From growth to progress

Inclusive Economy04 Jul 2013Evert-jan Quak

Day one of the conference Economics for a Better World ended with a number of interesting presentations on how to achieve real progress. This is a task not only for governments but also for the private sector.

In the years before the financial and economic crisis started, social spending by governments concentrated on employment and growth. Nevertheless, income poverty increased at the same time. Bea Cantillon of the University of Antwerp is trying to find out why this happened. Was it because governments failed in implementing the right policies? Or is the policy paradigm no longer correct?

Since 2000, European governments have focused on employment and social investment. Cantillon concludes that these policies did not deliver in reducing poverty rates. Only in the new EU member states in Central Europe and in Ireland do policies to invest in people seem to have resulted in diminishing poverty rates. Why is this strategy not working in traditional welfare states like Sweden, Germany, France or Spain? Cantillon argues that, during the boom years from 2000 to 2008, job growth benefited work-poor households much less than work-rich households. Secondly, the redistributive capacity of welfare states has declined. Less money goes to the poor and more to the working middle class. In other words, social spending has become less work-poor. Investment has focused on making work more profitable. This meant investing in people who already had good job prospects, believing that the others would follow. The result was jobs for the work-rich but no significant improvement for the work-poor.

Cantillon argues that social redistribution should be put back on the agenda. Social spending is no longer related to distribution. To change this, social investment strategies must be revised, employment policies must focus on the work-poor, and there must be a new emphasis on social protection and child benefit.

However, it is not only the public agenda that needs to be revised. Colin Mayer of the Saïd Business School at Oxford University believes that the business community has a role to play. The fundamental problem with big businesses nowadays is that their potential to serve the public good has been hijacked by their shareholders. Whereas ten years ago shareholders kept their shares for an average of eight years, this had fallen to four years only four years later and it is now just a couple of months. With devastating consequences for environmental and social values. According to Mayer, the short-termism of shareholders runs against all the principles of wellbeing.

In today’s economy, it is shareholders who decide on day-to-day management. And they have no interest in investing profits in productive activities or in workforce training, or in avoiding long-term costs. Board-room strategies are now very one-dimensional, aiming only at maximizing profits in the short term.

Rebalancing shareholder power in favour of more corporate values will not change the market value of companies or make them less profitable. According to Mayer, most successful and sustainable companies are those that do not have to answer fully to their shareholders. Furthermore, countries with strict rules on shareholder power, like Norway and Sweden, by no means have the worst economies. It is a change of mind-set that is needed.

What is needed are long-term committed owners, independent boards, more responsibility for conduct and consequences (e.g. distribution within value chains), tougher enforcement, reform of business education, and redefining roles and responsibilities.

An example that shows what is happening is the debate on corporate tax and tax evasion. Shareholders have no interest in paying taxes to finance investments in public goods. More regulation on country level will not help. Governments are therefore having to shift away from raising revenue from companies through corporate taxes to stimulating public interest with targeted subsidies and taxes. However, this is more complicated and will not necessarily generate the much-needed revenues for debt-struggling countries.