Communism, defeated, may lie in the dust-heap of history; but equality still is the key issue of this century. Most everywhere, the privileged and the poor are separating—like Disraeli’s England of the 1840s—into two nations. Urban communities are unravelling, as their well-to-do residents retreat into gated, self-sufficient suburbs. Reducing inequality before it sets off social conflict is the great challenge for both governments and the market system.
The British international charity OXFAM notes that already the richest 1% controls half of all global wealth. The 80 richest individuals in the world altogether own $1.9 trillion—“nearly the same amount shared by the 3.5 billion people who occupy the bottom half of the world’s income scale.”
Twenty-first century economies will need twenty-first century capitalism to work for the many and not just the few.
In capitalism’s nature
Ironically, Communism’s defeat in the Cold War has sharpened our need to take a second look at capitalist economics. At its best, entrepreneurial capitalism spurs innovation, productivity, and growth. But it has failed to ease the inequality and insecurity that seems so much a part of the capitalist economy.
The controversial French economist Thomas Pikkety asserts that income inequality is built into the very nature of capitalism.
Citing economic data that go back 50 years, Pikkety argues that return on capital tends to outstrip economic growth. The faster an economy expands, the faster inequality grows. And unless the state intervenes—to reverse this tendency—inequality will not just increase. The whole economy will also slow down—from lack of demand by the mass of consumers whose share of income is declining.
Like Communism, European Social Democracy endorses the strong centralized state; but its typical “welfare state” also recognizes the individual’s right to own private capital. “Womb-to-tomb” safety nets of the kind the Scandinavian states have spread for their peoples are founded on high tax structures. France now takes as much as 70 percent of the highest net income. (Pikkety advocates 80 percent.) The United States takes a maximum 30 percent.
The Germans use the term “social market” to express what they regard as the mutual dependence between the free market and the human community.
In Germany, the state intervenes in the economy mainly to prevent the formation of monopolies or oligopolies. The state structures the economy, but does not dictate it. To prevent capital from overwhelming labor, government also seeks to build strong workers’ associations and strong civil society. In sum, the “social market” seeks to combine the virtues of the market with those of the social welfare system. In recent years, German political foundations have sought to popularize the social market concept in the developing world.
In the United States, “inclusive capitalism” has become the new political buzzword. It is a market-oriented economic agenda to ease rising income inequality.
Since the middle 1980s, 90% of Americans have barely benefited from rising wealth driven by the “greed-is-good” doctrine of unfettered capitalism. Popular concern is rising about the sharply declining share of national income flowing to labor, and the parallel increase flowing to owners of capital. Since 2000, more and more middle-class Americans have been falling into poverty. President Obama estimates that the average American chief executive now earns 273 times more than the average worker.
Obama promises to devote to the struggle against rising inequality the rest of his term. He has proposed to Congress a program to lift off from the American middle class some of its tax burden.
Obama proposes major revisions of the tax code that would raise tax rates on the wealthiest Americans. These new imposts would generate $320 billion over the next 10 years. This fund would pay for expanded tax credits for the middle class and enable community colleges to offer free tuition for two years of college. Obama also proposes legislation that would pressure corporations to raise workers’ pay to match growth in their productivity.
Since Republicans control Congress solidly, Obama’s proposals are unlikely to prosper during the next two years. But “Inclusive Capitalism” sounds a winning slogan for the Democrats in the 2016 presidential campaign the two parties are poised to fight.
East Asia’s inclusive growth
In East Asia—where the most dramatic feats of inclusive growth have taken place—capitalism has generally been the junior partner of the developmental state.
Our region’s variety of “state capitalism” may well become the characteristic system of economic management for late industrializers. Meiji Japan and Ataturk’s Turkey were its pioneers. Taiwan, South Korea, Singapore, Thailand, Malaysia and Indonesia, each in its turn, have all benefited from inclusive growth.
The Philippine exception
To this trend, our country has been the exception. Our economy has been growing continuously since 2002. Yet, in 2012, 25.2 percent of Filipinos still lived below the poverty line—only slightly better than the 26.3 percent in 2009. Among rural families, the poor make up 40 percent; and they have known no improvement in their material life since 1997.
The World Bank in 2010 ranked the Philippines as “having the most unequally distributed income among the East Asian middle-income countries.”
The economist Cielito Habito in February 2013 calculated that, in 2011, the 40 richest Philippine families accounted for 76% of gross national income. The two richest families between them held 6% of the entire economy.
Why does Philippine poverty stay flat?
The short answer is that we still have a colonial “Dual Economy”—one divided between a rural subsistence sector and a relatively modern urban sector. And far too many of our people still live outside this modern sector that is growing so well. Consequently, social power relationships are weighted heavily on the side of the non-poor. Despite two insurgencies during the last 70 years, the poor—being largely unorganized—can make few credible demands on government.
A new social balance
The challenge for the state in our time is to find ways of protecting people from the negative consequences of capitalism, while seeking to preserve the dynamism that individual enterprise—the hope of personal gain—injects into the economy.
Nor can the alleviation of (mainly rural) poverty be just a side benefit of (urban) economic growth. Growth by itself is never enough, and “trickle-down” doesn’t work.
State policies should deal directly with specific aspects of mass poverty—with hunger, malnutrition, housing, basic education, jobs and livelihood.
Our regressive tax system and our lack of social “Safety Nets” severely restricts the poverty-reducing and income- equalizing effects that growth has had in our neighbor states. Yet the East Asian economic “miracle” the World Bank documented between 1965 and 1990 teaches that only shared growth—equitable development that transforms the lives of ordinary people—can sustain itself.