- Wealth needs to be more broadly redistributed.
- Governments will need to intervene more to ensure better and fairer outcomes from private sector investments.
- New institutions need to incorporate profound reforms to ensure better racial integration.
Capitalism as we know it needs to be reformed. The growing discontent at the ideology that has created so much wealth and progress on the one hand, and yet so much inequality and instability on the other hand, is causing increasingly frequent social disruptions across the world. The COVID-19 crisis has laid bare most of these dysfunctions, ranging from uneven access to healthcare, education, economic opportunities, and social progress, to growing inequality among and within nations and racial and ethnic groups. At the centre of these multiple crises lies the tension between privilege and meritocracy.
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From a global economic perspective, capitalism, as the dominant economic system since the end of World War II, has played a substantial part in fueling inequalities within and across nations.
After decades of austerity policy imposed by the World Bank and the International Monetary Fund (IMF) on Latin American, African and other lower-income economies as a false cure for recessionary cycles, rich countries’ responses to the macro-economic effects of the COVID-19 crisis have spectacularly rejected the public sector restraint sold to developing countries as foundational to post-war capitalism.
Indeed, advanced economies have resorted to unprecedented unconventional and counter-cyclical policies to boost economic growth through public spending, leaving the balanced budget approach as an afterthought.
According to the IMF, G20 countries have collectively spent $9 trillion on stimulus in the first half of 2020 – more than 10% of the world’s GDP. Government leaders argue that this approach was essential in maintaining economic and social stability and yet, not all countries had the privilege of fiscal and monetary policy space required to emulate this response.
In hindsight, there is evidence that the widespread use of austerity plans on developing countries has cost them billions of dollars of output, millions of jobs, and years of stagnant growth that have contributed to the great divergence between the rich countries and the rest that we observe today.
Given the compounding effect of past investments, the poor policy prescriptions of the 20th century have contributed to widening the gap between high and low-income economies so vastly that only proactive and broad based interventions can help narrow it again. Forget laissez-faire and the invisible hand.
From a global social perspective, there is growing discontent from the 99%. The need for social justice is taking centre stage as wages have grown only marginally when compared to the income and wealth of the 1%.
Growing unemployment and job instability have created resistance against immigration, globalization and labour-replacing automation. Education has not only remained static and become unfit to train workers towards upward social mobility, but it has also done poorly at preparing workers to face the wide ranging challenges that stem from profound and rapid change in just about everything.
Years of under-investment in public infrastructure have eroded the quality of public services. That is not to forget long-standing issues that relate to climate change, food security, geopolitical tensions and systemic racial injustice. Over the past two months, the death of George Floyd has spurred mass protests in the United States, France, Great Britain and Australia among many other countries. Countries with a colonial past that have failed to ensure full racial integration and to actively combat systemic racism will suffer from sustained social unrest and national identity crises.
With all that said, there is an urgent need to design institutions that can address the wide ranging imperfections of the world as we know it. A new social contract that accounts for the specific challenges and histories of each country but that also aims to ensure that “a rising tide lifts all boats” is needed to lay the past to rest and pave the way to a better future.
In the post-COVID-19 world, there are three features that will need to be fully institutionalized as part of the new local and global social contract.
1. Capitalism and socialism will need to merge
Firstly, the slow death of capitalism does not equate to a resurgence of communism. However, rethinking capitalism, or giving capitalism a “Great Reset” as World Economic Forum Chairman Klaus Schwab has suggested, means that capitalism and socialism will need to merge to create a productive and inclusive economic and social model.
Wealth has become abundant, thanks to capitalism, but it now needs to be more broadly redistributed, as socialists have long called for. In particular, there is an urgent need to recouple the wealth of financial markets with the real economy.
The great divergence of the recent decades, both among and within nations is, in large part, due to the rise of intangible assets (tradable securities and intellectual property) and to income from privilege (inheritance, income from accumulated capital, and pre-existing social conditions such as networks of wealth and power associated with race, gender, religion, and culture) compared to the stagnant productivity growth observed in the real economy.
If Jeff Bezos was a country, his net worth of $172 billion as of 5 July 2020 would rank as the third wealthiest nation in Africa after Nigeria and South Africa, but ahead of Kenya; controlling more money than the majority of a region of 54 countries and 1.2 billion people. The introduction of a tax on passive income and wealth is essential in a world where individuals are more wealthy than nations.
Above a certain level of wealth, more income in the pockets of ultra-high net worth individuals becomes less productive and less fair for the economy as a whole than if it were to land in the pockets of workers.
Indeed, a number of economists have argued that inequality leads to economic instability. One mechanism by which this happens is that the rich consume a smaller proportion of their income than the poor. They save money which people on lower incomes would spend. This leads to a reduction in aggregate demand, which in turn leads to unemployment. Therefore, wealth creation and income redistribution can reinforce each other. Both need to be equally important in the post-COVID institutional context to ensure economic justice.
2. We must improve coordination between the public and private sector
On social justice, there is a fundamental need to improve coordination between the public and private sector in order to ensure both equity and efficiency. Despite long-standing fear of an “efficiency-equity tradeoff,” in reality both features can coexist, and we can do better on both measures than we are doing now.
The push to support market-based incentives to accelerate the privatization of everything has enabled governments to cut public spending in favour of private investments. In advanced countries, this has led to an increase in the costs of many essential goods and services that have traditionally been free to citizens, through mechanisms such as toll roads, tuition hikes, and ballooning medical fees. This trend also led to the erosion and exclusion of public service quality to those most in need.
In the new institutional context, governments will need to intervene more to ensure better and fairer outcomes from private sector investments. One way this can be done is by introducing a universal basic income (UBI) funded by taxing wealth and passive income, and by making better use of public savings.
High-income countries have the resources to make this possible. In developing countries however, resources are scarce, and both unemployment and informality rates are high. Too much of the economic activity falls within the domain of the public sector and it results in inefficient and insufficient public spending on infrastructure, employment, education, and health; which often crowd out private sector investments.
Governments in low-income countries can do better if they pull in private investment to finance profitable projects and push public finances to fund projects that have low economic but high social value to ensure that services are always accessible to the most vulnerable groups.
Furthermore, there is a need for more decentralization to allow municipalities to intervene more effectively at a local level, and for the central government to invite the private sector to invest and manage select infrastructure projects as public-private partnerships. Ultimately, the best way to optimize social investments on public finances in developing countries is by ensuring that governments provide an enabling environment for entrepreneurship and private investment activity to flourish and create wealth that is fairly distributed among investors, workers and the state.
3. We must improve access to equal opportunities
On systemic racism, new institutions need to incorporate profound reforms to ensure better racial integration and to rectify centuries of accumulated prejudice to colonized countries and to minority groups, especially black and brown communities. It is important to acknowledge “white privilege” and to break the myth of pure meritocracy that has persisted for too long as an explanation for not only the divergence in outcomes between rich and poor countries, but between rich and poor people along all dimensions of society.
Centuries of prejudice cannot be reversed within one or two generations. Leaders of the new institutional order must proactively design mechanisms to improve access to equal opportunities and to social and economic accelerator programmes. These initiatives need to be macro in scale. Programmes such as affirmative action are well-intended, but they remain defensive and tactical interventions to improve the odds for black and brown communities. The work at hand is not about the 3-5% of students in elite colleges of the world who are black; it is about making growth, progress and social upward mobility systemic within the black and brown community.
This can be done by shifting the focus from “giving a hand” to these communities to empowering them with large-scale public investments to level up access to conditions on a par with those of more privileged communities. For example, public investments directed at improving the infrastructure in black neighbourhoods would increase the value of real estate for black owners, improve the quality of education and healthcare and help build a community of more affluent residents who would have a vested interest in perpetuating generational progress.
With some exceptions, such as South Africa, and India (given its caste systems and particularly the exclusion of Dalits), the rationale for such demographically motivated investments in developing countries is not as necessary since the population is overwhelmingly composed of disadvantaged groups. Nonetheless, the need for more social investment and for more socially-conscious policies, such as local content and indigenization rules, is equally important to expand access to racial justice. These initiatives, such as the Black Economic Empowerment in South Africa (BEE) program, have helped empower previously the marginalized, but they have also been criticized for distorting markets and for concentrating wealth, power and influence in the hands of a small group of people. New programmes in this vein must not replicate these mistakes.
Systemic injustice is the defining challenge of our era of capitalism, and COVID-19 has brought it to the surface. Underneath the abundance of the few lies a high degree of inequity. Meritocracy does exist, but it is important to distinguish outcomes driven by privilege from those resulting from meritocracy and to diagnose contexts where privilege hinders meritocracy.
It has been in the interests of capitalists to promote the virtues of meritocracy and to downplay the extent of injustice and prejudice. Poor countries and poor people aren’t poor because they don’t work or try hard. In many instances, poverty and exclusion comes from working in a system where the weight of privilege outweighs the possibility for hard work to translate into social mobility.
What is the World Economic Forum doing to manage emerging risks from COVID-19?
The first global pandemic in more than 100 years, COVID-19 has spread throughout the world at an unprecedented speed. At the time of writing, 4.5 million cases have been confirmed and more than 300,000 people have died due to the virus.
As countries seek to recover, some of the more long-term economic, business, environmental, societal and technological challenges and opportunities are just beginning to become visible.
To help all stakeholders – communities, governments, businesses and individuals understand the emerging risks and follow-on effects generated by the impact of the coronavirus pandemic, the World Economic Forum, in collaboration with Marsh and McLennan and Zurich Insurance Group, has launched its COVID-19 Risks Outlook: A Preliminary Mapping and its Implications - a companion for decision-makers, building on the Forum’s annual Global Risks Report.
Companies are invited to join the Forum’s work to help manage the identified emerging risks of COVID-19 across industries to shape a better future. Read the full COVID-19 Risks Outlook: A Preliminary Mapping and its Implications report here, and our impact story with further information.
New institutions need to level the playing field and to actively intervene not to reverse the past (as what is done is done) – but to build a future where people of all racial, social, gender and economic backgrounds can excel and be judged “not by the circumstances in which they were born, but by the content of their character” to paraphrase the famous words of Dr. Martin Luther King, Jr. The spirit of his words continues to echo in our era, and we must let them guide our actions – especially our investments and policies – now more than ever.
This blogpost was originally published by the Harvard Kennedy School Review.