can consider that this rural-to-urban migration led to the emergence of an urban working class.

Industrialisation and migration fow in the 1930s developed against the backdrop of the return of the conservative forces to power. In 1930, the government of Yrigoyen (UCR) was overthrown and a military regime, pursuing a corporatist model, closed the parliament. However, in 1932, a new coup led by the liberal sector of the military put an end to the corporatist regime and reopened the parliament. Although the new government, which was led by the Conservative Party, practised electoral fraud, the limited multi-party system allowed for political competition between parties. Tis competition rendered the political arena receptive to the interests of pressure groups: pension funds were established for employees of the merchant navy in 1939 and, also in 1939, for journalists.

During the frst half of the 1930s, the UCR decided to withdraw from electoral competition and parliamentary activity as a strategy to oppose fraudulent democracy. As a consequence, the number of seats held in parliament by the Socialist Party rose steeply from one in 1930 to fortythree in 1932–1934; but declined to twenty-fve in 1936–1938 and fve in 1939–1941 as the UCR returned to the electoral arena (Matsushita 2014, 150). During this time, socialist legislators presented bills which became laws: Saturday half-holiday (1932), the right to breastfeed at work (1934), a maternity-leave fund for female employees (1934), the provision of appropriate seating for workers (1935), and the prohibition of dismissal due to marriage (1938) were approved by Congress. Although the role of socialist legislators was important for the enactment of these laws, the climate of opinion on labour reforms had changed after the Great Depression. Te business sector, which had an alliance with the conservatives, became more receptive to some labour reforms as the economy became more industrialised (see the chapter by Gerards-Iglesias in this volume) and, as shown above, industrialisation was an unintended consequence of a shift in trade patterns.

Nevertheless, the emergence of a strong urban working class and political party competition did not ofer sufcient conditions for the expansion of a comprehensive social security system. It was necessary for the working class to have access to power and it did so through a political coalition with a sector of the military. Although this government was led by Juan D. Perón, a nationalist military ofcial, the trade unions had a strong position within the coalition (Torre 1989). Terefore, it was between the years of 1944–1955 when "the foundations of modern social security were laid, expanding the pension system to cover most of the labour force" (Mesa-Lago 1978, 168). In the realm of healthcare, the creation of a tax-fnanced national health system that was open to the whole population was combined with trade unions' mutual insurance funds and healthcare protection programmes for some occupational groups (Mesa-Lago 1978). Regarding educational policies, the most important laws were the creation of a technical university (1948) and the removal of tuition fees from public universities (1949).

### **3 Conclusion**

Te interdependencies of immigration and trade with social policy development in Argentina were highlighted here. Overall, international trade shaped the economy and this, together with immigration fows, had, in turn, structured society. Consequently, societal sectors and their interests were also refected in the political arena shaping social policy development.

In a frst moment of historic development (1880–1929), entry into the global market led to the consolidation of an export-led economy specialised on agricultural products. Tis process was intertwined with a nation state-building process and the immigration of European workers. Terefore, early pension funds were exclusively directed to state-related occupations and occupations which were powerful due to their role in the agro-export economy. Furthermore, massive immigration shaped the political arena as it hindered the formation of a strong electoral workingclass movement. Tis may explain why a comprehensive social security system was not established at this time and why labour laws were an attempt to regulate the world of work from above. Finally, health and education policies aimed to strengthen the nascent nation state, maintain social order and socialise a population with a strong immigrant component.

Nevertheless, during the 1930s the interruption of international trade, caused by the Great Depression, set of a strong industrialisation process which in turn fostered an internal rural-to-urban migration. In the short term, socialist legislators passed labour reforms as the climate of opinion, concerned with the new issues brought by industrialisation, became more favourable to improvements in working conditions. In the long term, a strong urban working class emerged and in a coalition with a sector of the military gained access to power. It was at that point that the foundations of a comprehensive welfare state were laid.

From this account of the matter, we might draw two conclusions. First, immigration appears to have delayed and fragmented social policy as it hindered the formation of a strong working-class party. Moreover, global trade under the international division of labour scheme also hampered the development of a comprehensive social security system, whereas bilateral trade and protectionist measures fostered industrialisation which, in turn, strengthened the working class and led to the establishment of the modern welfare state. Nevertheless, it remains unknown whether immigration and trade relations had a similar efect in other countries. Further research exploring this question would be useful. For the time being, this chapter provides a case study where these factors were identifed as important drivers of social policy development.

**Acknowledgements** Tis chapter is a product of the research conducted in the Collaborative Research Center "Global Dynamics of Social Policy" at the University of Bremen. Te centre is funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—project number 374666841—SFB 1342.

## **References**

Torre, Juan Carlos. 1989. Interpretando (una vez más) los Orígenes del Peronismo. *Desarrollo Económico* 28 (112): 525–548.

———. 2012. ¿Por qué no Existió un Fuerte Movimiento Obrero Socialista en Argentina? In *Ensayos Sobre Movimiento Obrero y Peronismo*, ed. Juan Carlos Torre, 55–72. Buenos Aires: Siglo Veintiuno Editores.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/ licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

## **Part IV**

**Ideas, Expert Networks and Migration**

## **32**

## **Introduction: Ideas, Expert Networks and Migration**

**Delia González de Reufels and Frank Nullmeier**

Social policy in general is devised and regulated by the nation state. Tis explains why, in turn, the development of social policy concepts and ideas for a long time has been studied within national contexts and attributed to the national sphere and specifc individual and collective actors such as politicians and labour unions. While this may be very much in line with the ways in which social policy is explained by decision-makers to the population afected by the measures, it is not accurate. In fact, social policy development and the difusion of discrete instruments are driven by the exchange of ideas that occurs across national borders (Dobbin et al. 2007; Gilardi and Wasserfallen 2019; Kuhlmann et al. 2020). Recent research has emphasised that a national perspective is insufcient when it comes to social policy development. More often than not, the ideas that shape social policy as well as discrete policy measures are transnational in origin: they are conceived beyond national borders

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and are the results of complex processes that include but are not limited to dialogue, emulation and learning (Rodgers 1998; Kettunen and Petersen 2011; Gingrich and Köngeter 2017; Kuhnle et al. 2019). As a matter of course, nation states in their search for solutions to social problems and social imbalances tend to look to other national contexts that have dealt with comparable issues and devised efective policy instruments in response. Tis is especially the case during crises that put particular strains on nation states and created pressure to act; the Great Depression is an outstanding example here (Patel 2016). Tis search may also be a search for possible improvements to existing measures and be focused on new adjustments, concepts and nomenclatures (Béland and Petersen 2015).

Furthermore, research that emphasises the transnational in social policy enables us to put the national dimension of the policies into perspective. Tis not only shows *that* but also *how* nations eager to create internal social balance and to provide security against the risks of life in an industrialised society have embarked on processes of exchange of ideas and transfer of programmes across borders in the past and the present. State sponsored trips by ofcials to study foreign social policy and the import of relevant literature are just two examples that were used by diferent nations at diferent points in history. Over time, transnational expert networks and globally communicating epistemic communities (Haas 1992) emerge as a result. Terefore, while the dynamics and fows of these exchanges lead us to re-examine the development of the nation state in the nineteenth and twentieth century, they also are signifcant for our grasp on social policy formation that is yet to materialise. For example, the needs of aging societies with precarious demographic developments are prompting new social policy legislation in most nations of the Western hemisphere, and we can expect nations in other parts of the world to follow suit as soon as their populations enter similar stages (Liu and Sun 2016). In this way, the analysis of the development of social policy ideas adds to our knowledge of what has been called the "prehistory of the present" of the welfare state (Conrad 2013, 555) and informs our understanding of the directions it still may take.

Te welfare state may be called a European invention (Kaufmann 2012), and in fact, Europe, and in particular Western Europe, has been at the centre of many transnational social policy exchanges for a long time. Shared intellectual infuences and historically established connections helped to establish the welfare state and its instruments in other parts of the world. Tus, the United States and pioneering Latin American countries progressively introduced social policy in the early twentieth century that in part has been seen as a response to domestic developments and pressures (Mesa-Lago 1979). In Asia, Japan was the pioneer who introduced European inspired social security whereas nations such as South Korea and China introduced extensive social policy only more recently in times of profound fnancial and economic crisis (Kuhnle et al. 2019). And African nations had, at least in part, inherited European social policy ideas from the colonial powers which had governed them and then transformed these ideas, whenever feasible, according to national needs.

It is important to note, however, that the search for social policy concepts in general is guided by previously established connections; these connections are the result of other developments over time such as colonialism. Also, in the late nineteenth century the expansion of transatlantic trade and the movement of people fostered the creation of the North Atlantic as a distinct physical and intellectual space of interaction. While it supported economic activities, and set goods and people in motion, it also created possibilities for the exchange of ideas. Tus, in the United States, "the reconstruction of American social politics was of a part with movements of politics and ideas throughout the North Atlantic world that trade and capitalism had tied together" (Rodgers 1998, 3). Within this new space "a new understanding of common histories and vulnerabilities" emerged (Rodgers 1998, 33), attracting travellers as well as students who focked to European institutions of higher education, and universities in particular. Members of highly transnationally professional groups such as doctors, architects and military ofcers as well as groups of actors with specifc interests in social policy such as educators would travel back and forth, taking social policy ideas and literature with them. Moreover, the nation states were interested in showing of their latest social policy achievements which they presented at world fairs, international congresses and other venues that functioned as spaces for exchange. Tus, social policy left national contexts and became the object of transnational representations.

Neither the space itself nor the connections have been static but changing over time. Te connections included other parts of the Atlantic and the Americas but unravelled after World War II. Nevertheless, the connections remind us of the relevance of such new spaces of interaction for any study of social policy development. Fittingly, the twentieth century saw the establishment of new connections via trade that expanded and transformed over time to include nations hitherto only loosely connected such as Germany and China (Leisering et al. 2017; Liu 2015).

New spaces attract and form new actors who, in turn, exert their infuence on the development of these spaces. Students were especially important because they moved abroad and returned with new books, ideas and knowledge on foreign societies and the policies that were applied there. During the nineteenth and the frst part of the twentieth century, the experts, as a matter of fact all male, came from a wide array of disciplines although physicians and lawyers were among the frst to claim and to be granted this special position. At a time when the term had not yet been born, experts already were a vital part of the history of the welfare state as highly infuential actors who shaped the new national institutions and worked on the political measures (Rinke and González de Reufels 2014). According to their own view, they served their nation to the best of their abilities and knowledge, while they also were striving to increase this knowledge and introduce ideas that had been developed elsewhere. To this extent, the expert can also be considered a key fgure in the transnational acquisition and difusion of relevant knowledge in the feld of social policy.

Because the movement of ideas is not limited to but a vital part of the movement of people, migration can be considered a major factor in shaping the consecutive emergence of discrete social policy measures in diferent parts of the world. Migration is part of the process of the transfer of social policy ideas, and it occurred outside the arena of expert knowledge. It is rather the experience of migrant workers that infuences the emergence of social security systems in other parts of the world and is a central driver for economic development (Bastia and Skeldon 2020). Te labour movement has globalised through migration and carried the interests of workers as well as the ideas of trade union and party organisation to the Global South. In addition, migration is an important part of the social question (Hoerder 2002, 344–365).

Migration triggered social policies that dealt with the consequences of the arrival of new people during the age of European mass migration as well as in the more recent past: whenever people cross borders to make their lives in new places they pose special challenges to welfare that has to accommodate new arrivals and their needs. Today, the direction of migration runs predominantly from the south to the north. Highly qualifed physicians and other professionals are leaving their native countries and emigrating to Europe and the United States. Between Eastern and Western Europe, especially in the area of long-term care, migration chains, called care chains, have developed. Social services as a central component of the welfare state often rely heavily on a migrant labour force (Yeates and Pillinger 2019). Migration movements shape social policy at least threefold: on the side of problem situations and social risks, on the side of the difusion of ideas and, thirdly, on the side of the workforce that implements social policy programmes professionally. Tis fnal part of the volume intends to highlight new and relevant transnational spaces and impulses for social policy formation and to direct attention to the actors who have moved within them.

Te following eight chapters deal, in turn, with diferent time frames and examine social policy felds such as health and labour in particular. *Tao Liu and Tong Tian* examine the complex process of how the People's Republic of China sought to learn from Germany to develop a new scheme for social protection that would take the place of measures that were no longer adequate for a rapidly changing economy and society. Policy transfer and policy learning is furthermore studied by *Johanna Fischer, Hongsoo Kim, Lorraine Frisina Doetter and Heinz Rothgang* for Germany, Japan and South Korea, three countries that established longterm care insurance in the fnal decades of the twentieth century and the early 2000s, and were weighing diferent options against a varying backdrop of domestic needs and foreign ideas. *Monika Ewa Kaminska* analyses the development of social health insurance in Eastern Europe after the collapse of the USSR and the end of communism by tracing the infuence of a wide range of German experts and knowledge that superseded advice by a supranational organisation like the World Bank. In the following chapter *Ulrich Mückenberger* studies how the still on-going process of establishing gender equality in the feld of labour has been advanced since the early twentieth century in transnational forums of debate and by collective actors such as the International Labour Organization (ILO). *Teresa Huhle* examines the impact of European immigrants on social policy development in Uruguay, a pioneer in this feld in Latin America, and stresses their role in a decisive phase of policy formation. *Tao Liu and Tobias ten Brink* study the groundwork for social protection of migrant workers, a highly vulnerable group, that was laid in the PR of China under Mao, and how these protection schemes, whose reach has remained limited, were reformed during two important phases of economic change. *Friederike Römer* explores the concept of welfare rights and studies its relevance for the assessment of the situation of non-Western immigrants in Western countries by using comparative data for twenty-fve OECD countries that shows signifcant diferences between countries and over time, raising questions about the protection welfare states are willing to provide to migrants. Finally, in the last chapter *Karin Gottschall, Kristin Noack and Heinz Rothgang* study how the introduction of long-term care insurance in Germany paved the way for care chains and sustained circular migration from Eastern European countries, which is an unintended and unforeseen efect of a new social policy measure that has become highly dependent on the infux of foreign female care workers.

**Acknowledgements** Tis chapter is a product of the research conducted in the Collaborative Research Center "Global Dynamics of Social Policy" at the University of Bremen. Te centre is funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—project number 374666841—SFB 1342.

### **References**

*Policy*, ed. Pauli Kettunen and Klaus Petersen, 218–240. Cheltenham: Edward Elgar.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/ by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

## **33**

## **Relations Between Germany and China and the Rise of the Social Insurance State in China Since the Economic Reform of 1978**

**Tao Liu and Tong Tian**

## **1 Introduction**

In the modern history of Chinese social protection, the difusion of knowledge and model transfer have played a signifcant role in shaping the discourses, scripts and conceptual models in this feld. In general, Chinese social policy experts avoid referring to one specifc national model. Yet, there is a consensus among the Chinese social policy community that the German model of social insurance has shaped the basic design and overall architecture of modern social protection in China. So far, few studies within the social policy literature have investigated

T. Tian

T. Liu (\*)

Zhejiang University, Hangzhou, China e-mail<EMAIL_ADDRESS>
University of Bremen and Jacobs University Bremen, Bremen, Germany e-mail<EMAIL_ADDRESS>
in-depth the unique role of Germany for the development of social policy in China.1 Our study places emphasis on the impact of Germany on the semantical, conceptual and institutional development of social policy in China since the economic reform of 1978. Tis chapter underscores an inter-state interdependence and reveals a bilateral communicative context of social policy. Te questions this chapter addresses in the following are: Why have Chinese social and political elites used the scripts and prescripts of Germany as a cognitive and institutional framework for Chinese social policy? Who are the primary actors driving knowledge transfer between these two distant countries? Who are the senders and recipients of knowledge in both countries? And fnally, how do institutions transfer knowledge in the bilateral context? Tus, this chapter traces the unique role and clout of Germany in shaping social policy developments in the post-communist China.

### **2 Historical Background**

Te infuence of Germany on social policy in China can be traced back to the epoch of the Republic of China (ROC, 1919–1949). During the emergence and early development of a fedgling industrial sector in China, exploratory studies on social protection and social policy appeared in the early twentieth century. Some scholars started to tentatively and sporadically investigate the genesis and operation of social protection in industrialised Western countries. Experiences from "early bird" countries were explored and used as theoretical and practical sources for Chinese academics. Tough diferent social policy systems and social laws from several leading Western countries had been studied comparatively, the German system of social policy, which was renowned as a worldwide

<sup>1</sup>Te major exception in the literature includes studies by Leisering and Liu, who have investigated knowledge transfer between Germany and China, as well as rationalistic policy learning among Chinese social scientists and policy-makers based on the German statutory accident insurance system (Leisering and Liu 2010; Liu and Leisering 2017; Liu 2015). However, these studies only cover one specifc policy area—work accident insurance; they have merely traced the policy transformation of this feld in China with a parallel analysis of inter-state policy transfer. A comprehensive analysis of the institutional impact of Germany on the overall framework of Chinese social policy has not yet been conducted.

pioneer in social insurance, was underscored both by scholars and by social and labour ofcials within the Nanjing government. Tese early and historical contributions in the republican age included translated works, monographs, commentary essays, and guidelines on social policy in Germany (Li 2014; Zhu and Zhu 2014). Even the very frst draft of a labour insurance regulation—the so-called Draft of the Labour Code proposed by the Labour Law Drafting Committee of the Nanjing government in 1929—was heavily infuenced by German social insurance law (Zhu and Zhu 2014). At that time, the two major Chinese governments diverged in their models of social protection: while the nationalist government in China emulated the German model of social insurance, the communist government preferred the Soviet model of labour insurance. After the victory of the Communist Revolution, these two competitive models split the Chinese territory in half: while Mainland China adopted the Soviet model of labour insurance, the Taiwanese government adopted the German model of social insurance for the small Chinese island. Te historical rivalry between the parties persisted throughout the Cold War (Hu 2012).

### **3 Social Policy Diffusion from Germany to China in the Modern Era**

Since the end of the Maoist development path, and the adoption of economic reform and the open-door policy in 1978, China has gradually bid farewell to the Soviet model of a centrally planned economy, facilitating the development of a market economy. Te Soviet economic model, as well as the Soviet style labour insurance system, has disintegrated. Amid ongoing reform, enterprises with diferent forms of ownership, including private enterprises, joint ventures and transnational corporations, have not only been allowed to exist but also been stimulated to thrive in the newly formed competitive domestic market. Tis economic transformation has made the labour insurance model borrowed from the Soviet Union outdated. Chinese ofcials, policy-makers and scholars from the feld of social protection, as well as ofcials from fnancial and economic felds, were keen to import state-of-the-art knowledge from outside to create a new, modern version of social protection in China, which would be adaptable to the new market economy. Against this backdrop, the historical German infuences of the early twentieth century were revived after half a century, and Chinese social and economic elites began to closely observe mainstream trends in worldwide social policy through travelling to major social insurance states and additionally through inviting ofcials and scholars from abroad to China to educate Chinese ofcials, with a special focus on the social insurance model. Germany has become one of the most relevant reference countries in this development stage.

After the bifurcation owing to diferent institutional preference and choices during the Cold War, social protection in two Chinese societies—Mainland China and Taiwan—started to converge. Te Bismarck model of social insurance has become the systemic commonality, shaping the elementary structure of social policy in both societies. Troughout, Germany has exerted an immense impact on Chinese social policy.

### **3.1 Actors and Agencies**

Within the study of difusion, one of the most relevant questions concerns the primary actors driving the difusion and the learning processes. In the context of the Chinese economic reform, policy-making has become rationalised and "scientised"; in other words, the role and function of scholars, scientists and intellectuals have been elevated and increasingly valued by policy-makers in China. Top leaders, technical ofcials, social scientists, and economists constitute the relevant issuerelated policy communities and advocacy coalitions for diferent felds. Some of the integrated research institutes of state ministries have played the role of think-tanks in providing reform ideas and options for government ofcials.

Since the economic reform, China has been actively engaged in the activities of international governmental organisations (Kent 1997), endeavouring to use the repertoire of knowledge, ideas and conceptual scripts from international actors to open a new horizon for Chinese policy-makers in diferent felds. In the 1980s, some forerunners to social protection in China had created strong ties with experts from international agencies and entities, constructing a mainstream world trend in social protection that relied on international expertise. China has modifed its original institutional path, moving away from labour insurance and towards a new destination—a transformation in social insurance. Social insurance states have been scrutinised by the Chinese epistemic community more than ever before. Besides the global mega-trends observed and constructed by Chinese social and economic elites, some novel reform trends from the 1980s have been additionally identifed and included into the public policy agenda, such as scripts on privatisation and individual accounts in pension reform (Zhou and Zhang 2015; Hu 2012; Hu and Manning 2010). Various international infuences from diferent streams and diferent countries have overlapped in the social policy feld in this post-communist transitionary context. Due to the signifcance of China's transformation, the social policy feld has turned into a magnetic experimental feld, attracting expertise from think-tanks, research institutes and foundations around the world (Liu 2018).

Due to diferent values and normative tendencies, various individuals and institutions have developed an uneven inclination towards diferent countries and models. Te Ministry of Labour (MOL), later the Ministry of Human Resources and Social Security (MHRSS),2 has, for instance, consistently tended to maintain a close and intensive relationship with Germany due to its strong inclination towards the German model of social insurance. Te MOL–Germany tie can be traced to the late 1980s. Minister Luo Gan of the MOL met with representatives from the Beijing Ofce of the Friedrich Ebert Foundation (FES)3 on 29 November 1988, to arrange bilateral cooperation on labour issues and social security. In the 1990s, both sides deepened their cooperation and the FES has fnanced diferent pilot projects on labour protection and social protection in China, consistently playing the key role of providing expertise and social–technical knowledge to its Chinese peer colleagues.

<sup>2</sup> In 1998, the Ministry of Labour (MOL) was renamed the Ministry of Labour and Social Security (MOLSS), and in 2008, the MOLSS was renamed the MHRSS.

<sup>3</sup> In German, it is *Friedrich-Ebert-Stiftung*, shortened as FES.

Some key fgures, such as Zhou Hong from the leading think-tank in China—the Chinese Academy of Social Sciences (CASS)—and Zheng Gongcheng from Renmin University, who are widely considered the key designers and trailblazers of modern social protection in China, have built deep and enduring connections with Germany. Zhou Hong graduated from the Department of German Literature at Nanjing University in the 1960s, and she had been the director of the Institute of European Studies at the CASS for a long time, during which she created close ties and facilitated exchanges with Germany and other European countries. Zheng Gongcheng, the most eminent and infuential professor at Renmin University, has also been actively engaged in the development of social policy and social protection in China, through the People's Congress,4 and has established long-term cooperation mechanisms with Germany. Trough constant collaboration with the FES and with the Max Planck Institute for Social Law and Social Policy (MPISLSP) in Munich, Zheng has attempted to systematically absorb and transfer the state-of-the-art knowledge from German social policy to China.5

#### **3.2 Semantics and the Perception of Models**

Since the economic reform, Chinese scholars, ofcials and policy-makers have applied the method of "global scanning" (Liu 2018), which strives to target social protection programmes from leading OECD— Organisation for Economic Co-operation and Development—countries and Western welfare states prior to the legislation on social protection in China. Against this backdrop, the German model of social protection has been increasingly perceived and circulated within Chinese academia. Te Chinese social policy community has widely conceived of the eminent position of Germany as the original pioneer of state-organised social

<sup>4</sup>Zheng Gongcheng is a member of the Tenth National People's Congress' Standing Committee and the vice president of China Social Insurance Academy.

<sup>5</sup>Zheng has regularly sent his Master's and PhD students to the MPISLSP in Munich in order to study and explore social policy knowledge. After coming back to China, these students have actively engaged in translating and transferring social policy knowledge from Germany to China. Foreign study and training abroad have become a signifcant method of inter-state policy learning and knowledge transference.

policy, through the Bismarck model.6 Due to this inclination towards the German model, terms like "Germany", "the German model of social protection" and "the Bismarck model of social insurance" have become highfrequency terms within the discourse of the labour and social ministry (MOL, later MHRSS).

Te most infuential scholar—Zheng Gongcheng—believes frmly in policy learning and has profoundly infuenced the Chinese epistemic community through his well-known catchphrase: "From afar, China shall learn from Germany (*yuan xue deguo*); from up close, China shall learn from Japan (*jin xue riben*)." In this case, Germany and Japan represent two typical social insurance reference models: while Germany is the original inventor of the Bismarck model, Japan embodies an East-Asian Bismarck model. According to Zheng, the chief designer of social protection, the overall architecture of Chinese social protection should be based on a primary system of social insurance, supplemented by other types of programmes, such as social assistance, social relief and diferent kinds of social services. Zheng's core belief in the macro-structure has crucially shaped the elementary design of Chinese social protection; the country has approached the status of a social insurance state, embracing neither the Beveridge model nor the market-steering model. Zheng's personal beliefs and his famous remarks have laid the cognitive foundation for China's learning from Germany. Even Japan represents an *Asianised German model* since Japan has learned from Germany, adapting the borrowed scripts and models to the local context.

Zheng's idea of learning from Germany (from afar) and from Japan (from up close) has been implemented and concretised in diferent social policy felds; for instance, in the reform of old-age pension insurance and in the newly piloted long-term care system. In their quest to establish a long-term care insurance system through frst-step local experimentation,7

<sup>6</sup>Using the keywords "German social protection system" in the Baidu scholar search engine, one retrieves 95,200 research results. If the search period is limited to 1980–2000, there are still 23,700 relevant research results.

<sup>7</sup>Long-term care insurance was frst tested in Qingdao City, Shandong Province, in 2012. In 2016, it was piloted in ffteen cities across the country. Currently, there are also voluntary pilot programmes in nearly ffty cities to provide long-term care services for disabled elderly people. Diferent local models have appeared, including the Qingdao model, the Nantong model, the

Chinese authorities have called upon Germany and Japan as primary empirical examples for the Chinese context. For many Chinese scholars, these two countries are the two most infuential in the world in terms of social insurance for handling the risks of long-term care, providing strong evidence that a social insurance model works in this distinctive feld. Learning from the German and Japanese models of social insurance for long-term care has become a popular and fashionable trend within Chinese academia, and the discussions, debates and research articles on the topic have mushroomed in the past decades in China.8 Te Japanese long-term care insurance system has been understood as a borrowed script from Germany that has been localised and innovated in Japan. Dr. Jin Weigang, the director of the Chinese Academy of Labour and Social Security, an integrated think-tank of the MHRSS, called upon Zheng's remark about learning from Germany (from afar) and from Japan (from up close) in the feld of long-term care insurance, by explicitly referring to practices common in Germany, such as separate long-term care premiums fnanced by employers and employees, as well as a care-level system to establish a national standard on long-term care insurance on the occasion of an academic forum (2017) in China.9

### **3.3 Interaction and Communication Channels**

Diferent interaction patterns and communication channels between Germany and China have facilitated the exchange and knowledge transfer between the two countries. First, ministries, institutes and research foundations from both countries have fostered institutional cooperation channels for the long term, including the strong and trustworthy institutional ties between the labour and social ministry in China and FES in Germany or between Renmin University (Zheng Gongcheng) in Beijing

Shanghai model and the Chengdu model; many of these models take Germany and Japan as a direct example for their policy design.

<sup>8</sup>Using the keywords "long-term care insurance in Germany", the Chinese scholarly search engine—Baidu Scholar—returns 50,100 research results in total.

<sup>9</sup> See the report by the China Pension Network at: http://k.sina.com.cn/article\_5617251953\_14 ed0767101900p453.html?from=health. Accessed on April 1, 2020.

and MPISLSP in Munich. Second, since the late 1990s and particularly since the millennium, the European Union (EU) has become another relevant supranational actor promoting multiple bilateral cooperation in the feld of social protection between China and other European countries. For instance, within the framework of the EU–China Social Security Reform Cooperation Project (EUCSS) and the EU–China Social Protection Reform Project (SPRP), many German experts and scholars have been invited to China to consult with Chinese ofcials and policymakers about social policy reform.10 Tird, China and Germany have signed inter-governmental cooperation treaties for transferring the German model of social protection to China; for example, the Chinese government has strived to "import" the German model of statutory work accident insurance since 2004 (Liu 2015; Leisering and Liu 2010). Te bilateral cooperation project for work accident insurance has lasted for fve rounds, with the latest round signed by the two governments in 2018.11 Fourth, bilateral visits, including the invitation of German scholars, professors and ofcials to China and the organisation of inspection tours in Germany by Chinese ofcials and scholars have constituted signifcant interaction forms. Some Chinese ministries and universities have regularly invited eminent German experts and scholars to give lectures in China, who have, in some cases, consulted with Chinese ofcials about reform. For instance, professors from Renmin University, including Zheng Gongcheng, have regularly invited professors in the feld of social law and jurists from Germany to Beijing in order to introduce the German social insurance laws. Chinese ofcials, policy-makers and scientists have regularly organised inspection and investigation tours in Germany for learning from German examples and experiences in various

<sup>10</sup>Co-funded by the EU and the Chinese government, each project lasted fve years, covering domains such as pensions, unemployment insurance, administration, and management, as well as fnancing and budgeting. Te EUCSS translated the rural pension schemes of EU member states into Chinese to help Chinese authorities draw lessons and design a rural pension model for China. Te SPRP has been involved in several pilot sites in expanding universal pension coverage, supporting the Ministry of Finance in fnancial management related to social funds and accessing legal frameworks for social assistance.

<sup>11</sup> See "China and Germany sign the ffth letter of intent for cooperation in work injury insurance". Download under the Peoples' Net at http://world.people.com.cn/n1/2018/0728/c1002-30175341. html. Accessed on April 1, 2020.

felds like pension reform, health protection, work accident insurance, unemployment insurance and social assistance. Fifth, personal trust has become an asset benefting bilateral cooperation. As above mentioned, Zheng Gongcheng from Renmin University prefers to send his students to MPISLSP in Munich for study exchanges. Since 2016, the Faculty of Social Sciences of the University of Duisburg-Essen has become another German institute that has trained various guest PhD students in the feld of social protection from Renmin University, Wuhan University, Huazhong Normal University and Huazhong University of Science and Technology, among others.

### **4 Conclusion**

Tis chapter has traced the historical connectivity between China and Germany in the feld of social policy, identifying a long tradition of learning from the German model of social insurance. Tough the Chinese– German connectivity in this feld had been frozen in the Maoist period for about three decades, the bilateral interlinkages have been revived in the period of reform and open-door policy. Various ministries, institutes, entities and persons from both sides have woven a dense social security cooperation network, fostering domestic discourses and debates about the elementary design elements of modern social protection. Tough different state departments and persons have diferent inclinations towards diferent models and diferent countries,12 an undeniable fact is that Germany and the Bismarck prototype of social insurance have played a signifcant role in setting the course for Chinese social protection. Due to

<sup>12</sup>For instance, during health insurance reform in China in 2006, diferent departments favoured diferent models: while the MOLSS favoured the German model of health insurance, the Ministry of Health was inclined towards the Beveridge model of National Health Services and the Ministry of Finance was keen to import the US market-dominated model. Another example is refected in the personal rivalry between two eminent Zhengs: Zheng Gongcheng from Renmin University favours the German model of social insurance, while Zheng Bingwen, another prominent and infuential scholar, acting as director of the Institute for American Studies of the CASS, insists on learning from the US model and promotes the discourse concerning the privatisation of social security. Zheng Gongcheng and his advocacy coalition for social insurance have been more successful in convincing policy-makers to embrace their scripts and have thus shaped the mainstream discourse on Chinese social protection.

promotion by the labour and social ministry, Zheng Gongcheng from Renmin University, Zhou Hong from CASS and other actors, a basic guideline of Chinese social protection has been developed, specifying that the overall framework for Chinese social protection should be based on the German social insurance model. Notwithstanding learning from diverse sources, Germany remains the pivotal country that acts as a central model for modern social protection in China. Te German–Chinese tie is a part of a panorama of interdependency and interconnectivity of social policy developments in world society and has revealed that the birth of social policy in latecomer nations is not a sporadic and isolated phenomenon, it has been rather shaped by travelling ideas and concepts through active social policy learning and emulation by epistemic communities and decision-makers.

**Acknowledgements** Tis chapter is a product of the research conducted in the Collaborative Research Center "Global Dynamics of Social Policy" at the University of Bremen. Te centre is funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation)—project number 374666841—SFB 1342.

#### **References**

———. 2018. Epistemological Globalization and the Shaping of Social Policy in China. *Journal of Chinese Governance* 3 (4): 461–476.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/ by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

## **34**

## **Social Long-Term Care Insurance: An Idea Travelling Between Countries?**

**Johanna Fischer, Hongsoo Kim, Lorraine Frisina Doetter, and Heinz Rothgang**

## **1 Introduction**

In 1994/95, a mandatory insurance scheme for long-term care (LTC) dependency, in other words, the extended need for assistance with daily living due to physical and/or mental impairments, was established in Germany. Te implementation of this novel system not only constituted a landmark in national social policy but was also followed with interest by foreign observers. While the German system was not the frst comprehensive public scheme focusing on LTC dependency, the introduction occurred at a time when debates around aging and care intensifed in

University of Bremen, Bremen, Germany

e-mail<EMAIL_ADDRESS><EMAIL_ADDRESS><EMAIL_ADDRESS>
#### H. Kim Seoul National University, Seoul, South Korea e-mail<EMAIL_ADDRESS>
J. Fischer (\*) • L. Frisina Doetter • H. Rothgang

many high-income countries (e.g. Teobald and Kern 2011).1 Consequently, the scheme attracted—as did other models of LTC experts internationally. Two apparently similar LTC schemes were established in East Asia thereafter: Te long-term care insurance (LTCI), *Kaigo Hoken*, in 1997/2000 in Japan; and the LTCI, *No-in Jang-gi Yo-yang Bo-heom*, in 2007/2008 in the Republic of Korea (hereafter Korea).

Tis chapter sets out to investigate the role of *policy transfer* for designing LTCI in Japan and Korea. Transfer describes a process by which knowledge about policies, past or present, is—voluntarily or coercively used in another context (Dolowitz and Marsh 1996, 344). We focus on the spread of ideas from the German—and, in the case of Korea, also Japanese—LTC system. For this "chain" of introductions, the role of interdependent developments, in particular by means of *transnational policy learning*, is frequently stressed as having played an important part in the institutional set-up of the LTCI in Japan and Korea (e.g. Campbell et al. 2009; Sunwoo 2012; Maags 2020). However, it remains largely unclear as to what extent international exchange has taken place and infuenced system features. In what follows, we ask, what evidence exists for policy transfer—including "positive" and "negative" learning—in the design of the Japanese and Korean LTC systems? To answer this question, we begin by considering the concept of policy transfer and the mechanism of policy learning, specifcally, identifying "necessary" and "sufcient" criteria for empirical investigation. We then proceed to examine evidence in two steps: First, we explore the features of the three LTCIs to identify (dis)similarities that suggest transfer took place. Second, we review extant literature on the international travelling and infuence of ideas. We conclude by refecting on the strengths and limits of existing scholarship and suggest next steps for research.

<sup>1</sup>Te Netherlands introduced a compulsory social insurance already in 1967/68. State-funded and state-administered LTC systems have even existed from the mid-twentieth century in several highincome countries.

### **2 Concepts**

Te role of ideas, knowledge and experience has been highlighted as one important factor in explaining policy-making (Maags 2020). Increasingly, attention has been drawn to exchanges beyond the confnes of nation states, allowing the study of welfare policy to move past the so-called "methodological nationalism" characterising much research (Obinger et al. 2013). One concept that emphasises the role of transnational interdependencies in domestic social policy-making is *policy transfer* (Obinger et al. 2013; Teobald and Kern 2011). For our study, we want to stress two elements: Firstly, policy transfer entails the *travelling* of knowledge or ideas from country A to country B, for example via scientifc experts or government ofcials. Secondly, the transferred knowledge is *employed* in country B in some way, indicated, for instance, by similarities in policy design.

Scholarship on transfer and related concepts has identifed various types thereof. Accordingly, one important *mechanism* that can, amongst others, underpin transfer processes is *policy learning* (Obinger et al. 2013). Constituting a voluntary and intentional form of transfer, learning is an activity of drawing lessons from external information and examples for fnding suitable policy solutions and minimising error in domestic policymaking. It is important to note that learning can be both *positive* and *negative* in kind (e.g. Dolowitz and Marsh 1996; Teobald and Kern 2011). Tat is, not only can actors from country B look abroad for best practices for adoption, but they can look to the experiences of country A and consciously choose *non-adoption* by drawing "negative" lessons. Based on extant studies, we hypothesise that the mechanism of lesson learning is of particular relevance for driving transfer in our cases.

It follows from these theoretical considerations that evidencing transfer entails establishing (1) that the introduction of systems occurred in chronological order; (2) that systems show similar features for demonstrating positive policy learning and diferences in the case of negative learning; and (3) that foreign examples and discussions have been picked up by domestic actors and indeed infuenced the policy outcome. We regard the frst two criteria as *necessary conditions* for establishing transfer, while the latter can be seen as a *sufcient condition* for corroborating the role of *learning* as a mechanism driving transfer among our cases. We now turn to investigate empirically to what extent the three outlined conditions are met.

### **3 Same but Different: Comparing LTCI in Germany, Japan, and Korea**

As indicated earlier, Germany, Japan, and Korea adopted *compulsory social insuranc*e LTC systems in succession of one another. Te timing of adoptions therefore makes policy transfer a tenable notion. To establish whether the second necessary condition for policy transfer is also met by our cases, this section reviews key similarities and diferences in fnancing, provision, and regulation of LTC (see Table 34.1).

As social insurance systems, they are all underpinned by *principles of social solidarity* and share several characteristics. Te three schemes rely, at least partly, on *ear-marked contributions for funding* and are managed by *designated insurance bodies* (Rhee et al. 2015). While remarkable diferences in benefts do exist (to be discussed), in general all three systems provide *a wide range of benefts* across community, home, and institutional settings. Regarding the regulatory framework, the German, Japanese, and Korean LTCIs share *formalised eligibility criteria* in line with standardised dependency assessments, as opposed to, for instance, means testing (Campbell and Ikegami 2009; Chon 2012). Another common attribute is the relatively wide *choice* of services and providers, and high provider competition (Campbell et al. 2009; Maags 2020).

Signifcant diferences also exist, especially, but not only, between the German and the other two systems. Firstly, while Germany allows for a minor role for substitutional mandatory private LTCI (Rothgang 2010), both Japan and Korea only have a *social LTCI* in place. Secondly, in contrast to Germany, the Japanese and Korean systems both employ *age as an entitlement criterion* (Maags 2020; see Table 34.1). Tirdly, the *mix of fnancial sources* difers: Japan and Korea rely on a wider mix of contributions, state budget and co-payments, while the German LTCI is formally

**Table 34.1** Comparison of LTCI schemes in Germany, Japan, and Korea

(*continued*)

Source: Own compilation, based on cited literature plus additional sources (available upon request)

fnanced by contributions exclusively (Rhee et al. 2015).2 Te fnal remarkable diference that sets the German system apart is its heavy reliance on *cash allowances*: While Japan provides in-kind benefts only, and Korea mainly, both in-kind and cash benefts are available and can be mixed in Germany (Campbell et al. 2009).

Diferences between Japan and Korea exist, for instance, regarding the extent of regulation and concerning coverage and generosity (see Table 34.1). When comparing the share of LTC beneft recipients as a percentage of the total population for the three countries as indicated in Table 34.1, we see that it is much higher in Germany and Japan, both shortly after introduction of the schemes and today. One reason for this divergence is that the Korean government decided for fnancial reasons to limit LTCI benefts to the population with the highest need (Seok 2010). While this constitutes one way of controlling public LTC expenditure, Germany implemented a diferent, albeit also strict *cost control* mechanism by fxing benefts levels below cost-covering rates (Rothgang 2010). In contrast, both the Japanese and Korean systems use fxed individual co-payments by LTCI benefciaries, with rates signifcantly higher for the latter (Maags 2020; Table 34.1). With a view to the similarities and differences of these cases, and given the role of timing, evidence suggests that policy transfer was possible. We now turn to review extant literature to examine whether sufcient evidence exists for the role of policy learning as a mechanism of transfer.

<sup>2</sup>However, it has to be pointed out that out-of-pocket payments and tax-fnancing are important sources of overall LTC fnancing in Germany as well (Rothgang 2010).

### **4 Travelling Ideas? Revisiting Evidence on Transnational Policy Learning**

#### **4.1 Japan**

Te adoption of the Japanese LTCI Act in 1997 was preceded by a decade of extensive public discourse on how to deal with the (rising) need for care among the elderly population. In addition to changing socioeconomic structures, extended hospitalisations of elderly patients created "negative policy feedback" (Maags 2020, 9) through rising expenditure in the healthcare system (see e.g. Campbell 2000). In 1989 and 1994, the government presented strategies aimed at expanding the existing meanstested, state-run LTC scheme. As these did not provide sustainable solutions (Campbell 2000), policy-makers continued to search for alternatives throughout the mid-1990s. As Japan had experience with both statebased welfare schemes and social insurance programmes, both kinds of schemes were institutionally anchored and seen as potential paths for the new LTC system (Campbell 2000; Campbell and Ikegami 2009).

Te literature highlights the role of several relevant *domestic* actors in the policy design of the novel LTC scheme: administrative ofcials, especially within the Ministry of Health and Welfare (MHW), political actors like parties and governments, and several interest/advocacy groups (e.g. Campbell 2000; Peng 2005; Campbell et al. 2009; Maags 2020). While we cannot go into detail on their roles here, for our purposes it is important to examine whether and to which extent they were exposed to "foreign" ideas. Campbell and Ikegami (2009), Campbell et al. (2009) and Teobald and Kern (2011) report cross-national exchanges between Japanese ofcials and German, but also Scandinavian LTC experts. An interesting observation is provided by Campbell (2000, 92–93) who describes that there were two camps of MHW bureaucrats in the 1990s, one "deeply infuenced by British and Scandinavian social policy", the other connected with social health insurance. While this point stresses the importance of transnational ideas or ideologies, it does not necessarily link them to LTC. In any case, it seems that ideas from Germany (and elsewhere) were known and studied within the social policy administration.

Most articles refer to the general model of social LTCI as the *object* of transfer without greater detail on the transferred features. Some authors (Campbell et al. 2009; Campbell 2000; Teobald and Kern 2011) also mention that monetary LTC benefts were explicitly *not* adopted, although they are a key aspect of the German system. Campbell et al. (2009, 72) point out that the proponents of cash allowances in Japan used the German example to legitimise their proposal. However, the role of domestic political considerations and (feminist) advocacy in the decision against cash transfers is highlighted much more in the literature (e.g. Peng 2005; Campbell 2000). It therefore remains unclear how important the German beneft model was as a reference point—negatively or positively—in the Japanese policy design.

All in all, what do researchers conclude about policy learning in the case of Japan? Campbell and others stress in several publications (Campbell 2000; Campbell et al. 2009; Campbell and Ikegami 2009) that the German LTCI mainly provided *legitimacy* for establishing the social LTCI in Japan but did not notably infuence or form the choice(s). Others, like Maags (2020) and Teobald and Kern (2011), attribute a greater role to policy learning/adaption, but without showing to what extent foreign policies concretely became relevant for Japanese decisionmaking. We can thus conclude that knowledge transfer from abroad occurred. However, when it comes to naming precise policy choices or transfer channels, extant research does not adequately corroborate data for the sufcient condition of policy learning to be met.

#### **4.2 South Korea**

In Korea, the Elderly LTCI Law was passed in 2007 and implemented the following year, making Korea a comparably early adopter with regard to the country's welfare state, economic and demographic development (Campbell et al. 2009). Te policy process for establishing a new LTC system started in 2000 and was mostly driven by the government's progressive welfare agenda (Seok 2010; Campbell et al. 2009). Te public was generally positive about the establishment of a more comprehensive LTC system; the proposed policy features did not evoke much debate nor advocacy activities (Seok 2010; Maags 2020; Rhee et al. 2015). Consequently, an independent social LTCI model was agreed upon quite easily and deemed suitable for several reasons, among others the existing institutional infrastructure and experience with social insurance programmes (Chon 2012).

In terms of the present interest in transnational policy learning, evidence of exchange in the form of study trips and analysis of foreign systems are mentioned by Campbell et al. (2009, 75) and Chon (2012, 220). However, they do not provide details on the content of the exchange. All we learn is that Korean "experts", "politicians" and "policymakers" studied approaches elsewhere. Additionally, Sunwoo (2012, 49) points out that the emerging Korean academic discussion about LTC in the 1990s coincided with the implementation/drafting of the schemes in Germany and Japan, implying a relevance of these policy examples as well.

In the reviewed studies on Korea, only Germany and Japan are cited as concrete foreign models (e.g. Maags 2020; Campbell et al. 2009; Sunwoo 2012), with a somewhat stronger signifcance ascribed to the latter (e.g. Chon 2012). Authors attribute this to the Korean interest in social insurance. Regarding specifc policy features transferred, the idea of a fve-year basic LTC plan for revising the system regularly was brought from Japan (Sunwoo 2012, 59), as well as the needs and eligibility assessment instrument (Campbell et al. 2009, 78; Chon 2012, 223). While these specifc policy adoptions indicate policy transfer resulting from positive learning, a third instance—the implementation of a cost control mechanism in Korea—points to negative learning. As mentioned earlier, the beneft coverage of the LTC scheme was limited in order to control expenditure. Chon (2012, 222) points out that this fnancial prudence was inspired by "Germany's and Japan's experiences of increasing defcits within a few years of their implementation of LTCI systems". While more evidence on how these examples specifcally exerted an infuence on the Korean policy design is certainly necessary, this could be an instance of learning from negatively perceived foreign experiences.

In the literature reviewed, most authors (Chon 2012; Maags 2020; Seok 2010; Sunwoo 2012) attribute infuence to foreign models, but base this assessment on similarities of policy features without specifying the sufcient condition of how ideas from abroad might have found a place in Korean LTCI design. In contrast, Campbell et al. (2009) are, as in the case of Japan, sceptical about a greater signifcance of foreign models. Furthermore, the availability of internationally circulating ideas is mentioned as a source of inspiration for Korean policy-makers (Campbell et al. 2009, 78; Maags 2020), but, again, without much explication of concrete ideas and "travel routes". Consequently, while research highlights Korean experts' interest in German and Japanese policies, uncertainty about concrete transmitters and infuences remains.

### **5 Conclusion**

Te phenomenon of policy transfer and, by extension, the underlying mechanism of policy learning can be evidenced with respect to LTC by analysing several conditions. Firstly, the succession of introductory dates of LTCI systems in Germany, Japan and Korea allows for ideas and experiences of the forerunner(s) to be picked up by later adopter(s). Secondly, the comparison of system designs shows multiple resemblances, but also diferences in beneft types and cost controlling mechanisms. Tus, the necessary conditions for policy transfer in terms of both timing and (dis) similarities are fulflled.

Regarding evidence of actual lesson learning, the reviewed literature points out that in both Japan and Korea, foreign systems that could serve as a blueprint were indeed studied—by policy-makers and academics. In Japan, two schools of thinking could refer to foreign experience, the one relating to Britain and Scandinavia and the other to Germany. In the end, the decision for an LTCI rather than a tax-fnanced state-led system therefore seems to be the result of national politics, with European examples serving as a springboard for ideas and a source of legitimation. In the non-adoption of cash benefts, referencing for the purposes of legitimation seems also more likely than the occurrence of actual learning. In the Korean case, the insurance model was adopted without seriously discussing a tax-fnanced system. Tis might indicate the agenda-setting power of the Japanese example, which Korea follows more closely than the German design—but this is not yet proven. Both pre-adopted schemes might have served as a warning with forbidding budget defcits, although Korean domestic fscal prudence might have ultimately been more infuential for establishing tight cost control than foreign examples.