In last week’s contribution I covered in a very brief way the wider scenario in which the yearly meeting of the World Economic Forum took place this year. I had argued that this backdrop does not represent much reason for optimism. To make things worse, we could be seeking to apply old formulae to the new problems, because we may find the scenario familiar. We would not be recognising that in the meantime so many factors have changed, that we may not see the need to refine economic strategy.
In fact several commentators stated that the issues and challenges identified and discussed at previous meetings have not been adequately addressed by governments and business leaders and these issues and challenges seem to have now caught up with them. As such the atmosphere was very sombre and sober. There was no hype.
The issue of income inequality has become very glaring. After the international financial crisis of a decade ago and the resulting economic recession, the gap between the rich and the poor has grown. The economic crisis has hurt a great number of people, even if there were some winners. For the sake of the economy, workers have had to accept that their income does not increase in line with their increased productivity.
So countries as a whole may have benefitted from globalisation and technological developments – but that is because we look at aggregate numbers. The middle class has shrunk in many countries. There has been a growing market concentration in a number of sectors, resulting in less employers and less power for workers.
Bitterness and anger have resulted, requiring us to take steps to redefine economic strategy. The argument may not apply for Malta because the trend in economic growth in the last 15 years has been different in Malta to that of other countries. However, if we look at the bigger picture, the world certainly needs a new approach to economic management.
Admittedly some countries have benefitted from globalisation. People in some countries with emerging economies feel more positive about technology as it has provided access to markets, opportunities and employment. However, in the leading economies, large sections of their population feel worse off and do not have much hope about the future. Life is simply not getting better.
To say it as it is, people are feeling economically insecure
A majority of people living in the EU expect the economy of their country not to show signs of improvement in the coming months. To say it as it is, people are feeling economically insecure. And this has led to the sombre and sober atmosphere at the Davos meeting of the World Economic Forum.
A question that needs to be answered is how can further developments in technology and increased trade among countries, serve to reduce income inequality and bring about more social cohesion. Can there be only winners? Do we need to look at a new social contract which provides citizens with economic security that would then require a different economic approach to the one we have got used to? Can we use new technologies and increased trade among nations to promote the common good, as opposed to creating division and discord?
The answer is yes – an unqualified yes. However, we need to rethink some aspects. First, we need to create some sort of measure of consumer welfare and well-being. This cannot be whittled down to the share of employment income of the gross domestic product, as is the case at present.
Second, linked to this we need to distinguish between what is real economic value and what is referred to by economists as economic rent. Economic rent is that part of the income which does not result from the creation of economic value, but results from situations that favour a particular person or company. The presence of economic rent leads to income inequalities and the creation of winners and losers in an economy.
Third, governments need to rethink strategies related to job creation. We have got into a situation where governments incentivise job creation through a diverse set of measure such as lower tax rates and cheaper land and then let the private sector to operate. This was a good strategy, but it seems to have run out its course. Should governments take a more interventionist approach in the sphere of job creation through direct investment in specific areas such as infrastructure, the green economy and IT.
Fourth, there should be a total rethinking of social welfare systems. These were developed at a time where there was less volatility in labour markets and the economy, and when stable employment was the norm. This is no longer the case. As such although unemployment and poverty may be familiar concepts, the reasons for unemployment and poverty today are different to those that caused unemployment and poverty some 30 or 40 years ago.
This requires governments to adopt innovative approaches and to redefine their economic strategy.