A broken economic system

Only the rich countries can afford the luxury of free market economy (FME). Indeed, FME is a luxury the rich countries have enjoyed to the hilt over the last 40 years while the not-so-rich and the poor suffered horrendously from this system. Whatever wealth the latter had held in the 1970s went to the former as if sucked in by a magnetic pull.

Lately, however, the severe side-effects of the FME like galloping inequality have started rendering health, education, housing, transportation and law out of the financial reach of even the middle classes of these rich countries.

Joseph Stiglitz had won a Nobel Prize nearly two decades ago for identifying the inequities and imperfections in market economies. He has spent a career warning of the perils of wealth concentration, railing against monopoly power and championing higher taxes.

And lately, even some of those who have profited most from the American-style free markets have worried about their sustainability, with the billionaire investor Ray Dalio going so far as to say that "capitalism is broken."

In rich and poor countries alike, elites promised that neoliberal policies would lead to faster economic growth, and that the benefits would trickle down so that everyone, including the poorest, would be better off. To get there, though, workers would have to accept lower wages, and all citizens would have to accept cutbacks in important government programmes. Remember the IMF conditionalities?

The elites claimed that their promises were based on scientific economic models and "evidence-based research." Well, after 40 years, the numbers are in: growth has slowed, and the fruits of that growth went overwhelmingly to a very few at the top. As wages stagnated and the stock market soared, income and wealth flowed up, rather than trickling down.

Capitalism is, indeed, broken. And in a desperate bid to save face, some of the champions of capitalism have come up with terms that more or less seem to be a feeble attempt at denial. What else can it be if not denial when terms like 'progressive capitalism', or 'decent capitalism' or 'democratic capitalism' or 'stakeholders' capitalism' are being used to side-step the embarrassment of accepting that capitalism as was being practised over the last 40 years is now showing its deadly colours and alternatives with a broad brush of socialism are being sought.

Stiglitz in one of his articles (Progressive Capitalism Is Not an Oxymoron - April 19, 2019 - the New York Times) which he wrote to explain his latest book (People Power, and Profits: Progressive Capitalism for an Age of Discontent)says:

"We can save our broken economic system from itself. The prescription follows from the diagnosis: It begins by recognizing the vital role that the state plays in making markets serve society. We need regulations that ensure strong competition without abusive exploitation, realigning the relationship between corporations and the workers they employ and the customers they are supposed to serve. We must be as resolute in combating market power as the corporate sector is in increasing it."

Capitalism by definition is said to be indecent. Disillusioned with the consequences of this economic model founded on what since early 1980s has been known to be no-holds-barred capitalism and underpinned by unregulated free market economy, a select group of economists is seeking ways to reshape it into 'decent' capitalism.

This model would include three interrelated dimensions. First, the model should be ecologically sustainable. Second, it should be formed in such a way that the targeted growth process is not jeopardised by either the asset-market inflation or ensuing deflation (so-called boom-bust cycles), and does not result in the excessive indebtedness of individual sectors or even whole economies, thereby leading to the next crisis. Third, all population groups have a share in social progress. Inequality of income and wealth distribution must be at politically and socially acceptable limits. Everybody should have a decent living.

Democratic capitalism is too simple. All that it recommends is to keep the private sector, having rentier as well as exploitative attributes at bay and guaranteed interventions of the government to ensure, come what may, the economy is not taken over by the big business.

Renowned US economists Laura Tyson and Lenny Mendonca in their article (Making Stakeholder Capitalism a Reality - published in Project Syndicate on Jan 6, 2020) said, for a half-century, American corporations (and many others around the world) have embraced shareholder primacy, which holds that the only responsibility of business is to maximize profits.

"But this principle is now being challenged by corporate leaders themselves, with the United States Business Roundtable announcing last year that it will adopt a stakeholder approach that focuses not just on shareholders but also on customers, employees, suppliers, and communities, all of which are deemed essential for business performance."

"But perhaps the strongest motives behind the growing corporate support for stakeholder capitalism are the erosion of trust in business and the accompanying rise of populism. Citizens are lashing out at what they perceive to be a "rigged" economic system. Income and wealth inequality have surged in recent decades as middle-class incomes have stagnated, and as labour markets have become more polarized. The 2008 financial crisis and its aftermath, along with the growing costs and urgency of climate change, have undermined public confidence in globalization and market capitalism.

"These conditions are highly reminiscent of the period leading up to the Progressive Era of reform at the turn of the twentieth century, when policymakers broke up monopolies, introduced new protections for natural resources, and strengthened participatory democracy. Today, business leaders are understandably concerned that citizens will press for a new era of progressive policies that will curtail their freedom to operate. To head off or influence such efforts, companies are seeking ways to demonstrate their commitment to the countries, regions, and communities where they do business.

"Hence, even if the only reason is self-preservation, the business community's multi-stakeholder rhetoric is likely to be accompanied by real changes in corporate behavior. But self-imposed changes will not be enough. Government action will be necessary to ensure that democratic market capitalism remains politically and environmentally sustainable over the long run. Of particular importance are policies to encourage competition, combat climate change, contain inequality, and bolster democratic institutions."

So, those among us in Pakistan who have put their unreserved faith in the outdated conditionalities of the IMF better wake up and smell the coffee. Moreover, the government of the day and the State need to be extremely wary of our rich classes who have already cornered all the national wealth and more and are not willing to pay taxes and even allow the economy to be documented.

We lack the most essential ingredients that go into wealth creation: capital, energy and technology. Therefore, we need to tightly regulate the economy so as to be make the most of our limited reach and resources adhering strictly to the right kind of prioritisation.

But we would not be able to achieve the right kind of prioritization unless we retake the state from the so-called Pakistani elite.

Our own world renowned economist, Dr Hafiz A Pasha in his book (Growth and inequality in Pakistan - Agenda for Reforms) lists prominent members if this elite group: large rural landowners, defence establishment, multinational companies, urban property owners, commercial banks, MNAs/MPAs, trading community, exporters, stock market members and senior bureaucrats. These elite groups do create wealth but not for the nation, not for reinvestment or for industrial innovation, but for their own personal perks and luxuries. Most don't pay taxes and pilfer utilities, like water, power and gas and serve as the toughest barriers against documentation of the economy.

This elite thrives on the age-old dole dependent economy of Pakistan and have successfully blocked all attempts by some of the past governments to break the begging bowl. They are doing it once again.

In fact, the elite seems to have captured the present government as well along with the state. Almost the entire group of 15 Special Assistants of Prime Minister Imran Khan and his Advisors are non-PTI persons having no idea about PTI's ideology nor even about the concept of Madina-ki-Riyasat of the PM. They actually represent the elite described in some detail in Dr Pasha's book. Unless we somehow break the deadly hold of the elite on our economy we would not be able to break the shackles of the dole dependent economy.