Social progress is, fundamentally, about policies that promote convergence towards the top: ‘convergence’, because otherwise it isn’t social; ‘towards the top’ because otherwise it isn’t progress. Global social progress extends outcomes to convergence between countries and policies to those that benefit from international coordination. Potentially, it thus has three components: greater equity between countries, coordinated greater equity within countries, and restored global growth.
Three recent developments have made global policy coordination more desirable for each of these conditions. The opportunity afforded by the global commodity boom for the sustained convergence of the poorest countries is, to say the least, fraught. The reduction in intra-country inequality is threatened by the power structure in international corporations. The recovery of global growth is threatened by the decline in OECD investment. This month’s discussion is timely: the present chill climate of short term crisis and long term austerity have shrivelled discussion and driven such issues to the margins. I take the three in turn.
Convergence of the poorest countries
Even during the past decade, when virtually all developing economies have converged in the OECD, the poorest countries have continued to diverge from the emerging market economies. The latter are developing sustainably, in that their economies are becoming more diversified. In contrast, growth in the poorest economies remains based on their traditional economic structures of resource extraction, agriculture and government. Currently, these sectors are benefiting from a global boom, but, while this is an opportunity to finance diversification, it is not in itself a sustainable means of convergence. The challenge is to avoid repeating the common history of missed opportunities. While many of the key choices are national, global policy can help by setting standards. (For details, see my previous columns).
Divergence within countries
Intra-country inequality has been increasing, especially in the USA and Britain. There are many forces at work here, but one that would benefit from international policy coordination is the incentive structures shaping the behaviour of the modern international corporation. The ‘discipline’ of capital markets puts companies at the mercy of shareholders most of whom keep their holdings for less than a year, and so drives managers to the short term maximisation of ‘shareholder value’. In turn, this generates excessive risk-taking at the expense of the obligations to employees, retirees and communities, who in reality have far more at stake that a transient holder of equity. Excess risk taking has, in turn, been powerfully disequalising: the short term gains have been captured privately, whereas the long term losses have been socialised. International policy, probably through the OECD, could aim to rebalance rights and obligations.
The bias in obligations is compounded by the excessive power of managers to skew remuneration in their favour and stronger incentives to do so. The income inequalities generated within corporate remuneration have increased astonishingly over recent decades and still show little sign of having reached equilibrium. The trend may be a response to the reductions in top tax rates which have encouraged companies to reward through salary rather than status. Both the restoration of higher top rates of tax and restraints upon the power of managers to set remuneration are needed, but because of the footloose nature of modern corporations, the risks associated with the policy are lower the more the approach is internationally coordinated.
The IMF has just revised its forecast for global growth substantially downwards. The BRICs are decelerating, and so reviving the OECD is now critical. Yet in the OECD private investment is down due to fears of continued recession, and public investment is down because of fiscal austerity. These behaviours are in aggregate self-fulfilling: individual decisions generate an externality. The decline in public investment is particularly damaging. New research finds that the marginal product of public capital in the OECD is considerably higher than private capital and far in excess of public borrowing costs. An implication is that the public capital stock is already far too small.
Declining investment is not inevitable. Through changing the structure of corporate taxation, governments could increase the returns on private investment at no net budgetary cost. But again, because corporations are now footloose, the risks associated with changing taxation would be lower the better they were coordinated. To increase public investment while maintaining bondholder confidence, governments could cut popular recurrent spending at the same time as increasing investment – precisely the opposite of what is happening. Even if the cuts did not fully offset the spending, the package could not be mistaken for fiscal populism. Again, bondholder confidence is largely relative: if all the major economies borrowed to invest bondholders would have little option but to accept it.
This post is part of the ‘Basic Values Debate’ jointly organised by the Friedrich-Ebert-Stiftung and Social Europe Journal. Read more on the progress debate: ‘At the limits of growth: the promise of new progress’