Business as usual is dead. What has shaped economic analysis and policy over the last forty years has failed us. We need urgent structural rather than incremental reforms.
All this sounds obvious and could have been voiced by either a fundamentalist socialist or a rightwing populist. But these are declarations by no less than the august Organization for Economic Cooperation and Development (OECD), the club for rich countries’ latest report, “Beyond Growth: Towards a New Economic Approach”.
The report was commissioned by OECD Secretary-General Angel Gurria as part of the OECD “New Approaches to Economic Challenges Initiative”, guided by an Advisory Group of economists who are willing to question mainstream neoclassical thinking that has dominated economic policy formulation in the last forty years. This is the frankest admission by the establishment that its thinking was flawed, and that change is inevitable, urgent and necessary.
Basically, the OECD is asking for a paradigm shift out of the present neo-classical model that focuses on GDP growth, ignores people (inequalities) and planet (ecological destruction and climate warming) into a new paradigm that prioritizes human well-being, environmental sustainability, economic resilience and adaptability to new risks.
The rich and developed countries have finally woken up to the realization that in the last decade they have been experiencing a running series of crises – declining productivity, rising inequality, financialization of debt, technological disruption, deteriorating jobs and quality of life, civil wars, pandemics, natural disasters and rising risks of global war. But why were they blind to the crises that those at the bottom of the pyramid, the bottom 40 per cent of the population suffer every day?
The OECD report blames it on the current economic paradigm. The policy makers’ current obsession with quantitative GDP growth completely ignored the qualitative change in the well-being of both people and planet. Thomas Piketty’s brilliant work on inequality (Capital in the 21st Century) makes the simple point that capitalism values capital more than human beings, labour being another commodity to be exploited. Worse, the colonial brand of capitalism that exploits through colonization of new lands and people, first through gunboats, then through money, and finally through the mind, treats Mother Nature as another commodity to be exploited.
This power game has not changed throughout history. After conquest, distribute land and enslaved people to the winners. But when the winners fight amongst themselves for declining spoils, distribute more to the winning faction. The losers are everyone else, including Mother Nature.
Consequently, even though the average GDP numbers appear to grow, qualitatively, the top global 10 per cent (and especially the 1 per cent) has gained in the last forty years significantly more than the bottom half of the population. Moreover, not only have the benefits of trade and globalization been distributed unevenly, good jobs have been hollowed out and sub-contracted out to cheaper workers, with no attention paid to the those who have lost their jobs, income and health insurance.
The cruelty of the current system is amazingly revealed by the pandemic – it no longer matters that this year, up to a million will die globally – getting the GDP numbers up in order to win elections is the priority. The OECD’s manifesto to re-examine growth and economics is therefore commendable. Economics must be more integrative (multi-disciplinary), and economic policy making must take into consideration environmental sustainability, rising well-being, falling inequality, and system resilience. In short “a path of development which meets the needs of both people and planet.”
Visions are inspirational, policies are aspirational, but outcomes are often bad. The OECD Growth manifesto is short on why economic policies are unable to deliver what they promised. This is an area that most economists skirt because they would like to focus on the “economics” rather than the politics. The economics profession fails when it fails to speak economic truth to power. Politicians fail when they fail to speak truth to the people.
The pandemic has shown how the world is suffering multi-dimensionally. In tracking the 2015 Sustainable Development Goals (SGD) in 17 metrics, the Gates Foundation Global Goalkeeper report 2020 says that “mutually reinforcing catastrophes” have resulted in the world regressing in almost every area. In economics, despite governments pumping $18 trillion to revive growth, world GDP may fall $12 trillion or more by the end of 2021. In 2020 alone, more than 37 million people fell into extreme poverty (defined as below $1.90 a day), ending a 20-year streak of progress. The problem is structural, not fixable by incremental moves.
The obvious rational solution to the global pandemic and recession is mutual cooperation, but polarized politics is preventing this from happening. Indeed, there is now a significant new factor that overrides the economic agenda – the rise of national security and military spending and risks. Economic negotiations which used to be the domain of trade and finance ministries are today dominated by national security concerns over technology. You only have to read the Rand reports on the Future of War with China and US as enemies to see that preparation for war is already on all policy makers’ radar screen.
Since war is politics enforced through violent means, we have moved from a dilemma between politics and economics to a trilemma that includes national security and defence. But pushing down that path to war is not a good outcome for the world as a whole, because war will not only disrupt lives, but also livelihoods with huge planetary damage. The First and Second World Wars saw the loss of millions of lives, but few were concerned at that time over the planetary consequences.
In other words, earlier wars were damaging, but World War Three between nuclear powers would be existential. Growth would not even exist if much of humanity is destroyed.
We do need new economic paradigms, but beyond growth, we need to think (and act) on paradigms for well-being for all, rather than beating deranged drums of war.
The writer is a former central banker and financial regulator. The views are entirely his own.