The global economic system is being seen to be under existential stress in view of various new factors that have emerged over the last decade or so. And because of this palpable stress, the global financial stability remains under threat. Indeed, the rapid pace of technological change and rising inequality are said to be fuelling ever-louder calls for a qualitative revision of the entire economic system.
Margareta Drzeniek-Hanouz, Head of Future of Economic Progress, Member of the Executive Committee, World Economic Forum Geneva says (Our economic toolkit is out of date. Our future depends on updating it - 17 Apr 2018) for governments to cope with these mounting pressures, they will need to rethink the key policy tools on which they have relied for well over a century, starting first and foremost with taxation.
Death and taxes may have been the only certainties in the world of Benjamin Franklin two centuries or so ago; today, only death remains undeniable as according to Margareta Drzeniek-Hanouz (MDH) with the rise of the digital economy, more and more economic value is being derived from intangibles such as the data collected from digital platforms, social media, or the sharing economy. And because company headquarters can now be moved between countries with ease, governments are finding it ever harder to raise taxes. At the same time, public spending will likely have to increase to meet the demands of those left behind in the era of globalisation and digital technologies.
Lawmakers, according to MDH, have mostly sought to nurture innovation, in the hope that new industries will spur productive capacity and, in due course, fill government coffers. But digital service providers have grown larger in terms of just about everything except the taxes they pay.
That may be about to change, says MDH. One idea currently gaining traction is to tax firms offering free-to-use digital services differently, so that their intangible value receives the same tax treatment as the tangible value produced by manufacturers and traditional service providers.
"But taxation could be on the cusp of a much broader transformation, not limited to the digital economy. With today's businesses expected to contribute more to society than just what is on their balance sheets, there is a new impetus to base corporate taxation partly on a firm's social footprint. For example, governments could adjust tax rates according to a company's environmental stewardship or the size of its workforce.
"Beyond the debate about how to tax today's tech giants, Western economies confront the more fundamental question of whether markets still represent the most efficient way to allocate resources. In many ways, today's transformative technologies are challenging that premise.
"Modern data science, for example, is becoming so advanced that algorithms driven by existing consumer data could soon take over the task of making efficient buying decisions. The question, then, will be whether the market or a state armed with algorithmic knowledge would be better at providing certain goods and services.
"Data are influencing our economic consciousness in other ways, too. For one thing, consumers are starting to realize the extent to which digital services profit from their personal information. Data are also the wellspring for artificial intelligence, machine learning, and similar technologies, which will have an ever-greater economic impact. Thus, we may be approaching an inflection point where consumers start demanding payment for their data.
"Big data will also disrupt much of the financial sector. Today's insurance industry, for example, is built on information asymmetries and mutualisation of risks. As we move closer to an ecosystem of near-perfect information, the tools for accurately pricing risk will become increasingly powerful.
"Bloomberg's approach raises the key question of how we should measure economies in the 21st century. In the 1930s, the economist Simon Kuznets identified gross national product as an indicator of an economy's output of goods and services over a given period. Now, GNP - along with gross domestic product, or GDP - is regarded as the de facto indicator of national welfare around the world.
"But these measures are misleading, because they do not account for many of the things that matter to societies, such as equality, social mobility, or sustainability. Even if GDP were a good predictor of success in those categories, it still does not capture the intangible value being created in the digital economy.
"The biggest difference today is that rapid technological change, coupled with emerging environmental and inter-generational challenges, is directly affecting governments' ability to act.
"But governments will not achieve their goals by using outdated tools. Tax codes written for an analog economy and statistical methods that fail to capture real wealth will not do. A new approach to ensuring happiness and wellbeing in the decades ahead is unavoidable."
Meanwhile, inequality specialist Branko Milanovic says (Playing fair published on 18.04.2018 in International politics and society) redistributing wealth won't cut it in our globalised world. Rather than just raising taxes for the rich, progressives need to pour their energy into creating better educational opportunities for everyone, no matter what their background. That means people will start off in the jobs market on a more level playing field.
Germany, he says, is held up as an example of country that's adapted well to globalisation, however "incomes for the bottom 50 percent of the German population haven't gone up in 15 years. When you look at the economy from their perspective, and then add in other factors like a fear people's jobs will be affected by migration, the rise of populist parties in Germany and elsewhere seems more understandable."
Branko Milanovic says because of the changing nature of jobs and the workplace, trade unions around the world are losing members, both in the private and public sectors. That, in his opinion, raises real difficulties for left-wing parties which used to have strong links to the trade unions. Now these links, he says, are getting weaker, which means the Left needs to rethink its economic policies.
"Left-wing parties should expend more effort on policies that help people enter the labour market on a more equal footing. Rather than putting their time and resources into redistributing income that's already been earned, they should start pushing good education for everyone no matter what their social class and redistributing capital to the middle classes."
In the opinion of Branko Milanovic, protectionism is bad in the long-term for the world. 50 years ago, average rates in rich countries were 10 to 12 percent; now they are down to one or two percent. Going back to the old policies would be wrong.
"As rich people become more and more powerful and fund political processes and parties, they start dictating economic policies."
He further said that the economies of the poorer, populous parts of the world, eg, China, India and Vietnam, have grown. They've created, according to him, what one could call a global middle class. One sees this in the huge increase in Chinese tourism to Europe. That has resulted in reducing global inequality.
"But when it comes to inequality within nations, Western countries have responded to China's rise by slashing the jobs or wages of people working in industries that have to compete with China. The same force of globalisation which is increasing Chinese incomes and creating this global middle class might also have reduced incomes for some American workers. As a consequence, inequality in America is going up."
He says high inequality means many more resources in the hands of the top one percent of the population. A lot of legislation reflects the preferences of the rich. As rich people become more and more powerful and fund political processes and parties, they start dictating economic policies. And they dictate these policies in their own interest. So they reinforce the advantage they already have.
"You have lots of rich people and lots of poor people: how do you ensure parliament represents this balance? Probably, you'll just get richer people entering parliament. That wouldn't be populism but plutocracy."
As a first step towards a more egalitarian society, Branko Milanovic wants to de-concentrate capital ownership. If that capital remains very concentrated our society automatically becomes more unequal.
"Secondly, we need to guarantee equal access to excellent education. So, the biggest emphasis should not be put on better distribution of income that's already been earned, but on bringing everybody to a similar starting position.
"This could be a sensible policy for the Left: to concentrate more on what is called the pre-redistribution stage. Because that's a more fundamental form of equality than simply redistributing the money once it's been produced."
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