[ad_1]
In terms of GDP, the world is better than ever. However, we need a different global economic system if we want to create a more sustainable and inclusive world. Here’s why.
In the 75 years since World War II, the world has seen an unprecedented explosion of wealth. Thanks to enormous advances in technology and trade, the world economy grew so much, in fact, that almost everyone was doing better. The rapid development occurred first in western economies like the US and the EU, and then in eastern economies like the “Asian Tigers”, China and ASEAN.
But there was a setback to this medal. Or rather, two. On the one hand, there has also been an alarming increase in economic inequality in recent decades, everywhere from the United States to China. On the other hand, pollution, environmental degradation and emissions of CO2 and other greenhouse gases accelerated to levels never seen before, threatening the very health of our planet.
Why did this happened? And how can we create a global economy that works for progress, people and the planet in the future? In this article and the accompanying video, we look for some of the answers.
1. The golden age of capitalism in the West
Let us first consider the enormous advances in world wealth. Since the Industrial Revolution took off in the 18th century, several economies in Western Europe and the United States have enjoyed rapid industrialization. Thanks to the introduction of steam technology, the internal combustion engine and other novel technologies, Europe and the US underwent a radical transformation.
But it was only after World War II ended in 1945 that a “golden age of capitalism” took off in the West, and the fruits of economic progress were widely shared. The fact that there was a great sense of solidarity helped, as did the nature of technology to increase the workforce. As a result, blue-collar workers prospered, the labor share in GDP peaked, and business and government did well, too.
But starting in the 1970s, several factors changed. On the one hand, the environmental footprint of human activity began to exceed what the planet could handle. Industrialization had brought with it enormous economic progress and innovation, but it had also introduced the massive burning of fossil fuels, the exploitation of natural resources, and pollution of various other kinds.
Furthermore, a different kind of capitalism began to take hold. Milton Friedman, an economist at the University of Chicago, postulated in 1970 that “the social responsibility of companies is to increase their profits,” and nothing more. It contrasted with the view that companies were a social and economic entity, deeply rooted in society, consulting with its stakeholders.
Friedman’s view, namely that of “shareholder capitalism,” ultimately won out, and as a result, more and more companies sought short-term profits and dividends over long-term value creation. In many Western economies, the power of unions waned and government intervention in the economy receded, as did business in general and the financial sector in particular.
Eventually, both commerce and technology continued their advances, leading to an increasingly globalized and connected world. Those trends had been largely beneficial in the first postwar decades, boosting economic growth and wages. But as the nature of capitalism changed, freer free trade, coupled with increasing market concentration, led to greater economic inequalities.
2. The rise of Asia
Meanwhile, on the other side of the world, China and other Asian economies began their rise. Japan was the first Asian economy to adopt new technologies and pursue innovation and trade. In the 1960s, the so-called Asian tiger economies joined. And when Deng Xiaoping became the new leader of China in 1978, he also opened up.
Until Deng’s “reform and opening up” program, China had been something of a sleeping giant, pursuing economic policies such as the collectivization of agriculture and autarky. China was essentially an agrarian economy, which was closed to the world economy. It was detrimental to entrepreneurship, innovation and industrialization.
But a spark changed all that. After visiting Asian Tiger Singapore, Deng left impressed with the city-state’s manufacturing base and its export-based development model. He introduced a similar model in several Chinese cities, creating so-called Special Economic Zones where foreign investment could take place and other capitalist methods were encouraged.
The result was the greatest story of economic development the world has ever witnessed. In the 40 years from 1980 to 2020, China went from being a poor, rural economy to the world’s second-largest economic powerhouse, driven by manufacturing and innovation. Along the way, its citizens saw their income multiply, and education, health care, and housing improved accordingly.
The economic model that he applied was known as “socialism with Chinese characteristics” within the country, but it can be better labeled as “state capitalism”: most of the economy is in private hands, but the government retains a decisive role, establishing the long -temporary management and intervening in critical sectors and at critical moments.
In recent years, other emerging markets began to follow in the wake of China. Or the Asian giant became its biggest export market, as China’s relative lack of natural resources meant it developed a huge appetite for imports. Or, as is the case in countries like Vietnam or Ethiopia, China offered a development model that they, in turn, could adopt.
The most remarkable result, year 2021, is that Asia has a larger share of world GDP than the rest of the world, for the first time in two centuries. Before industrialization in the West took off, Asian economies such as China and India had been the world’s leading economies for most of recorded history. After two centuries of Western rule, a new Asian century has begun.
But some of the same shortcomings that emerged in Western economies starting in the 1970s and 1980s have emerged in China and other emerging markets in recent years. First, economic inequality and other forms of inequality have widened dramatically. Initial inequalities in terms of housing, education, work, or capital exploded along with China’s economic and technological development. A similar evolution took place in other major emerging markets, such as India.
And secondly, as Asia and other emerging economies industrialized, their emissions of CO2 and other greenhouse gases began to increase at the same rate as their economic growth. Today, China (number 8 below) is the world’s largest CO2 emitter, and the United States and Europe are not far behind. In general, CO2 emissions are today at their highest level yet.
3. The elephant graph
The introduction of capitalism in emerging markets, in other words, created some of the same problems that we face in the West: inequality and climate change. This is not to deny the massive achievements of capitalism in its various appearances, or the progress brought by technological advancements and globalization. As stated above, the world is better off in terms of GDP today than ever before in history.
But, as we have also seen, neither the advances have been the same nor have they been without harmful side effects. A striking graphic in this regard is the so-called “Elephant Chart”. Summarize in one line what has been the effect of globalization, technological progress and the widespread adoption of capitalism (either with shareholders or the state in the lead role).
The Elephant Chart, shown below, shows on the horizontal axis each percentile of the population, classified by income level. The vertical axis shows the increase in income that each percentile has had in the last four decades. The resulting picture is revealing: it shows that the rise in world income has been, on average, spectacular, but equally spectacularly uneven.
Click to enlarge The elephant graph showing that the rise in world income has been uneven.
Some of the biggest beneficiaries of state and shareholder capitalism, and advances in commerce and technology, have been the poorest percentiles of the population. They form the new middle classes of emerging markets, including China. The “global middle class,” which includes some of the working classes in the West, saw a much smaller increase in income.
But the biggest increase in revenue is in the global one percent, and even more so in the one percent of one percent. They saw that their income often doubled, tripled, or more. In terms of wealth, the picture is even more uneven. Only a few dozen people, as estimated by organizations such as Oxfam International, now own as many assets as the poorest 50% of the world’s population. And, he also said, COVID-19 is destined to make these inequalities much worse.
4. Stakeholder capitalism
Both of the excesses of our global economy – growing economic inequality and harmful environmental degradation – should make us wonder whether we need another kind of capitalism. Such a system exists: it is called stakeholder capitalism. The stakeholder model is one in which companies do not optimize short-term profits, but long-term value creation, taking into account all their stakeholders.
It is also a system where companies, government, civil society, and international organizations are recognized as equal partners, and where all pursue a common goal: the well-being of people and the planet. It would keep economic inequality from spiraling out of control the way it did. And it would make caring for the planet a much higher priority than it is today.
Turning from shareholder capitalism and state capitalism to shareholder capitalism is no easy task. It requires companies to change their long-term goals, include other stakeholders in their decision-making, and take new measures of success. And it requires responsive and accountable governments, whose members consult both with other stakeholders and with their global peers.
However, it is possible. The social market economies of Western Europe are one example. In countries like Denmark, the Netherlands or Germany, the government, companies and unions to this day work together in an institutionalized form of stakeholder capitalism. And countries like New Zealand and Singapore are experimenting with their own stakeholder models.
In the end, both people and the planet will benefit in the long run if more economies make this shift toward stakeholder capitalism. Given the inequalities and crises we face today, it is a change worth making.
Source: World Economic Forum
[ad_2]
