“It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.”– Adam Smith 1776
“One has to understand that the ongoing crisis is not a crisis of real poverty, but an organizational crisis. The world is like a ship loaded with the goods of life, where the crew starves because it cannot figure out how the goods should be distributed.”– Ragnar Frisch 1931
Social democracy, it is often said, is nice but pricey. Whatever its merits in the rich countries of Western Europe, social democracy is frequently dismissed as an infeasible model for developing countries. Based on generosity towards the poor and protection against market competition, the argument goes, social democracy is only possible in consensual, homogeneous, and affluent societies with an extraordinary commitment to equality. In Third World countries that are conflict-ridden, heterogeneous, and poor, does the social democratic model have any relevance?
In this article we offer an agnostic view of the feasibility of the social democratic model of development in the Third World. First, we argue that consensus, homogeneity, and affluence are products of the social democratic model, not prerequisites. Second, we claim that the central social democratic policy in terms of economic development is the policy of wage compression attained through highly centralized wage-setting institutions.