11 Jul 2018
No political consensus lasts forever – at least not without reform. The pre-eminence of the liberal economic order prior to the global financial crisis might have tempted us to think that this time would be different.
Instead of political convergence, however, we have witnessed growing fragmentation across many Western democracies over the past decade. There has been a polarisation of political views in response to the financial crisis and its fallout. Voices that oppose the economic system, and the role of global finance and international trade within it, have grown louder.
Yet there are risks that proposed solutions could mean ‘throwing out the baby with the bathwater.’ Unless many widespread concerns are successfully addressed, the global economy’s ability to create wealth and lift hundreds of millions out of poverty could increasingly come under threat – leaving us all worse off in the long run.
The financial crisis accelerated structural forces that were already disrupting the established socio-economic order in parts of the West. A lack of global competitiveness in many traditional industries had already consigned millions of workers to structural unemployment.
The fallout from the crisis destroyed jobs and dented confidence in the global economic system. Slow growth hindered the recovery, and many of the new jobs that have been created in developed market economies are casual or temporary in nature.
The rise of a disenfranchised ‘precariat’, battling low wages, high living costs and economic insecurity, has been seized upon by many politicians, eager to capture the energy of their frustrations and ride the wave to power. Some have succeeded at the polls, often with an anti-global agenda.
Yet unravelling the agreements that have underpinned decades of strong economic growth around the world could be highly detrimental, including for many of those embittered by globalisation.
The chart below shows the apparent decline in extreme poverty over the last thirty years and the background of increasing globalisation. Assessing a relationship between the two is no doubt over simplistic; not only do we have the problems of correlation and causation, but there are real problems in collecting poverty data (perhaps best outlined by Morten Jerven).
However, it is clear that we need more than just rhetoric to make a case against globalisation. Trade is not a zero-sum game and it is unlikely that economic nationalism will lead to the recovery in living standards that some argue, with a meaningful risk of unintended consequences. Many lost jobs will never return having been replaced altogether by robots. Moreover, as consumers, many in the developed world benefit from cheaper imported goods. Finally, what about the detrimental impact of economic nationalism on foreign workers?
More specific criticisms might be harder to address.
One is the effect of negative real interest rates, after taking account of inflation, which have reduced the value of savings since rates were first cut in response to the financial crisis. Particular anger has been directed at the European Central Bank from many northern European savers.
Another concern relates to the impact of quantitative easing, whereby central banks have been buying assets to encourage reinvestment and support economic growth. Empirical evidence has, to some extent at least, vindicated the popular view that QE has mainly benefited the rich, whose investment assets have been inflated in value.
However, how can we know the counterfactual outcome from a different approach? Had central banks not stepped in with QE and lower interest rates, the economic pain inflicted by the global financial crisis – including on those who lost out most – could have been much worse.
Despite the lack of clear cut answers on these issues, the champions of todays’ economic system struggle to be heard. In many ways this is understandable. The financial industry is perceived as having been the ‘winner’ in this system and so any arguments it makes to highlight the risks from more radical change will typically be received with scepticism.
The industry is widely believed to be self-serving and has certainly provided ammunition for its critics. It must continue to work hard to improve its standing and enrich the communities it serves.
Those that work within the financial system must display humility and an openness to new points of view. Economic prescriptions that appear solely to benefit our own position will fall on deaf ears.
Finance must work to re-establish its legitimacy at the heart of an economic system that is not just seen to work for the ‘winners’ of globalisation, and support appropriate interventions where markets fail. More than this, capitalism must also recapture its popular appeal by demonstrating that it can work for all.
Without reform, alternatives to the current model will seem appealing in the current ‘age of anxiety’, even if past experience has shown them to fail.
There’s no shortage of radical ideas to address these shortcomings. Ideas such as a citizens’ dividend or “helicopter money”– where central banks transfer money directly to households, bypassing the usual transfer mechanisms – or a universal basic income for all adults, or sovereign wealth funds dedicated to a specific social purpose, should all be explored.
Finding workable ideas that create a more inclusive form of capitalism is essential. If global finance and the economic system are to regain legitimacy, popular reform cannot be the preserve of populists alone.
Anne Richards is CEO at M&G.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.