financialization Archives

Globalisation 3.0

By Diego Castañeda Garza

Some scholars would argue that the world was first globalised as far as five centuries in the past when the European conquests of the new world brought its sinews to the old. When silver began to circulate the globe as the first truly global commodity (Flynn & Giráldez 2004). However, for most economists, the world was first globalised as close as two centuries ago, after the end of the Napoleonic wars, with the rising industrial power of the British nation and the peak of its imperial power (O’Rourke & Williamson 2002).

In any case, five or two centuries ago, globalisation has always implied distributional effects, winners and losers in each corner of the world it has reached. First, the enrichment of political and economic elites in the colonial powers and its colonised countries and then again at the time of the great divergence when countries started to industrialise, but most of their populations at either time did not. Today’s globalisation is not different; we have designed it that way.

Since the beginnings of trade theory with David Ricardo’s Principles of Political Economy and Taxation and the introduction of the idea of comparative advantage, the existence of distributional effects was a distinct aspect of international trade. Trade specialisation following national comparative advantages strongly favoured some sectors and industries and hurt others. The gains for trade were never distributed equally among all sectors; the distribution of wages, benefits and rents entailed by necessity winners and losers. Nevertheless, for a long time, economists, when engaging the public about international trade and its benefits, when speaking and teaching about Ricardo’s ideas (and their extensions through the Hecksher-Ohlin model, i.e equalising international prices and wages entails winners and losers) obviated this basic result:often not all benefit from trade.

As Polanyi (1944|2017) argued, the attempt to disembed politics from the economy entails risks. In the past, the negligence encouraged by not recognising the distributional consequences of globalisation and the failure to address them have been a source of social and political instability. Ignoring the people propelled backlashes against globalisation more than a century ago. At the end of the 19th century and the beginning of the 20th, one of those backlashes occurred. The consequence of the backlash was that several countries (i.e. Germany, France, Sweden) that previously had been moving towards trade liberalisation halted their movement. They started to look backwards to protectionist policies. In time, the outbreak of the Great War finally ended the so-called first globalisation (O’Rourke & Williamson 1999).

From this historical experience, we should have learned an essential lesson in our times, but we failed to do so. The lesson is that there is nothing natural nor granted in the process of achieving a sustainable global economic integration. Similarly, there is no linear path of development that necessarily arrives at a hiper-globalised world. Globalisation today, or in the 19th century, is an international political construct supported by the equilibrium of power and interests between existent states. The inequality embedded in our economic systems, in the same way, exists largely due to political economy reasons.

After the 1970s, the end of the trente glorieuses, a new policy framework characterised by deregulation, liberalisation and the capture of the state by private interests took root around the world. It propelled the new second globalisation. Over the last four decades, we have been living in an increasingly interconnected world. For decades, the rate of growth of international trade surpassed the growth rate of the world economy, a phenomenon often called hyper-globalisation. Underlying this era, we have witnessed high-speed economic growth in some regions, but also growing inequalities and accelerated environmental degradation. Now, at the end of this period, there is a trend break in which the costs of the politics of previous years are manifesting themselves. We are witnessing a reversal of fortune in which China is returning to a prominent role in the global economy. Meanwhile, the advanced countries that defined the rules of the world economy are riddled again with backlashes, political instability, and economic stagnation.

These already turbulent times got compounded with the pandemic and the economic fallout it unleashed. However, this bleak scenario also presents us with opportunities. The current sense of crisis around the world, especially in the advanced countries, provides the imperative to solve the “twin problems” of the 21st century: rising national inequalities and climate change. It is a unique opportunity to redesign globalisation under new principles. It represents a chance to redesign it around principles that privilege equality, sustainability, and the existence of global public goods, like global public health and our environment.

The Great Lockdown, a necessary response due to the Sars-CoV-2 pandemic, has served as a mirror for nations to look at themselves, it has made their problems even more evident. The global nature of the current crisis and the way it interacts and exacerbates within-country economic inequalities exhibits economic weaknesses, intensifies geopolitical conflicts, and highlights the need for global solutions. History has yielded us with a perfect context to change globalisation. It is an opportunity to work towards the solution of the twin crisis and, in the process, create a new globalisation 3.0.

Globalisation 3.0 should be constructed as a more sensible process of economic integration. It should be embedded with different rules and norms of good behaviour, that privileges the needs and preferences of the world population and not the preferences of global elites. Instead of focusing on capital flows and finance, it should focus on public health, climate change, labour rights. It should do a better job of representing the priorities of developing countries. Historical experiences either in the times of the gold standard, Bretton Woods or the current one, shows to us that the rules give the shape of globalisation. The rules we agree to uphold, the priorities we set.

The construction of globalisation 3.0 should ensure countries have enough policy space to guarantee economic, political, and social stability. In that sense, instead of reaching from the global to the national in what constitutes a politically fragile architecture, the new rules should reach from the national to the global. It should ensure the states liberty to pursue pragmatic policies that enhance their development capabilities. Room to do active industrial policy, to correct economic inequalities through adequate taxation. That space implies the need to accept the embeddedness of politics in economic matters, to accept that economic policy is unsustainable without addressing mass politics.

To fix our problems, the existence of tax havens, climatic disaster, the surge in inequalities, and their feedback loop towards political life is a necessity of our time. But it will not be possible if we choose to preserve globalisation in its current form. There is no need for a tradeoff between national policies and true global imperatives. Both can be aligned, but they require that we finally learn the lessons of history and redesign our global economy in such a way to leave room for both. In the end, it is only the harmony between national and global interests that will allow us the capacity to respond to our challenges. Redesign the functionings of the world economy is the path to preserve social stability, develop our countries and respond to the crises of our times.

About the author: Diego Castañeda Garza is an economist and economic historian; he is the head of the economic cluster at Agenda for International Development (A-ID) and a coordinator of the Economic History Working Group at the INET’s Young Scholar Initiative.

This article is a runner up in an essay competition held by the UNCTAD YSI Summer School on Globalization and Development Strategies. Participants of the school worked with senior scholars to fine-tune their drafts, and the top-5 articles were published here. For other articles in the series, please click here.

About UNCTAD UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964. Its headquarters are located in Geneva, Switzerland, with offices in New York and Addis Ababa. UNCTAD is part of the UN Secretariat, reports to the UN General Assembly and the Economic and Social Council, and are also part of the United Nations Development Group.

Global economic justice: from aspirations to transformative action

By Sergio Chaparro Hernández

The unfulfilled promise of a just global order

The Universal Declaration of Human Rights states that everyone is entitled to a social and international order in which her rights can be fully realized. However, the functioning of the global economy today is far from aligned with the kind of order the Declaration prescribes.

Before the COVID-19 pandemic, inequalities between and within countries were already alarming. But confronted with disturbances such as pandemics, the world seems to move towards a greater concentration of power and wealth in the hands of the few, while disadvantaged populations are left behind. Lower-income countries face severe restrictions on their policy space in trade, fiscal, industrial, digital and monetary matters, and the global financial architecture exposes these countries to increasing systemic risks. International cooperation, which is highly necessary to address pressing global challenges, is replaced by competition between States against a background of increasing corporate power. The global order is not enabling the full realization of rights, but rather restricting human flourishing for the many while reinforcing privileges for the most powerful.

Neoliberalism and (the lack of) global democracy

Neoliberalism, understood as the project of creating a world tailored to the needs of capital, faces a serious crisis but has proven its ability to reinvent itself. It is true that some of the entrenched policy myths that its advocates had turned into ‘conventional wisdom’, such as the benefits of fiscal austerity or free trade for all, have been called into question in the context of the pandemic. But they might be revived under more friendly packaging. It is worth remembering how corporate attempts to capture the 2030 Agenda and the Paris Agreement are well advanced. In fact, international financial institutions (IFIs) are prioritizing private finance mechanisms -such as public-private partnerships- over domestic resource mobilization through progressive taxation or through development banks to achieve the Sustainable Development Goals (SDGs) and building ‘green’ infrastructure. Then, it would not be surprising that, in the absence of orderly and massive debt relief and restructuring, a new wave of austerity will be presented sooner than later as the only way to restore trust in domestic economies and let the private sector play the role of ‘Building Back Better’.

In this context, the lack of democratic governance on economic matters goes without saying. Currently, key decisions to address the unparalleled risks and instability that hyper globalization has created are being taken on an ad hoc basis in spaces such as the G-20, when not in opaque instances in which corporate interests prevail. These spaces lack any grounds in international law to operate as the captains of the global economy. International financial institutions continue to function under a plutocratic model that assigns decision-making prerogatives based on the outdated balance of power of the post war economy. In other fields, such as in global tax matters, the OECD controls the agenda and works as the de facto standard-setting global institution, in the absence of a multilateral body in which all countries can participate on an equal footing. On the investment side, there is a semi-private justice system in which investors can sue States before arbitration tribunals for exercising regulatory power to protect people’s rights, arguing that their expected profits will be reduced as a consequence. On the monetary front, while central banks in high-income countries absorbed the economic shock of COVID-19 by expanding their balance sheets in unprecedented ways and without meaningful democratic accountability, lower income countries struggled to overcome harsh liquidity constraints awaiting for global responses that haven’t occurred.

This democratic deficit and the consequent asymmetries of power in the global economy may seem, in principle, disconnected from the daily struggles of ordinary people or social movements. But they have everything to do with the unmet demands for better health care systems, adequate budgets to combat gender violence, or achieving substantive racial equality. Indeed, they are an important factor undermining the capacity of domestic institutions to deliver as well as a driving force behind the way opportunities for human flourishing are unevenly distributed. Among the interests neglected by the way the global economy works are not only those of marginalized communities in the Global South. As it is the case with the dollar hegemony in the international monetary system, hierarchical arrangements do not necessarily benefit the working class neither in the US nor in other rich countries.

Expanding human capabilities in our shared world

Prior to the pandemic, there was an influential narrative that despite widespread pessimism and malaise the world was going through impressive progress, and things were essentially changing for the good. Champions of these views argued that world poverty had been declining and poor countries were progressively catching up with the richest, without explaining that the so-called ‘convergence’ is driven almost entirely by China and East Asian countries. Furthermore, any criticism of the global order calling for structural transformations used to be rejected under the idea that it could end up throwing the baby out (all the supposed benefits and successes achieved by the global order) with the bathwater (the sources of indignation or rage against this order).

This line of thinking falls within the old way of economic reasoning that we must overcome. Countries have gone through paths of poverty reduction and improvements on basic indicators of well-being (not for everyone, and not evenly distributed), while putting more pressure on planetary boundaries and exacerbating inequalities and power asymmetries. Now we are seeing how decades of progress in the fight against poverty in several countries are being erased by factors that cannot be considered merely incidental to the way the global economic works. As scientific evidence has shown, pandemics are not exogenous shocks to economic systems: zoonotic diseases such as COVID-19 arise from the accelerated intervention and degradation of ecosystems by unfettered human activity. Likewise, preventing the catastrophic consequences of climate change depends on our determination to make major shifts in the way we produce, distribute, consume and value in order to adequately address the greatest collective action problem we have ever faced. Even if States were to adopt pro-growth policies that lead to poverty reduction (such as carbon-intensive strategies of development) they could end up reinforcing power arrangements to preserve the status quo and precluding the emergence of the kind of coalitions that are needed to successfully address the risk of extinction and other systemic threats.

Therefore, we need an alternative framework for action – one that enables us to find solutions to our collective challenges in a world with ecological ceilings, while expanding the capabilities of communities and individuals to live according to their own values. Under such a framework, it should not be enough to make progress in basic indicators of well-being regardless of the path chosen, but also to build more equal relationships among States, communities and individuals and create the material conditions for cooperation. To that end, not only institutions and rules matter, but also the distribution of resources, voice, and power.

Global economic governance and a new set of policies

The quest for global justice has focused on the institutional global arrangements that would enable individual States, and particularly low- and middle- income countries, to choose and implement a set of policies that allow them to catch up with the ‘developed’ nations of the world. Such a linear and monolithic view of progress ignores how far the world can go if resources, power and voice were given to communities to seek their own development paths under fairer global rules.

Rather, global justice must be geared towards creating the power arrangements and the material conditions to allow the expansion of human capabilities in our common and interdependent world, leaving no one behind.

This means at least three key shifts in priorities as part of a broader effort to move towards a rights-based economy.

First, expanding lower-income States’ policy space and supporting them for providing comprehensive social protection and implement an audacious set of policies to manage increasingly disruptive risks that could throw millions to poverty and unemployment in a matter of days. Public institutions must be in a position to fulfil basic rights that people can be deprived of due to the intricate network of interdependent connections the global economy has become, including through quality care services and the right to benefit from a compensated general reduction in working hours.

Second, move towards a multi layered global governance system aiming to correct power asymmetries, and give voice and decision power to multiple actors in truly democratic global forums (including social movements, civil society organizations, grassroots, small-scale business and emerging actors). Such a multi layered system should prioritize ambitious targets in terms of carbon pricing, climate change adaptation, free access to public goods, debt restructuring, combating tax evasion and avoidance through taxing multinationals as units (not as separate entities) and the definition of a minimum effective corporate tax rate.

Third, creating the institutional, legal and material conditions for every person in the world regardless of their nationality, gender, race or socio-economic status to use the best available knowledge, technology, data, and a basic capital endowment to pursue their own goals, as well as to benefit from scientific progress and its applications (including free and timely access to COVID-19 treatment and vaccines as public goods).

Geopolitics and collective action for justice

It would be naive to think that these changes can be achieved in a top-down direction and outside of geopolitical dynamics, but it wouldn’t be accurate either to ignore the contradictions of the current global order, and the increasing demands for systemic change. These changes require going beyond the narrow logic of nation-states as the main channels through which human interests in the global order are represented and negotiated. The gap between the possibilities that technological and productive advances have opened up and the inability to put them at the service of fundamental human needs reflects, in turn, the magnitude of what alternative schemes of social cooperation could achieve. For example, the same technological tools used for State surveillance, can also be used for emancipatory purposes if those tools were reappropriated by social movements and democratic forces, as the spread of climate justice, anti-racist or feminist mobilizations beyond borders have shown. Amid the crude exploitation of fear and despair in times of Covid-19, it is worth pushing for transformative joint action and remember Thomas Fuller’s words: ‘the darkest hour is just before the dawn’.

About the author: Sergio Chaparro Hernández is an Economist and M.A in Law from the National University of Colombia. He serves as Program Officer at the Center for Economic and Social Rights (CESR). Twitter: @SergioChaparo8. Email address: schaparro@cesr.org

Highway to hell: How neoliberalism is driving “advanced” economies towards a Latin American-style accumulation pattern

By Baptiste Albertone

The weight of the past has sometimes been more present than the present itself. And a repetition of the past has sometimes seemed to be the only foreseeable future.
Enrique Krauze

The history of independence in Latin America is a history of reproduction of the same, but different. The Napoleonic wars that weakened the Crown provided the opportunity for Latin American landlords to finally claim the full possession and administration of the fertile soil and abundant cheap labour at their disposal. As the first nations proclaimed their right to self-determination, the new states engaged in the consolidation of a new institutional framework, independent of the Crown, but reconfigured to fit the taste and interests of landed-elites and the colonial bourgeoisie. As it is common in the revolutionary processes of nations under colonial rule, despite the adhesion and (indispensable) active participation of the popular sectors, only a segment of the elite benefited from the structural reconfiguration of what the Marxist literature calls: a Bourgeois revolution.

The political rupture translated into economic continuity: The regime of accumulation inherited from the colonial period remained unaltered to reproduce a rentier-style capitalism. Indeed, the material reason for independence was not the transformation of the economic structure but the conquest of a larger share of its benefits by one class. In addition to internal interests, a parallel international driving force supported the maintenance of this rentier regime: the centro-peripheral dynamics of the world economy, which placed Latin American nations in a subordinate and “dependent” condition of natural resource providers for “core” economies.

The role of economic ideas has certainly been decisive in the ability of the rentier regime to reproduce itself despite its deleterious effects. First, in the post-independence period, the neoclassical theory of comparative advantage offered a strong argument against developing a manufacturing sector through industrial policy. Later, in the early post-war years, the US administration-backed modernization theoryacted as a strong counter-discourse to classical development theorists’ arguments in favour of a structural transformation. Finally, from the late 1970’s onward, the infamous Washington Consensus came to provide an intellectual rationale to the political and historical project of capital and power concentration with de-industrialisation in the Latin American continent.

The socio-economic consequences of the rentier developmental mode are profound. As the Latin American structuralist school has vastly discussed, the rent-seeking style of development has favoured the persistence of 1) a large pre-capitalist sector, and 2) a highly heterogeneous intersectoral productivity. These structural determinants have major consequences on both pre-tax and post-tax income inequality dynamics. First, the economic dualism of the productive structure, a feature of rentier capitalism, implies that the share of labour in national income is very low In fact, land concentration and the scarcity of productive employment produce structurally unequal labour markets, with a very high number of informal workers acting as a reserve army. Second, the absence of a meaningful social contract between the governing elites and the popular sector gives rise to a regressive and fragile fiscal state, reluctant to influence the structural level of inequalities and to finance public goods.

Therefore, the Latin American state was designed in such a way to guarantee the reproduction and the capture of the benefits of economic development by a wealthy minority, echoing Smith’s view that “[c]ivil government (…) is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all”.

The so-called era of democratisation in Latin America did not alter these power asymmetries. The structural configuration of extreme wealth and income inequalities as well as an almost unlimited ability to match economic power with political power gave rise to a form of quintessential Neoliberal state where, in José Gabriel Palma’s words the “new ‘democratic’ agenda of capital ensures that the state will fulfill its sole function of reproducing the new capitalist system”. The consequence is a unique level of inequality characterised by an unrestricted capacity of the elites to perpetuate themselves despite political changes.

But if the recipe for Latin American success once appeared to be a well-kept secret – only shared with some South African nations – it may no longer be the case. The neoliberal revolution that successfully altered labour markets and fiscal structures of most OECD countries is producing what Palma describes as a form of “reverse catching up”, with some advanced economies moving towards a Latin American style of accumulation.

The graphs below illustrate the evolution of pre-tax inequalities in Germany, the United States, and the United Kingdom, three of the countries most affected by Neoliberal — or Ordoliberal in the German case — reforms.

Since the 1980s, these countries have experienced a dramatic rise in the share of the national income going to the individuals in the top 10% of the income distribution, mirrored by an almost identical, but opposite, trend affecting the share held by the bottom 40%. These tendencies are certainly not independent of the political and economic context that characterised the period.

From the mainstream viewpoint, the justification given for the tragic evolution of inequality is that of an growing capital-output ratio driven by entrepreneurial investment leading to an elevation in the share of profits in national income.

Nonetheless, when looking at real investments’ figures, the picture turns out to be dramatically different from the expected dynamic. In the US, the gross private investment share of GDP has fallen by 3 percentage points since the late 1970s. On the contrary, what we see is a growing capacity from corporate elites to capture the benefits of economic growth with the help of both globalisation and financialization dynamics. Consequently, between the mid-1970’s and 2017, while real US GDP did more than triple, the real hourly wage of most Americans stagnated.

What is at stake is a reconfiguration of the political space in the image of the Latin American oligarchical institutional style, where hierarchical economic principles subordinate the democratic and representative principles of politics embodied in the figure of the State. According to Branko Milanovic, the neoliberal restructuring while “it maintained the pretence of equality (one-person one-vote), (…) eroded it through the ability of the rich to select, fund, and make elect the politicians friendly to their interests”. In other words, neoliberalism should be understood as an active project that, as Quinn Slobodian notes it, “rather than ‘freeing’ or ‘disembodying’ ‘the’ market, [attempt] an ‘encasement’ of economic structures, isolating them from popular democratic demands”.

By weakening the power of labour with more flexible workers’ protection, unravelling the Welfare State where it existed, engaging in a privatisation of public goods — the capital of those who don’t have any —, by adopting tax reforms that enhance regressive taxation and tax evasion, and by globally consolidating what Slobodian calls “the human right of capital flight”, neoliberalism demonstrated its striking effectiveness as a “technology of power” to rewrite the rules of the game in favour of capital accumulation. In the same way as Latin-American elites structured the newly born nation for the benefits of their interests, the recent success of Northern capitalist elites to create an environment suitable for the flourishing of their rent-extraction ambitions.

The structural reconfiguration that has been taking place since the mid-1970s is simultaneously endangering social and ecological balances, as well as putting societies at risk of implosion under authoritarian governments eager to establish Neoliberalism in a single country. We might be heading towards a dark horizon sketched by Slobodian as one of “brute competition in a zero-sum world where all that matters is the enrichment of an ethnically defined, territorially bounded national population”, where the protection of the environment – a common good by definition – is relegated to the tenebrous depths of national political agenda.

From this frightening observation arises an unsurpassable necessity to engage in a struggle for the transformation of economics — which today serves under its technocratic authority as the core instrument of the corporate elites’ political project — so that it becomes a democratic instrument for a fair and ecological economic transformation.

About the author: Baptiste Albertone is an MPhil candidate in Development Studies at the University of Cambridge and holds an MA and BA from the Institut d’Etudes Politiques de Paris. His research focuses on industrial policy and sustainable development in the Latin American context. Twitter: @BaptAlbertone

New Economics for Sustainable Development: Alternative economic models and concepts

By Dr. Chantal Line Carpentier

The widespread neoliberal model and the financialization of the economy is linked to the skewed system by which production factors are rewarded, whereby increasingly the lion’s share of income generated is going to reward capital compared to labor thereby increasing inequalities. While the maximization of profits at-all-costs economic model and its linear consumption and production patterns of “take, make, use, and dispose” are leading the rise of greenhouse gas emissions, biodiversity and ecosystems loss, and water, soil, and ocean depletion. The pandemic has exposed the interdependence and fragility of the economic, financial, environmental, and health aspects of human life, as well as the interrelation among these four dimensions as we meet increased material demand by encroaching on the last forested frontiers leading to increasing zoonoses.

The Sustainable Development Goals (SDGs) and the Addis Ababa Action Agenda for Financing for Development (FfD) adopted unanimously by all UN member States in 2015take into account these interconnections and thus provide roadmaps, principles, and means to channel previously unavailable funds that are being rolled out by governments and international organizations to support collapsing economies. These trillions in public funds that just materialized must help advance the transition to economic models compatible with the SDGs – already not on track to be met prior to the pandemic according to the Global Sustainable Development Report 2019. The transition is feasible within the planetary boundaries but we need new economic and financial models. UNCTAD has called for a Global Green New Deal (GGND) but it turns out that blue, orange, purple, and yellow economies together have a better chance to rebuild resilient, inclusive, and more equitable economies. And this is in line with requests made by UN member states that the United Nations ensure its work is tailored to the different contexts in which it operates.

The Green New Deal extends the US “New Deal” approach of massively investing in infrastructure projects to create jobs and get the US economy out of the Great Depression, to target jobs in the green and new economy sectors such as resilient construction, decarbonized energy, clean transport, and sustainable agriculture and cities. The Global Green New Deal (GGND) proposed by UNCTAD crucially includes an equality and equity dimension. Under the GGND, the international community would have to address the root causes of inequality. Spurred by international solidarity and the realization that our economic, health, and political systems are interdependent, developed nations should not only fund their green, blue, orange, purple, or yellow economic stimulus but also support that of developing countries. This would allow developing countries, where most new infrastructure is being built, to use circular economy principles, avoid investing in stranded assets, whilst generating jobs to help workers’ transitions to the new economy, such as from fossil fuels to renewables energy.

The circular economy uses science, technology, and innovation to increase efficiency by designing for recyclability and re-use at the end-of-product lifecycle and cutting out waste and pollution from production systems. It aims to produce more with less waste, resources, and energy through a make-use-recycle-reuse circular pattern. Many countries have embraced the concept. For instance, Uganda does so by using biogas technology, e-waste management, organic agriculture, green manufacturing, and eco-industrial parks. New business and distribution models are needed to achieve deployment at scale.

A related concept is “frugal innovation” whereby the aim is to do “better with less”. A frugal mindset creatively builds upon and repurposes existing technology and innovation and aims to provide low-cost, high-quality solutions to the most pressing issues of the world; it is thus more likely to view inequalities and climate change, and other social and environmental issues as business opportunities. The pandemic has accelerated the digitalization of the economy and the use of automation and artificial intelligence. In this sense, policies and fiscal stimulus that incentivize frugal innovations could accelerate deployment. While better reuse of agricultural and other scrap materials, as well as investment in rural infrastructure, could scale up access to basic services such as water, sanitation, and energy to previously un- or under-served populations while fostering rural MSMEs and job creation.

The Blue Economy is the green economy concept adapted to the ocean economy that could benefit many Small Island Developing States (SIDS) with massive ocean resources and developing countries with long coastal areas.

Similarly, the creative or orange economy, which relies more on human capital and ICTs, can support youth entrepreneurship and job creation. The orange economy is the trade, labor, and production of the creative industries, such as advertising, design, publishing, software, Film/TV/Radio. It requires a labor force with the ability to think and act creatively. The creative economy supports sustainable entrepreneurship and empowers innovators, especially the generation that grew up in the digital era. Marketing, fashion, or media companies also influence values and consumption, and lifestyle choices as they are often operated by young people who tend to be purpose-driven and support sustainability. A dynamic creative economy can thus play a vital role in promoting other alternative economic models, especially in developing countries.

The yellow or Attention Economy is the monetization of consumer’s attention by platforms such as Google, Facebook, Instagram, Snapchat, Twitter, Tik Tok among others by collecting vast amounts of information on consumers. They monetize this information by developing increasingly sophisticated algorithms and persuasion techniques to keep people clicking scrolling, and sharing. These techniques prey on many of human core subconscious tendencies for pleasure or fear to trap people’s attention and alter human behavior or perception. This market, valued in the trillions of dollars, is increasingly believed to be sowing the increased polarization, extremism, and radicalization being observed currently.

However, if harnessed, the Attention Economy could become a powerful tool to effectuate the necessary behavioral changes needed to transition towards the world we want, thriving in authentic mutual connection by using technology to bring humanity back into alignment with the rest of nature and the SDGs.

It is also an opportunity to build their care economy while creating more decent jobs and addressing gender inequalities. The care or “purple economy” – with investment in education and health providers for children, elderly, people with disabilities – would create 2.5 times more jobs than investment in physical infrastructure, create 30 times more jobs for women, and ease restriction on women’s time, and have greater and fiscal sustainability

To be even more inclusive and resilient, in line with the 2030 Agenda, these models could be supported by the Social and Solidarity Economy Organizations and Enterprises (SSEOEs). The Social and Solidarity Economy (SSE) is people-centered, addresses exclusion by reaching-out and incorporating marginalized groups in supply chains and facilitating their vertical integration into the larger economy. SSE also fosters shared prosperity through shared ownership of assets and means of production. It also promotes active citizenship, participatory democracy, and a pluralistic economy which bolsters social cohesion, accountability, and sound governance (SDG16).

SSEOEs include worker, producer, and housing cooperatives that share the features of joint ownership and democratic governance. Being an integral part of their communities, these organizations also have a stake in ensuring the social and ecological integrity of their host communities in the short and long term, which is not necessarily the case for publicly listed or privately-owned companies. Moreover, cooperatives have shown to be a prolific job creator as an estimated 9.5 percent of the world’s working population are employed by cooperatives.

We cannot afford to waste another crisis. The pandemic is and will be costly. Funding the transition to green, blue, orange, and purple economies is feasible! We have a duty to use the trillions that have materialized to jump-start and accelerate the transition to new economic models that can tackle the complex interdependencies among the SDGs. If international solidarity is not sufficient justification to support developing countries, the interconnectedness of our health and the ecosystem demonstrated by the pandemic should be.

About the author: Chantal Line Carpentier is the Chief of the UNCTAD New York Office of the Secretary-General. The views expressed in this publication/study are those of the authors and do not necessarily reflect those of the United Nations including the UN Conference on Trade and Development. This article builds on a draft developed with Raymond Landveld and Olivier Combe, Economic Affairs Officers in the UNCTAD New York office.

Is the falling wage share simply a statistical phenomenon?

Economists have suggested several competing theories to explain the phenomenon of the declining wage share, as it has been falling globally for several decades. In the case of the US, two specific factors can explain a significant part of the decline: The increase in economy-wide depreciation and the rise of imputed rents as a share of total GDP.

A number of economic studies in recent years have documented the declining wage share in many countries around the world. The wage share is the part of GDP that can be attributed to labor income (wages) and is usually assumed to fluctuate around 60% while most of the remaining part of GDP is accounted for by capital income, such as rents from housing, income from Intellectual Property Products, capital gains and stock dividends, etc.

The chart below shows that the US wage share has fallen from almost 58% two decades ago to just 53% as of today, a decline of about 5 percentage points. This phenomenon is concerning insofar as the majority of the population derives most of their income from wages whereas capital income only accounts for a small share for most people. The reason is, of course, that capital ownership tends to be highly concentrated: About 75% of the US total wealth being owned by the top 10%. While home ownership tends to be much more dispersed, it can actually vary quite significantly from country to country. In the US, the home ownership rate exceeds 60%, but it is significantly below what it was before the financial crisis when it almost hit 70%.

Source:BEA

There are several competing (but not mutually exclusive) hypothesis that have been put forward to explain the trend of the falling wage share. Some authors have focused on the decline of the bargaining power of labor, either as a result of eroding labor unions, or the result of globalization as a number of low-wage countries like China entered the global economy during the late 1980s.

Alternatively, some papers have suggested that monopoly power in many industries has increased, thus putting downward pressure on the wage share as markups are rising. Finally, some post-keynesian economists have emphasized increasing financialization as a possible cause.

In what follows, I will focus on yet another explanation that might explain part of the downward trend of the gross wage share. While GDP is usually defined as the sum of all the income streams in the economy, there are several categories that national statistics offices include in the GDP calculation, but technically there is no income stream flowing at all. There are two items that stand out in particular because they are quantitatively the most important: Depreciation of capital and imputed rents.

Depreciation of physical assets is included in the GDP calculation because it is counted as a cost of production to firms. From an accounting point of view, depreciation is the allocation of cost of an asset over its useful lifespan. Since depreciation expenses can be offset against a firm’s taxable profits, firms might actually have an incentive to overstate annual depreciation expenses.

US tax law allows firms to depreciate all kinds of assets that are used in the production process, ranging from nonresidential structures to all kinds of industrial equipment, and even Intellectual Property Products (IPP). Over the last few years depreciation as a share of GDP has increased mostly as a result of two factors.

First, more and more companies increasingly rely on modern technologies that tend to depreciate at a fairly rapid pace. Equipment like computers, smartphones, software, etc. tend to become obsolete within just a couple of years: According to the BEA, each of these items has a lifespan of only two to three years when it must be replaced. Compare this with other industrial equipment, which has an average lifespan of half a decade at least, with non-residential structures easily approaching a lifespan of two decades.

Second, US corporations have produced an increasing amount of intangible products in recent decades (IPP). This could be a patent, for example, which is basically a monopoly right granted by the government for a specified time period, usually 20 years in the US. As companies can depreciate all cost expenses of their patent over its useful or legal life, companies might also have an incentive to overstate their expenses because they can be offset against their tax liabilities. As the share of intangible assets has increased significantly over the last few years, so have depreciation expenses caused by the production of IPP.

The chart below shows that depreciation as a share of GDP has increased from about 6% in the postwar period to almost 13% as of today and this significant rise can account to some extent for the decline in the gross wage share. Most of the increase in depreciation can be explained by the rise of modern technologies, which tend to have a significantly lower lifespan and thus become obsolete much more quickly, as well as the increasing importance of IPP in today’s economy.

Source:BEA

The second large item that might have put downward pressure on the wage share is the increase in the rent share of GDP. In the case of the US, it is mostly imputed rents, the rent-equivalent a house owner would pay to himself in rent, that have risen significantly.

Source:BEA

Imputed rents are included in the GDP statistics even though there is technically no income stream flowing to anyone because otherwise a country that consists for the most part of renters (like Germany) would have an “inflated” GDP figure. Consider two countries, A and B, which are equal in every aspect with one single exception. Let’s say that in country A, I live in your house and pay rent to you and you live in my house and pay rent to me, whereas in country B we both live in our own houses. If we exclude imputed rents, country A would have higher GDP than country B simply because we pay rent to each other even though the two countries are equally productive (by assumption). Imputed rents are obviously derived from the value of the underlying dwelling.

As most advanced economies have experienced spectacular house price appreciations over the last couple of decades, mostly a result of supply-side restrictions rather than “speculative bubbles”, imputed rents surely have increased more or less in tandem. In the case of the US, imputed rents have actually surged from about 6% of GDP in the 1960s to about 8% of GDP as of today. The increase in the rent share of GDP, mostly a result of rising house prices being accompanied by increasing imputed rents, thus also puts some downward pressure on the gross wage share.

Source: Jorda, Schularick and Taylor (2016) Macrohistory database

We have therefore two items, economy-wide depreciation as well as imputed rents, which account for an increasingly large share of total GDP despite the fact that both categories actually do not represent any income streams in the classical sense.

It is exactly for that reason that some economists have argued that from an inequality point of view we should rather focus on the net wage share, meaning net of depreciation. Furthermore, as I have explained above, there is an argument to be made that such a net measure should also net out imputed rents (and potentially other imputed income streams that are included in the GDP calculations), thus focusing entirely on actual income streams instead. Doing so cancels out most but not all of the downward movement of the wage share one can observe across countries in recent decades. For the US, the graph below shows that the “net wage share”, adjusted for depreciation and imputed rents, is not significantly lower today than what it was from the late 1960s onwards.

Source:FRED

About the Author: Julius Probst is a Phd student at the Economic History department of Lund University in Sweden. His main research area is long-term economic growth with a special focus on economic geography.