A “global new deal” needed to build more inclusive economies
A UN development agency has called for a “global new deal” comprising fiscal stimulus as well as regulatory and redistributive strategies to revive and rebalance the world economy.
by Kanaga Raja
GENEVA: A “global new deal” that fosters proactive fiscal policies, along with coordinated strategies that address the triple challenges of large inequalities, demographic change and environmental problems, has been advocated by the United Nations Conference on Trade and Development (UNCTAD).
In this year’s edition of its annual flagship Trade and Development Report (TDR-2017), released on 14 September, UNCTAD has argued that a new policy agenda is needed to help create more inclusive societies and economies.
The original New Deal, launched in the United States in the 1930s and replicated elsewhere in the industrialized world, particularly after the end of the Second World War, established a new development path that focused on three broad strategic components – recovery, regulation and redistribution – said the TDR.
It said that while these components involved specific policy goals tailored to particular economic and political circumstances, they made job creation, the expansion of fiscal space and the taming of finance a common route to success along this new path.
Building a new deal today could draw on those same components; and, as before, States require the space to tailor proactive fiscal and other public policies to boost investment and raise living standards, supported by regulatory and redistributive strategies that tackle the triple challenges of large inequalities, demographic pressures and environmental problems.
“However, the specific challenges of inequality and insecurity in the twenty-first century will not be tackled by countries trying to insulate themselves from global economic forces, but rather by elevating, where appropriate, some of the elements of [US President Franklin D.] Roosevelt’s New Deal to a global level consistent with today’s interdependent world,” said UNCTAD.
In a foreword to TDR-2017, UNCTAD Secretary-General Mukhisa Kituyi points out that in sharp contrast to the ambitions of the 2030 Agenda for Sustainable Development, “the world economy remains unbalanced in ways that are not only exclusionary, but also destabilizing and dangerous for the political, social and environmental health of the planet.”
The gains of economic growth have disproportionately accrued to the privileged few, and a combination of too much debt and too little demand at the global level has hampered sustained expansion of the world economy.
Austerity measures adopted in the wake of the global financial crisis nearly a decade ago have compounded this state of affairs, hitting the world’s poorest communities the hardest, leading to further polarization and heightening people’s anxieties about what the future might hold.
While some political elites have been adamant that there is no alternative, this has proved fertile economic ground for xenophobic rhetoric, inward-looking policies and a beggar-thy-neighbour stance.
Others have identified technology or trade as the culprits behind exclusionary hyper-globalization, but this too distracts from an obvious point: without significant, sustainable and coordinated efforts to revive global demand by increasing wages and government spending, the global economy will be condemned to continued sluggish growth, or worse.
The Trade and Development Report 2017 argues that now is the ideal time to crowd in private investment with the help of a concerted fiscal push – a global new deal – to get the growth engines revving again, and at the same time help rebalance economies and societies that, after three decades of hyper-globalization, are seriously out of kilter.
The Sustainable Development Goals (SDGs) agreed to by all members of the United Nations two years ago provide the political impetus for this much-needed shift towards global macroeconomic policy coordination.
TDR-2017 calls for more exacting and encompassing policy measures to address global and national asymmetries in resource mobilization, technological know-how, market power and political influence caused by hyper-globalization that have generated exclusionary outcomes and will perpetuate them if no action is taken.
With the appropriate combination of resources, policies and reforms, the international community has the tools available to galvanize the requisite investment push needed to achieve the ambitions of the SDGs and promote sustainable and inclusive outcomes at both global and national levels, Kituyi said.
World economic prospects
According to TDR-2017, despite renewed optimism about the prospects for a broad-based global recovery, global growth is unlikely to rise much beyond the average rate of 2.5% recorded in the five-year period 2011-16. The forecast for the world economy in 2017 is 2.6%, not much higher than the 2.2% in 2016 and the same as in 2015.
The pick-up in performance can be attributed largely to the turnaround in some larger developing countries that were experiencing recession, and in the group of developing countries as a whole (from 3.6% in 2016 to 4.2% in 2017).
With growth in Japan, United States and the core eurozone economies stuck at a low level and clear signs of a slowdown in the United Kingdom, unless there is a significant and coordinated break with fiscal caution and austerity in these economies, the global environment will continue to hamper growth prospects across the developing world.
The situation in developing economies is, if anything, even more difficult to gauge, with considerable regional and country-level variation. The rapid recovery from the initial financial shock of 2008 has given way to a persistent slowdown in growth. The rate of output growth for the group declined continuously from 7.8% in 2010 to 3.6% in 2016, and is currently projected to rise to 4.2% in 2017.
The start of 2017 also saw some of the larger emerging economies move out of the recessionary conditions of the previous year, but with little chance of growth returning to rates registered in the first decade of the new millennium.
Two factors play a role here. The first is that while oil and commodity prices are up from their recent troughs, they are still well below the highs they experienced during the boom years, which dampens the recovery in commodity-exporting countries.
Second, fiscal tightening and/or enforced austerity continue to constrain domestic demand and growth in many countries. Indeed, with advanced economies abnegating responsibility for a coordinated expansionary push, austerity has become the default macroeconomic policy position in many emerging economies. This is certainly true of those facing fiscal imbalances and mounting debt levels, but it is also relevant in other countries pressured by foreign, especially financial, investors.
Not surprisingly, anxious policy-makers across the South are focusing their attention on the actions of the United States Federal Reserve, on the decisions of commodity traders and on the predatory practices of hedge funds, with a growing realization that they have limited control over some of the key components of their economic future.
In the absence of sustained international efforts to manage a coordinated expansion across the global economy against a backdrop of austerity, boom and bust is likely to remain the dominant growth pattern. Despite some moments of guarded optimism, stable and inclusive economies will remain elusive, said the TDR.
Whether a country has been able to grow largely based on the domestic market or has relied on exports as the driver of growth, global conditions are not conducive for a return to more widespread buoyancy.
Talk of technology or trade as the disruptive villains in this narrative distracts from an obvious point: unless significant and sustainable efforts are made to revive global demand through wage growth in a coordinated way, the global economy will be condemned to prolonged stagnation with intermittent pick-ups and recurrent downturns.
In a world of mobile finance and liberalized economic borders, no country by itself can attempt a significant fiscal expansion without risking capital flight, a currency collapse and a crisis. What is needed therefore is a globally coordinated strategy of expansion led by state expenditures, with intervention that guarantees some policy space to allow all countries the opportunity of benefiting from the expansion of their domestic and external markets.
As of now, the sentiment seems to be different, with nationalist rhetoric, protectionist arguments and a beggar-thy-neighbour outlook dominating economic discourse. Growing inequalities feed this xenophobic turn, which provides a convenient “other” to blame for everybody’s problems.
“Clearly, viable and equitable growth in this context will require a fiscal stimulus, along with other elements of a regulatory and redistributive framework, that must be coordinated across countries,” said the TDR.
From partial to hyper-globalization
There are, undoubtedly, reasons to worry about the current health of the global economy and about emerging threats to rising living standards, political stability and environmental sustainability. Questions over the strength and effectiveness of multilateral institutions designed to help manage the challenges of an interdependent world order are also of concern.
Much of the current discussion assumes that these institutions were immaculately conceived at the end of the Second World War, and that, subsequently, they have overseen a steady march towards a level global playing field of open and competitive markets and broadly shared prosperity. The reality, however, is more punctuated and nuanced.
The three decades or so after the Second World War ushered in multilateral rules and structures to prevent beggar-thy-neighbour policies, restrain volatile capital flows and extend international cooperation. But there was still enough space for national governments to undertake proactive public policies in support of full employment and extended welfare provision in the North, and resource mobilization and industrialization in the South.
This balancing act was built around a political consensus (and related compromises) aimed at avoiding a repeat of the international economic disintegration of the 1930s, and the waste, wretchedness and war that followed.
That consensus required the leading economies (and their corporations) to accept some constraints on their ability to dominate international markets and to move capital freely from location to location, whilst giving a privileged role to the dollar as a means of stabilizing foreign exchange markets.
But it also supported high rates of aggregate capital formation along with wages that rose broadly in line with productivity in the developed countries. These generated strong global aggregate demand, leading to a rapid rise in international trade. Nevertheless, this remained only a partial globalization, in that the rules and structures were designed primarily by and for developed rather than developing countries, and were concerned more with openness to trade than to financial flows or transfers of technology.
These arrangements buckled under a series of distributional pressures and economic shocks in the 1970s, giving way to hyper-globalization from the early 1980s. It was characterized by an extensive deregulation of markets – particularly financial and currency markets – in rich and poor countries alike, the attrition of the public realm, and the extension of profit-making opportunities to ever-widening spheres of not only economic but also social, cultural and political life.
The associated withdrawal of public oversight and management of the economy included the curtailment, and sometimes even the elimination, of policy measures previously used by States to manage their integration into the global economy. This was based on the belief that the unregulated forces of supply and demand were best suited to this task, said the TDR.
New patterns and players in international trade emerged along with a surge in international capital flows and significant shifts in the international division of labour.
Hyper-globalization has also been accompanied by a radical break in the governance of the postwar international framework, whereby “bodies once designed to foster sovereignty are now recast to curtail it”. Meanwhile, there has been a proliferation of more informal cross-border governance arrangements built around corporate networks and public-private partnerships.
Expansionary monetary policies have become the principal instrument of macroeconomic management, even as tight fiscal policies have constrained expansion. And the goal of financial stability has taken a backseat to the promotion of “financialization”, enabling financial markets, financial motives, financial institutions and financial elites to assume the upper hand in the operation of the economy and its governing institutions, at both national and international levels.
Together these pressures have steadily eroded the checks and balances that had previously helped channel market forces into the creative and productive activities needed for long-term growth. Capital formation has stagnated, speculative investments (by banks, businesses and households) have proliferated, and rising levels of private debt have replaced rising wages as the binding agent in increasingly insecure and fragile socioeconomic structures.
Even as many economists were anticipating a prolonged period of economic stability and income convergence, hyper-globalization entered its own dammerung (twilight) with the financial crisis of 2008-09, causing deep and long-lasting damage in the developed economies and a delayed but now evident slowdown in developing economies.
According to UNCTAD, the crisis was linked to rising economic inequalities both as a cause and an effect, and those inequalities were further accentuated by the policies adopted after the crisis. This trend has become a growing concern for policymakers seeking to promote hyper-globalization to an increasingly sceptical public.
There is now a greater willingness, says the TDR, to acknowledge that inequality may be an obstacle to growth, that it can pose a serious political threat to more open societies, and that current levels of inequality are morally unacceptable. However, the challenge of forging a more inclusive agenda is compounded by difficulties in measuring the problem.
Beyond some basic indicators of extreme deprivation, measuring poverty has never been straightforward; it is subject to changing social attitudes and political sentiments. Moreover, poverty data quickly become embroiled in a whole range of contentious issues that divide supporters and critics of hyper-globalization; for example, is it “the market” or the Chinese State that deserves the most applause for lifting more than a billion people out of extreme poverty?
The TDR said even as inequality has emerged as a primary political concern, the international community has lacked a convincing narrative linking distributional issues to the challenges of growth and development; instead, it has been focusing on the failure of national policymakers to adapt to the borderless forces of economic progress.
The current discussion continues a debate that began in the early 1990s, on whether it is increased North-South trade or technological change that is the principal source of economic disruption in the developed economies.
The impact of technological change is usually traced to relative price movements, the factor content of production and elasticities of substitution, with a bias towards new technologies (particularly information and communication technologies, or ICTs) that give skilled labour a wage premium over unskilled labour, thereby skewing income distribution.
This argument seems to offer a more palatable explanation than trade shocks, given the ubiquitous reach of technological change and its reported growth impulses (traditionally measured through the large residual in growth accounting exercises). It also lends itself to an easy policy agenda that targets education as the surest way to achieve more inclusive growth.
The “trade versus technology” discussion has served to highlight the critical role of employment in fostering inclusive economies, particularly given that a growing number of households are increasingly worried that the kinds of stable, well-paid jobs needed to secure a middle-class lifestyle have already been hollowed out in the developed economies and are also increasingly out of reach for an aspiring middle class in many emerging economies.
“However, the evidence linking greater inequality to either trade or technology remains inconclusive, in part because the scale of changes in both these areas over the past two decades does not directly match the pattern of job destruction in the manufacturing sector.”
The TDR further argues that the workings of the global economy and of individual national economies are closely tied to the cumulative sources of market power augmented through specific policy measures, including those that have helped to boost profits at the expense of wages.
This has given rise to unstable growth regimes, driven by rising levels of debt, and it reinforces the point that hyper-globalization has become intimately connected to the financialization of economic activity and to concomitant increases in income inequality within and across economies.
Since the financial crisis of 2008-09, researchers have paid growing attention to these links between polarization and instability, in part because inequality is increasingly considered a factor that contributed to that crisis.
Thomas Piketty’s Capital has become the leading opus in this emerging canon, and, despite its methodological shortcomings, it has refocused the inequality debate from the bottom of the income ladder (extreme poverty) to the top 1%. This, in turn, has drawn attention to systemic economic causes of rising inequality.
Moreover, by bringing wealth back into the discussion, Piketty has revived Adam Smith’s political economy aphorism (borrowed from Thomas Hobbes) that wealth is power, and – by implication – that an increasingly unequal distribution of wealth is likely to skew political power and, with it, policy design in favour of those at the top of the income ladder.
The TDR also said that two big trends characterize the era of hyper-globalization: a massive explosion in public and private debt, and the rise of super-elites loosely defined as the top 1% of income earners. These trends are associated with the widening gap in ownership of financial assets, particularly short-term financial instruments, and the related growth of financial activities that, as the economist James Tobin noted long ago (1984), “generate high private rewards disproportionate to their social productivity”.
“This is a world where rent extraction has become a much more pervasive source of income inequality,” said the TDR.
The TDR noted that less attention has been given to the ways in which non-financial corporations have become adept at using rent-seeking strategies to bolster their profits. Indeed, financial incomes constitute only one part of rents in this broad definition. It said a significant proportion of rents has also accrued through monopolies or quasi-monopolies created by intellectual property rights (IPRs), while still others can be described as “political rents” derived from the ability to influence particular aspects and details of government policies in ways that disproportionately favour certain players.
Recent evidence of rising market concentration across several sectors, at both the national and international levels, has revived interest in the links between market power, rent-seeking and income inequality. Market concentration and rent extraction can feed off one another, resulting in a “winner-takes-most competition” that has become a visible part of the corporate environment, at least in some developed economies.
The TDR highlighted three evident sources of exclusion: (i) the automation of production, in particular robotization, and the threat of this causing a “hollowing out” of the human workforce; (ii) the segmentation of labour markets, in particular in terms of the gender dimension, which threatens to engender a “race to the bottom”; and (iii) corporate strategies to concentrate control over markets, particularly by non-financial corporations, combined with growing “rent extraction”.
Each presents its own distinct challenges to policymakers, in both developed and developing countries, who seek more inclusive outcomes. However, they are all interconnected through the deregulation of markets and a tighter control of assets, along with asymmetries in market power as a potent source of growing inequality.
An inclusive agenda
“From all this, it is clear that moving away from hyper-globalization to inclusive economies cannot be a matter of simply boosting human capital, filling information gaps, honing incentives, ensuring better provision of public goods – particularly education – extending credit to the poor and providing stronger protection to consumers.”
Rather, said the TDR, it demands a more exacting and encompassing agenda which addresses the global and national asymmetries in resource mobilization, technological know-how, market power and political influence which are associated with hyper-globalization and which generate and perpetuate exclusionary outcomes.
Such an approach would bolster the SDG agenda of tackling income inequality, both within and across countries, with a strong narrative around which effective policy measures could be designed, combined and implemented.
Today, no less than 50 years ago, achieving prosperity for all in an interdependent world must still involve paying close attention to the biases, asymmetries and deficits in global governance that can stymie inclusive and sustainable outcomes.
With this in mind, a possible narrative around which an alternative inclusiveness agenda might be fashioned is a “global new deal”, said UNCTAD.
The original New Deal established a new development path with three broad strategic components: recovery, redistribution and regulation. While these components gave rise to specific policy goals tailored to particular economic and political circumstances, they made the taming of finance a common route to success along this new path.
Franklin D. Roosevelt, in his 1944 address to the US Congress, belatedly added another ambitious set of economic rights as a final component to achieving a secure and prosperous postwar United States. These included: the right to a useful and remunerative job, the right to economic security at all stages of life, the right to fair competition, the right to a decent home, adequate medical care, good health and a good education.
The shift from partial globalization to hyper-globalization has failed to bring about a more stable, secure and inclusive international order; and the lead role ceded to unregulated financial markets appears to be particularly ill-suited to delivering the SDGs. Just how an agenda built around recovery, regulation, redistribution and rights takes shape will depend, again, on local circumstances, and policymakers will need to ensure that they have the requisite policy space.
However, the specific challenges of inequality and insecurity in the 21st century will not be tackled by countries trying to insulate themselves from global economic forces, but rather by elevating the elements of the original New Deal to a global level consistent with today’s interdependent world.
According to the TDR, just as in the past, today’s global new deal will have to face the challenge of reclaiming and renewing the public sphere in ways that offer an alternative to the short-term, predatory and at times destructive behaviour of deregulated markets that is increasingly provoking a popular backlash.
Achieving this will require a more proactive State, but it will also mean empowering non-State actors to better mobilize and direct productive resources, and to establish levels of cooperation and coordination to match the ambition required.
According to the TDR, some possible elements of a global new deal include:
l Ending austerity: This is a basic prerequisite for building sustainable and inclusive economies. It involves using fiscal policy to manage demand conditions, and making full employment a central policy goal. Monetary expansion should also be used differently, so as to finance public investments which add to inclusive and sustainable outcomes. As part of a general expansion of government spending that covers physical and social infrastructure, the State can act as an “employer of last resort”; specific public employment schemes can be very effective in job creation, especially in low-income countries, where much of the workforce is in informal and self-employed activities. Both public infrastructure investments and employment schemes are important for reducing regional imbalances that have arisen in developed and developing countries.
l Enhancing public investment with a strong caring dimension: This would include major public works programmes for mitigating and adapting to climate change and promoting the technological opportunities offered by the Paris Climate Agreement, as well as addressing problems of pollution and degradation of nature more generally. It also means dealing with demographic and social changes that erode local communities and extended families by making formal public provision of child care and elderly care a necessity. In both respects, public investments should be designed to enable and attract more private investment, including by small and medium-sized enterprises (SMEs) and in more participatory ownership forms such as cooperatives.
l Raising government revenue: This is key to financing a global new deal. A greater reliance on progressive taxes, including on property and other forms of rent income, could help address income inequalities. Reversing the decline in corporate tax rates should also be considered but this may be less important than tackling tax exemptions and loopholes and the corporate abuse of subsidies, including those used to attract or retain foreign investment.
l Establishing a new global financial register: Clamping down on the use of tax havens by firms and high-wealth individuals will require legislative action at both national and international levels. Interim efforts in this direction could include a global financial register recording the owners of financial assets throughout the world.
l A stronger voice for organized labour: Wages need to rise in line with productivity. This is best achieved by giving a strong voice to organized labour. At the same time, job insecurity also needs to be corrected through appropriate legislative action (including on informal work contracts) and active labour market measures. More innovative supplementary income support schemes could be considered for achieving a fairer income distribution, such as a social fund that could be capitalized through shares issued by the largest corporations and financial institutions.
l Taming financial capital: Crowding in private investment requires taming financial institutions to make them serve the broader social good. In addition to appropriate regulation of the financial sector, it is important to tackle private banking behemoths, including through international oversight and regulation, as well as to address the highly concentrated market for credit rating and the cozy relationship between rating agencies and the shadow banking institutions that have allowed “toxic” financial products to flourish.
l Significantly increasing multilateral financial resources: This should include meeting targets for official development assistance (ODA), but also ensuring better capitalized multilateral and regional development banks. In addition, the institutional gap in sovereign debt restructuring needs to be filled at the multilateral level.
l Reining in corporate rentierism: Measures aimed at curtailing restrictive business practices need to be strengthened considerably if corporate rentierism is to be reined in. The 2013 OECD BEPS (base erosion and profit shifting) initiative is a start, but a more inclusive international mechanism for the regulation of restrictive business practices will be needed. Earlier attempts in the United Nations, dating back to the 1980s, would be a good place to begin. Meanwhile, stricter enforcement of existing national disclosure and reporting requirements for large corporations would be useful. A global competition observatory could facilitate the task of systematic information gathering on the large variety of existing regulatory frameworks, as a first step towards coordinated international best practice guidelines and policies, and to monitor global market concentration trends and patterns. Competition policy more generally should be designed with an explicit distributional objective.
l Respecting policy space: Meaningful reform of the many restrictive investment and intellectual property policies enshrined in thousands of bilateral and the growing number of regional trade and investment agreements, will be impossible without a fundamental overhaul of the current international investment regime. This should begin with rethinking its current narrow purpose of protecting foreign investors in favour of a more balanced approach that takes the interests of all stakeholders on board and recognizes the right to regulate at the national level.
The international investment dispute settlement and arbitration system needs to be fixed and, if necessary, replaced by a more centralized system with proper appeal procedures and grounded in international law. An Advisory Centre on International Investment Law could help developing-country governments navigate disputes with multinational corporations on more egalitarian terms. (SUNS8534)
Third World Economics, Issue No. 646, 1-15 August 2017, pp2-6