When this is all over, there is likely to be a new social contract. Which way will we go? asks JANAN GANESH in The FT
This year is the 70th anniversary of George Orwell’s death and the 150th of Charles Dickens’s. Never spellbound by either (“The man can’t write worth a damn,” said the young Martin Amis, after one page of 1984), I was inclined to sit out all the commemorative rereading. And I did. But then the crisis of the day took me back to what one man wrote about the other.
More on that in a minute. First, you will notice the pandemic is putting large corporations through a sort of moral invigilation. Ones that rejig their factories to make hand sanitiser (LVMH) or donate their knowhow (IBM) are hailed. Ones that behave like skinflints (JD Wetherspoon, Britannia Hotels) are tarred and feathered.
Companies have to weigh how much discretionary help to give without flunking their narrow duty to survive and profit.
This is the stuff of Stakeholder Capitalism or Corporate Social Responsibility.The topic has been in the air all of my career. It has been given new urgency by events. It is the subject of much FT treatment.
And Orwell, I suspect, would see through it like glass.
In a 1940 essay (how spoilt we are for round-number anniversaries) he politely explodes the idea of Dickens as a radical, or even as a social reformer. His case is that, for Dickens, nothing is wrong with the world that cannot be fixed through individual conscience.
If only Murdstone were kinder to David Copperfield. If only all bosses were as nice as Fezziwig. That no one should have such awesome power over others in the first place goes unsaid by Dickens, and presumably unthought. And so his worldview, says Orwell, is “almost exclusively moral”.
Dickens wants a “change of spirit rather than a change of structure”. He has no sense that a free market is “wrong as a system”. The French Revolution could have been averted had the Second Estate just “turned over a new leaf, like Scrooge”.
And so we have “that recurrent Dickens figure, the Good Rich Man”, whose arbitrary might is used to help out the odd grateful urchin or debtor. What we do not have is the Good Trade Unionist pushing for structural change. What we do not have is the Good Finance Minister redistributing wealth. There is something feudal about Dickens. The rich man in his castle should be nicer to the poor man at his gate, but each is in his rightful station.
You need not share Orwell’s ascetic socialism (I write this next to a 2010 Meursault) to see his point. And to see that it applies just as much to today’s economy.
Some companies are open to any and all options to serve the general good — except higher taxes and regulation. “I feel like I’m at a firefighters’ conference,” said the writer Rutger Bregman, at a Davos event about inequality that did not mention tax. “And no one is allowed to speak about water.”
What Orwell would hate about Stakeholder Capitalism is not just that it might achieve patchier results than the universal state. It is not even that it accords the powerful yet more power — at times, as we are seeing, over life and death. Under-resourced governments counting on private whim for basic things: it is a spectacle that should both warm the heart and utterly chill it.
No, what Orwell would resent, I think, is the unearned smugness. The halo of “conscience”, when more systemic answers are available via government. The halo that Dickens still wears. You can see it in the world of philanthropy summits and impact investment funds.
The double-anniversary of England’s most famous writers since Shakespeare meant little to me until the virus broke. All of a sudden, they serve as a neat contrast of worldviews. Dickens would look at the crisis and shame the corporates who fail to tap into their inner Fezziwig. Orwell would wonder how on earth it is left to their caprice in the first place.
The difference matters because, when all this is over, there is likely to be a new social contract. The mystery is whether it will be more Dickensian (in the best sense) or Orwellian (also in the best sense). That is, will it pressure the rich to give more to the commons or will it absolutely oblige them?
Showing posts with label social contract. Show all posts
Showing posts with label social contract. Show all posts
Saturday 28 March 2020
Saturday 29 September 2012
The root of Europe's riots
No wonder the protesters are back. They are angry at the backdoor rewriting of the social contract
Rioters beat a policeman during a rally against government austerity measures in Athens. Photograph: John Kolesidis/REUTERS
Throughout the 1980s and 90s, when many developing countries were in crisis and borrowing money from the International Monetary Fund, waves of protests in those countries became known as the "IMF riots". They were so called because they were sparked by the fund's structural adjustment programmes, which imposed austerity, privatisation and deregulation.
The IMF complained that calling these riots thus was unfair, as it had not caused the crises and was only prescribing a medicine, but this was largely self-serving. Many of the crises had actually been caused by the asset bubbles built up following IMF-recommended financial deregulation. Moreover, those rioters were not just expressing general discontent but reacting against the austerity measures that directly threatened their livelihoods, such as cuts in subsidies to basic commodities such as food and water, and cuts in already meagre welfare payments.
The IMF programme, in other words, met such resistance because its designers had forgotten that behind the numbers they were crunching were real people. These criticisms, as well as the ineffectiveness of its economic programme, became so damaging that the IMF has made a lot of changes in the past decade or so. It has become more cautious in pushing for financial deregulation and austerity programmes, renamed its structural adjustment programmes as poverty reduction programmes, and has even (marginally) increased the voting shares of the developing countries in its decision-making.
Given these recent changes in the IMF, it is ironic to see the European governments inflicting an old-IMF-style programme on their own populations. It is one thing to tell the citizens of some faraway country to go to hell but it is another to do the same to your own citizens, who are supposedly your ultimate sovereigns. Indeed, the European governments are out-IMF-ing the IMF in its austerity drive so much that now the fund itself frequently issues the warning that Europe is going too far, too fast.
The threat to livelihoods has reached such a dimension that renewed bouts of rioting are now rocking Greece, Spain and even the usually quieter Portugal. In the case of Spain, its national integrity is threatened by the separatist demand made by the Catalannationalists, who think the austerity policy is unfairly reducing the region's autonomy.
Even if these and other European countries (for other countries have not been free of protests against austerity programmes, such as Britain's university fees riot and the protests by Italy's "recession widows") survive this social unrest through a mixture of heavy-handed policing and political delaying tactics, recent events raise a very serious question about the nature of European politics.
What has been happening in Europe – and indeed the US in a more muted and dispersed form – is nothing short of a complete rewriting of the implicit social contracts that have existed since the end of the second world war. In these contracts, renewed legitimacy was bestowed on the capitalist system, once totally discredited following the great depression. In return it provided a welfare state that guarantees minimum provision for all those burdens that most citizens have to contend with throughout their lives – childcare, education, health, unemployment, disability and old age.
Of course there is nothing sacrosanct about any of the details of these social contracts. Indeed, the contracts have been modified on the margins all the time. However, the rewriting in many European countries is an unprecedented one. It is not simply that the scope and the speed of the cuts are unusually large. It is more that the rewriting is being done through the back door.
Instead of it being explicitly cast as a rewriting of the social contract, changing people's entitlements and changing the way the society establishes its legitimacy, the dismembering of the welfare state is presented as a technocratic exercise of "balancing the books". Democracy is neutered in the process and the protests against the cuts are dismissed. The description of the externally imposed Greek and Italian governments as "technocratic" is the ultimate proof of the attempt to make the radical rewriting of the social contract more acceptable by pretending that it isn't really a political change.
The danger is not only that these austerity measures are killing the European economies but also that they threaten the very legitimacy of European democracies – not just directly by threatening the livelihoods of so many people and pushing the economy into a downward spiral, but also indirectly by undermining the legitimacy of the political system through this backdoor rewriting of the social contract. Especially if they are going to have to go through long tunnels of economic difficulties in coming years, and in the context of global shifts in economic power balance and of severe environmental challenges, European countries can ill afford to have the legitimacy of their political systems damaged in this way.
Sunday 1 April 2012
The rebirth of Japan
What's the story of the next decade?
The country's urge to reset its business culture is a lesson to Britain in finding the way back to prosperity
In some fields Japan is years ahead of the rest of the world. Photograph: Gina Calvi/Alamy
It is a small thing, but it says a lot about the country. At Tokyo's Narita airport, when you take off your shoes at the security screening check, the guard hands you a pair of leather slippers. The message is obvious: this airport cares for your wellbeing and recognises your need.
In Japan, taxi doors swing open automatically; toilet seats are electronically warmed and cleaned; and the extraordinary variety of food is presented exquisitely. There is a passion for satiating every imaginable human want and a joy in embracing the science, technology and innovation that might help deliver just that.
For 40 years, between 1950 and 1990, this passion was a key ingredient driving one of the most remarkable periods of growth in economic history. But for the past 20 years, Japan has been stricken by stagnation. In the late 1980s-90s, it suffered a financial crisis nearly as severe as our own. The economic model – the Ministry of International Trade and Industry guiding Japanese companies; the keiretsu networks of loosely conglomerated firms and associated banks; the great global brands – suffered an implosion.
Yet this remains a $5trn economy, the third largest on the planet. The Japanese themselves are desperate to recover the elixir of growth, and understand that economic conservatism – in Japan just as in Britain – leads to disappointment and heartbreak.
In 2009, the Democratic party of Japan was elected by a landslide, pledging a root and branch reform of every bureaucratic, corporatist and anti-democratic element in Japan's broken system. It also pledged to recast economic policy to serve the people. Despite some epic mistakes, notably its handling of the Fukushima nuclear disaster, it still holds an opinion poll lead over its rival, the Liberal Democratic party (LDP).
However, forces within the government are very much open to pondering where it should go next. Ten days ago, I was invited by the DPJ government to go to Tokyo to contribute to this ongoing conversation.
Cabinet members wanted to discuss what a 21st-century social contract might look like, respecting both necessary labour market flexibility and security. They wanted to understand the contribution that open innovation ecosystems and an entrepreneurial state can play in driving forward innovation and investment. Above all, they asked: how could Japan reinvent its stakeholder capitalism of the second half of the 20th century so that it was more democratic? And they thought there might be something in my ideas rehearsed in the books The State We're In and Them and Us. In short, how could Japan do good capitalism?
It is the question – not only in Japan but, I would argue, in Britain. In Japan the devastating earthquake in Tohoku 12 months ago has made it even more acute. Three hundred and forty thousand people are still without homes. At least 19,000 died. And the nuclear power station at Fukushima very nearly suffered a meltdown.
At the time of the crisis, Japan hoped that, with the DPJ in power, there would be a decisive change from the way such matters had been handled in the past – obfuscation, delay, inactivity and anxiety to protect corporate interests. Yet the new government bounced off the secrecy of Tokyo Electric Power Company, the bureaucratic ministries, a muzzled media and the enveloping tentacles of the employers' organisation, the Keidanren, as if nothing had changed. Prime Minster Kan became party to delivering inadequate and late information via the impenetrable state and corporate networks; many Japanese became devotees of BBC World News as the only purveyor of truth. Kan was forced to resign last summer.
But the Japanese electorate is not ready to return to the status quo. They know they need nuclear power which just 12 months ago provided more than a third of their electricity needs; but as power stations are being closed down for safety inspections local communities are vetoing their reopening. In May, the last nuclear power station operating will also be mothballed.
The terms for their restarting are tough. Local communities, fired up by a new citizen activism, want effective oversight, transparency of information and commitments to meet international safety standards. It is Japanese good capitalism, driven by citizen demands from below.
Faced with this new phenomenon, the LDP is at a loss, while the DPJ itself seems to be re-gathering its conviction that its reform agenda is the only way forward. At an open meeting in the Japanese parliament, I was struck by the interest DPJ MPs showed in discussing innovative ways of kickstarting credit flows – as anathema to the Bank of Japan and Ministry of Finance as they are to the Bank of England and Treasury.
The Bank of Japan has just expanded a version of the Bank of England's quantitative easing programme; but abstains from the activism it used to show in the great days of Japan's growth. The conclusions are obvious. Japan's financial system is broken; an activist state has to restart bank lending by assuming some of the risk – just as it must in Britain.
If Japan could reset its macroeconomic policy, there is an enormous pool of dynamic hi-tech medium-sized firms that could immediately grow very fast. Consultant Gerhard Fasol argues that in areas like LED lighting or mobile phone payment systems, Japan is 10 years ahead of the rest of the world. The Fujitsus and Toshibas of tomorrow are in the wings. What Japan needs is for the increasingly sclerotic giants to be challenged by these many insurgents, who need new institutions to support their ambitions to go global. A new entrepreneurial, accountable state could drive a second phase of powerful Japanese growth.
These debates are foreign to our primitive business culture, which undervalues service and innovation and scarcely thinks about a more productive capitalism. There is a long list of British companies that have tried to break into Japan's market and failed. Observers say the common theme is wholesale insensitivity to the need for service and innovation, the precondition for any success in Japan.
Britain and Japan are two island economies, both mired in private debt with stricken financial systems. Although Japan has a long way to go, it is becoming obvious, confirmed by last week's British budget, which of the two countries is most likely to create the 21st-century framework for growth and prosperity. The Asian story of the next decade will be Japan's renaissance and China's relapse.
Sunday 25 September 2011
Global finance has dysfunction at its heart
Sound fiscal policy alone won't solve this debt crisis. We need structural reform of the entire financial system
The world economy is in turmoil again. We have seen two weeks of near-universal falls in major stock markets, prompted by the spread of the eurozone crisis to Spain and Italy, the phony fiscal crisis in the US manufactured by the Republicans, and the economic slowdown around the world. The first ever downgrading of the US debt by Standard & Poor's last weekend has certainly added to the drama of the unfolding events.
The debate focuses on how budget deficits should be controlled, with the dominant view saying that they need to be cut quickly and mainly through reduction in welfare spending, while its critics argue for further short-term fiscal stimuli and longer-term deficit reduction relying more on tax increases.
While this debate is crucial, it should not distract us from the urgent need to reform our financial system, whose dysfunctionality lies at the heart of this crisis. Nowhere is this more obvious than in the case of the rating agencies, whose incompetence and cynicism have become evident following the 2008 crisis, if not before. Despite this, we have done nothing about them, and as a result we are facing absurdities today – European periphery countries have to radically rewrite social contracts at the dictates of these agencies, rather than through democratic debates, while the downgrading of US treasuries has increased the demands for them as "safe haven" products.
Was this inevitable? Hardly. We could have created a public rating agency (a UN agency funded by member states?) that does not charge for its service and thus can be more objective, thereby providing an effective competition to the current oligopoly of Standard & Poor's, Moody's, and Fitch. If the regulators had decided to become less reliant on their ratings in assessing the soundness of financial institutions, we would have weakened their undue influence. For the prevention of future financial crises we should have demanded greater transparency from the rating agencies – while changing their fee structure, in which they are paid by those firms that want to have their financial products rated. But these options weren't seriously contemplated.
Another example of financial reforms whose neglect comes back to haunt us is the introduction of internationally agreed rules on sovereign bankruptcy. In resolving the European sovereign debt crises, one of the greatest obstacles has been the refusal by bondholders to bear any burden of adjustments, talking as if such a proposal goes against the basic rules of capitalism. However, the principle that the creditor, as well as the debtor, pays for the consequences of an unsuccessful loan is already in full operation at another level in all capitalist economies.
When companies go bankrupt, creditors also have to take a hit – by providing debt standstill, writing off some debts, extending their maturities, or reducing the interest rates charged. The proposal to introduce the same principle to deal with sovereign bankruptcy has been around at least since the days of the 1997 Asian financial crisis. However, this issue was tossed aside because the rich country governments, under the influence of their financial lobbies, would not have it.
There are other financial reforms whose absence has not yet come back to haunt us in a major way but will do so in the future. The most important of these is the regulation of complex financial products. Despite the widespread agreement that these are what have made the current crisis so large and intractable, we have done practically nothing to regulate them. The usual refrain is that these products are too complicated to regulate. But then why not simply ban products whose safety cannot be convincingly demonstrated, as we do with drugs?
Nothing has been done to regulate tax havens, which not only depriven governments of tax revenues but also make financial regulations more difficult. Once again, we could have eliminated or significantly weakened tax havens by simply declaring that all transactions with companies registered in countries/territories that do not meet the minimum regulatory standards are illegal.
And what have we done to change the perverse incentive structure in the financial industry, which has encouraged excessive risk-taking? Practically nothing, except for a feeble bonus tax in the UK.
A correct fiscal policy by itself cannot tackle the structural problems that have brought about the current crisis. It can only create the space in which we make the real reforms, especially financial reform. Without such a reform we will not overcome this crisis satisfactorily nor avoid similar, and possibly even bigger, crises in the future.
Monday 11 July 2011
Capitalism’s ideological crisis
Just a few years ago, a powerful ideology - the belief in free and unfettered markets - brought the world to the brink of ruin.
Even in its hey-day, from the early 1980s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology's 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.
Moreover, output growth in the United States was not economically sustainable. With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.
I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy - or at least the economies of Europe and America, where these ideas continue to flourish.
In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed. Rather than carefully balancing the benefits of each government expenditure programme with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer - not allowing the national debt to increase forcesexpenditures to be limited to taxes.
This leaves open the question of which expenditures get priority - and if expenditures to pay interest on the national debt do not, a default is inevitable. Moreover, to cut back expenditures now, in the midst of an ongoing crisis brought on by free-market ideology, would inevitably simply prolong the downturn.
A decade ago, in the midst of an economic boom, the US faced a surplus so large that it threatened to eliminate the national debt. Unaffordable tax cuts and wars, a major recession, and soaring healthcare costs - fuelled in part by the commitment of George W Bush's administration to giving drug companies free rein in setting prices, even with government money at stake - quickly transformed a huge surplus into record peacetime deficits.
The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract. Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.
But matters are little better in Europe. As Greece and others face crises, the medicine du jour is simply timeworn austerity packages and privatisation, which will merely leave the countries that embrace them poorer and more vulnerable. This medicine failed in East Asia, Latin America and elsewhere, and it will fail in Europe this time around, too. Indeed, it has already failed in Ireland , Latvia , and Greece.
There is an alternative: an economic-growth strategy supported by the EU and the IMF. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.
Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.
Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn't, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous - even if the major emerging market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.
(The author is University Professor at Columbia University and a Nobel laureate in economics)
Even in its hey-day, from the early 1980s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world. Indeed, over the course of this ideology's 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.
Moreover, output growth in the United States was not economically sustainable. With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.
I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy - or at least the economies of Europe and America, where these ideas continue to flourish.
In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed. Rather than carefully balancing the benefits of each government expenditure programme with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer - not allowing the national debt to increase forcesexpenditures to be limited to taxes.
This leaves open the question of which expenditures get priority - and if expenditures to pay interest on the national debt do not, a default is inevitable. Moreover, to cut back expenditures now, in the midst of an ongoing crisis brought on by free-market ideology, would inevitably simply prolong the downturn.
A decade ago, in the midst of an economic boom, the US faced a surplus so large that it threatened to eliminate the national debt. Unaffordable tax cuts and wars, a major recession, and soaring healthcare costs - fuelled in part by the commitment of George W Bush's administration to giving drug companies free rein in setting prices, even with government money at stake - quickly transformed a huge surplus into record peacetime deficits.
The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract. Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.
But matters are little better in Europe. As Greece and others face crises, the medicine du jour is simply timeworn austerity packages and privatisation, which will merely leave the countries that embrace them poorer and more vulnerable. This medicine failed in East Asia, Latin America and elsewhere, and it will fail in Europe this time around, too. Indeed, it has already failed in Ireland , Latvia , and Greece.
There is an alternative: an economic-growth strategy supported by the EU and the IMF. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.
Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.
Do we really need another costly experiment with ideas that have failed repeatedly? We shouldn't, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the US to return to robust growth would be bad for the global economy. A failure in both would be disastrous - even if the major emerging market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.
(The author is University Professor at Columbia University and a Nobel laureate in economics)
Subscribe to:
Posts (Atom)