Civilisation on Trial: Prospects for Sustainable Prosperity and Global Equality

Shopping Cart


Civilisation on Trial: Prospects for Sustainable Prosperity and Global Equality

Monday, 5 February 2018  | Ross Garnaut

Neoliberalism has become, it seems, an all-encompassing term to describe support for the market economy.

I don't think this is helpful or accurate, however. It is important that we be precise in what we mean by ‘neoliberalism’.

In her book Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America, American historian Nancy MacLean traces the origin of the ideas and the term ‘neo-liberalism’ back to the reaction against the civil rights movement in the United States.

The Supreme Court decision on segregated education prompted the establishment of an economic research institute at the University of Virginia, with the mission to provide arguments that could counter progress on civil rights.

This was the beginnings of a major intellectual effort, recognised in 1986 by the award of a Nobel Prize for economics to James Buchanan.

The institute's work focused on the importance of liberty for capital, which would require limitations on freedoms of other kinds. The neo-liberals said that limitations on democracy were necessary to support liberty in the use of capital - or else you would get the sort of interventions that had just come out of Washington, D.C.

These ideas were later taken up by organisations funded by American big business to contest what had been a historic movement toward social democracy in the United States under Roosevelt and the immediate post-war presidents. Ironically, the neo-liberal movement had its greatest influence and success late in the period of the primacy of social democracy. Ideas influence policy over long periods of time.

The greatest intellectual influence of neo-liberalism in the United States was probably exercised in the 1970s and early 80s, but the greatest political influence on public policy is now. We see the influence now in the campaign to turn back the clock on action on climate change and public provision of medical care, and the far-reaching effort to wind back the welfare state. We see the influence in the contemporary policy programme of the Republican Party in the United States. The Trump administration is chaos and noise in the middle of the campaign to turn back the clock on the successful social democratic programme of the Roosevelt and post-war administrations.

But, in rejecting something called neoliberalism, we go too far if we reject the role of the market economy. We have learned over the past half-century that open markets, open international trade can be highly supportive of broad-based development. In fact, we have learned that they are essential to it.

Grounds for Pessimism

It is easy to be pessimistic at the moment. There is a great deal to be pessimistic about. The biggest grounds for pessimism are the decline of the health of democracies in the developed countries, and the weakening of support for social democracy. The latter is reflected in the partially successful efforts to wind back the welfare state that emerged after the Great Depression and the Second World War. The partial success is reflected in the growing inequality of wealth and stagnant incomes of ordinary people in most of the developed world.

Australia is not as bad as most of the developed world on these things, but we face considerable challenges in the period ahead.

It's easy to be pessimistic about democracy when you look at the failure or collapse of governance in major regions of the Middle East, West Asia, North Africa. These regions were the original home of many aspects of our civilisation, and maintained important elements of the great civilisations until relatively recently. Institutions of government and society have fallen apart, most spectacularly in the twenty-first century. The collapse of governance has generated the largest displacement of people since the horrors of the Second World War - a large proportion of the contemporary world's sixty-five million displaced people.

Apart from these regions which have experienced a collapse of governance in recent times, a major portion of the human population has not yet joined in the global rise of income that accompanies modern economic development. Australians closest neighbours, though a rather small proportion of humanity, are suffering a complete failure of development - most comprehensively in the largest of those countries, Papua New Guinea.

It is also easy to be pessimistic about environmental pressures - most urgently, climate change. We are in the very early stages of human-caused climate change. Average increases in temperature across the global so far are just under one degree Celsius since the beginning of the industrial era; the prospects are for that increase to treble and worse over the remainder of the century, unless very strong action is taken. If no action is taken, then the increase will be a good deal worse than three times what the world has already experienced.

The consequences of such an increase for development, the stability of societies and the international order are immense. In particular, the inevitable consequence of complete or even substantial failure of action on climate change would be a collapse of international order that would put at risk the institutions of civilised society. One only has to think of the vulnerability of a couple of hundred million people in West Bengal and Bangladesh to the combined intensification of extreme weather events and rising sea levels, to recognise the possibility of the displacement of people on a scale we have never seen before. One would be naive to think that any element of the established political order would survive such disruption.

Cause for Optimism

Alongside these grounds for pessimism, we also face an opportunity this century to solve the development problem, and to make development consistent with stability of climate, and more generally conservation of the natural environment. We could, by the end of this century, see all of the people on earth enjoying living standards comparable with those of developed countries today, while there is substantial equity within countries.

The success of development in the world as a whole would take away some of the sources for rising inequality within the developed countries. Labour would be scarce and valuable everywhere, and working people in the developed countries would not be threatened by competition from goods and services produced by the labour of people on low incomes in the developing world. It is quite possible that humanity could live in such a world later this century, and for those happy material circumstances to be consistent with environmental stability.

Let's not be overwhelmed by the good reasons for pessimism. Let's keep at least half an eye on the opportunity. If we look at the world as a whole in the twenty-first century so far, we can see a very large part of the world community enjoying stronger growth in incomes than such large numbers of people ever have before. That comes from the spreading of modern economic development to most of the developing world, most importantly numerically to the big Asian developing countries - China, India and Indonesia.

In the first seven or eight years of this century, we had very strong growth in incomes in the world as a whole - developed and developing countries. We now know that a lot of the growth in developed countries was unsustainable. It was based on debt-led expansion of consumption and expenditure on housing in the developed countries, most importantly in the United States and the rest of the English-speaking world, plus Spain. The vulnerability to financial crisis was greatest in those countries, and they suffered immensely with the financial crisis.

During that first seven or eight years of the century, we saw broad-based growth in incomes through most of the developing world. For the first-time modern economic development gathered momentum in Africa - a crucial part of the world development story.

A high proportion of the world's poor today are in Africa. Africa is the one large region that has not yet had enough incomes growth for fertility to fall by a large amount. If the world did not include Africa, we would be on a path to stabilisation of global population, and then global population decline. Global population decline would ease many of the developmental and environmental problems. There is, universally, a close association between comfortable incomes and better education, especially of women, and greater self-confidence of women that goes with higher incomes. Low fertility and declining numbers of people entering the labour force follow.

Africa is the one large region of the world that has not participated in rising incomes to levels that support a decisive fall in fertility. That failure of development in Africa has created circumstances where it is possible that great economic development success and demographic transition in the rest of the world could be consistent with the proportion of people who are well-off late in this century being no higher than it was in the beginning. This would follow simply because the countries which have been left out of global development grow exponentially in number while population in other countries declines.

Currently mid-range World Bank forecasts have the labour force of Africa larger than the rest of the world at the end of this century. Successful development is the one mechanism that we know leads to declining fertility and stability of population. Successful development is associated with growth in incomes and many things that we know go along with it, including improvements in education. It is the stabilisation of population that holds out the prospect of labour becoming scarce and valuable on a global scale in the course of sustained growth in economic output, and therefore the prospect of much greater equity in the global distribution of income. So, Africa is central to the global development story.

And the good news is that, in the twenty-first century, most of Africa did better - albeit there are still a lot of African countries suffering civil war, civil disorder - conditions under which development doesn't happen. But in the rest of Africa, there was considerable progress early in the century. One has to divide Africa between a resource-rich and a resource-poor part, with differences in natural resource endowments per person being the distinguishing characteristic. The resource-rich African countries received a huge boost early in the century from the China resources boom, but has done badly since.

Resource-led growth, we can now see - as I for one did not see clearly as a general problem earlier in my professional career - is commonly associated with problems of governance that very seriously inhibit development. And so, since the change in the Chinese growth model, which has reduced growth in demand for resources in the last five or six years, those parts of Africa which relied on resource exports have done very badly. But those parts of Africa which don't have that wealth of resources have mostly performed well. Some of the most successful examples of development through this century so far have been the resource-poor countries of East Africa. Ethiopia began the century as one of the poorest countries on earth. It is a big country, with ninety million people. It has had just about the fastest average rate of growth on earth this century so far. Other resource-poor East African countries, including Kenya, Tanzania, Uganda, have also done much better.

The Trajectory of Global Inequality

While developed countries in the twenty-first century have had problems of stagnating incomes, growing inequality and problems of their democracies, in the developing world, the story has been better than in earlier periods of history.

It has been spectacularly good in the large Asian developing countries: China, India, Indonesia most importantly; but many other countries as well, including the populous economies of Bangladesh and Vietnam. The success in much of the developing world means that, over the past decade, we have seen a reversal of what has been a long historic tendency towards greater inequality in the global distribution of income.

The global Gini coefficient, a global measure of inequality for all the people on earth, shows that global income distribution has become less unequal over the past decade. That's largely because people once very poor in the large Asian developing countries are now enjoying much higher incomes. The mass of ordinary people in China, especially, and to a lesser extent in India and Indonesia have had, on average, the fastest rates of growth in incomes on earth. There has been very little growth of incomes of ordinary people in the developed countries, while the highest incomes have increased rapidly. But in the world as a whole, income distribution has become more equitable because of successes in much of the developing world.

The powerful phenomenon of modern economic development had its origins in Britain a quarter of a millennium ago. It was at first confined to Western Europe and the offshoots of Western Europe in North America, Australia and New Zealand. It made the early participants in modern economic growth rich and powerful compared with the rest of the world. That underpinned the amazing phenomenon of Imperialism, where a tiny proportion of the world's people governed just about the whole world. There had never been anything like that on earth. And the military capacity and the economic capacity to do that came from the very limited spread of modern economic development in the early stages.

The only major country outside those original geographic boundaries to join modern economic development in the nineteenth century was Japan. In the 1860s, the Japanese elite recognised that the alternative to joining modern economic development was not maintaining the status quo, but was being subject to colonial power. And so, in reaction, Japan embarked on far-reaching reform to adopt modern economic development. It was brilliantly successful and, within a generation, Japan was one of the imperial powers, governing Korea, Taiwan and parts of the Chinese mainland.

After that there was very little spread of broadly-based modern economic development until the post-war period, until the end of Imperialism. And the early post-war period, through the third quarter of last century, was not brilliantly successful. Certainly, in the large Asian developing countries, where most of the poor people on earth lived at that time - China, India, Indonesia being the largest - there was relatively little growth in incomes of ordinary people in the first post-war decades.

So, when we think of the 1960s and 70s as a golden era, let's keep in mind that it was only a golden era in the West. It wasn't a golden era for economic development - it was a time of disappointment for development in most of the developing world. You began to get some adsorption of the dynamism of modern economic development into some Asian countries in the 1960s and 70s, first the small economies in Northeast Asia (plus Singapore), then the larger countries in Southeast Asia.

The great developments were the joining of Asian countries in modern economic development, made possible by opening to the international economy leading to large amounts of international trade and investment. We can date the era of modern economic development in China precisely from the changes of policy in the plenary meeting of the central committee of the Chinese Communist Party in December 1978, when Deng Xiaoping got the numbers for far-reaching economic reform. China, from that time, absorbed the dynamism of modern economic development. Indonesia joined modern economic development in a few stages, but I date major changes towards a new pattern of economic development from the mid-eighties. The change in India came with the bounce-back from the macro-economic crisis of 1991.

In all of those cases, we saw long periods of sustained growth of incomes. And while there was high inequality, there was fairly broadly-based growth in incomes. In the case of China, it was clear that labour was becoming scarce in some places about ten years ago, and generally about six years ago. That was the turning point towards more equitable distribution of income.

Reconciling Keynes and Piketty

The global story of recent changes in income distribution is not a bad one, and continuation of current trends would lead us into a better place. What might the world look like if these trends continued over a long period of time? We get some insights into that, as we do into many important things, by looking at the work of British economist John Maynard Keynes.

Keynes wrote an essay about income distribution in the long-term future of capitalist development and presented as a seminar to Cambridge students to cheer them up at the beginning of the Great Depression. It was published in his Essays in Persuasion. He returned to those themes in the final chapter of his great book, The General Theory of Employment, Interest and Money. He said that continuation of economic development, with two qualifications, would lead over the next century (a decade or two from now), to an abundance of capital. Labour would be scarce. Capital would be so abundant that it would earn no return to its owners simply because they owned capital. So, high incomes would not go to those who owned a lot of capital. Labour would be scarce and valuable, and that would give people satisfactory standards of living. People who did not own a lot of capital would face choices that were unfamiliar in his times - such as how to use leisure wisely.

What were the two qualifications that Keynes introduced? He said this could all be upset by war making a mess of everything. Not long after, that qualification became very relevant. Or it could be upset by poor policy leading to unnecessary economic depressions. Of course, his general theory was all about how to avoid that second possibility.

We can contrast that vision of the future with the famous recent book of Thomas Piketty, Capital in the Twenty-First Century. Piketty's thesis is almost the opposite of Keynes. His view is premised on the rate of return on capital always having been about 5% plus inflation. He expects that rate of return to continue, at a rate that exceeds the rate of growth of the economy. It follows from these premises that the wealth of owners of capital will continue to increase, and the incomes of the owners of capital continue to grow, more rapidly than the total economy. It follows that, in the absence of fundamental changes, we will have rising inequality. He saw that as part of the essential logic of capitalism. Piketty saw some possibility of changing that outcome through democratic intervention. But his prescriptions were pretty weak, and they depended on international cooperation on matters of taxation of capital, which, as we know, is a good deal easier said than done.

So who is right? Keynes or Piketty? If you look at some aspects of today's world, Keynes is already right. The real rate of interest - the rate of return after inflation - on risk-free investment is now close to zero. The rate of return on government and corporate debt has been falling since the beginning of the century. Long bonds issued by the United States and Australian governments, after you adjust for expected inflation, now give a return of about zero. So, there is a sense in which we are already in a Keynesian world.

Piketty's great strength is his thorough collection and analysis of data. He demonstrates that there has been rising dispersion in the distribution of income in this century so far. High incomes have been boosted by the accumulation of more and more capital in the hands of people who already have much wealth and high incomes, and the continued high returns on that capital.

So how do we reconcile real interest rates being zero with the income going to wealthy people rising much more rapidly than other peoples' incomes in the twenty-first century? The reconciliation has several elements.

First, some of the growing inequality we see in this century is simply a result of falling interest rates, the immediate effects of which include the raising of the price of all capital assets - housing, shares in the equity markets, and so on. The resulting capital gains appear as income in Piketty's data. That is a once-for-all phenomenon. It has been a very powerful source of increasing inequality in the twenty-first century so far, but it won't continue forever unless the rate of interest, already zero, keeps falling forever.

Another important way of reconciling the Keynes and Piketty perspectives is through analysis of the role of rents. This is a complex matter, that is hard to analyse and is under-analysed by economists. The rents come from regulation and barriers to entry as in banking; exclusive access to scarce natural resources as in mining; ownership of scarce land as in agriculture and quantitatively more importantly in urban housing; from oligopolistic control of markets; from ownership of natural monopolies such as telecommunications or energy networks.

The increasing effectiveness of business in investing in the political process and capturing government and policies has been increasing roles of rents in developed democracies. Rents allow businesses in oligopolistic positions to earn a higher rate of return than the competitive rate of return. If you're a greengrocer or a restaurant owner and there are twenty other shops of a similar kind within a few kilometres, then you can't expect a positive return on capital in your current circumstances. You may get it through superior provision of services, but that superiority is balanced by competitors receiving a lower than normal rate of return. But if you're a big retailer in Australia, or if you are one of three big sellers of electricity, or if you're Google and you're the only company providing that type of network service, or Apple, or Microsoft, then you're not subject to competition. The return you get on your investment has nothing much to do with the cost of capital. Economic rent has become much more important in our economy in recent times.

So, we can see the origins of growing inequality in developed countries despite the falling to near zero of returns on capital in competitive markets: first, the once for all increase in housing costs and the value of business assets associated with falling interest rates; second, the growing role of rents from oligopoly and other sources in the economy.

The Test of the Future

The biggest threat to global development from the growing inequality in developed countries is that it is undermining support for democracy and the open economy. It is generating tensions within the democracies that are making the open policies that were important contributors to improved economic development in the developing countries, difficult to sustain. So, we're getting phenomena like Brexit and Trump, with their strong protectionist elements.

If that reaction went very far, it would close off many of the opportunities that have helped the success of development in the major Asian developing countries, and which have been important to the beginnings of modern economic development in the resource-poor countries of Africa this century.

So, what can we do about it? If we were confident about maintaining open economies and large transfers of capital in one form or another from the developed world to the developing world, and if we had consistently good governance in the important countries of the world, then we could look forward to a general abundance of capital and a general scarcity of labour later this century. This would extend to Africa. This would be a world in which democracy was more secure, because you would have less tension associated with rising inequality in the developed countries.

There are several big threats to realisation of this favourable outcome. One is the collapse of social democratic regimes in the developed world, which are necessary supports for openness in global development. A second is severe environmental breakdown and failure of mitigation of climate change. A third is failure of development in Africa.

Let me suggest solutions to each of these problems. It sounds easy if I quickly run through the solutions, but it goes without saying that they are diabolically difficult problems.

For continued success of social democracy in the developed world - and I think the only sustainable democracy in the developed world is social democracy - we are going to need to reform taxation in some important ways. The share of corporate taxation in total taxation has been falling under the influence of globalisation. The loss of revenue is large enough to undermine the welfare state. There is a path to a different approach to corporate taxation, that doesn't involve the Business Council's programme of simply reducing the company tax rate. We would need to adopt a quite different approach, in which we focus on taxation of business cash flows generated within each of the developed countries.

This is highly technical, but a successful approach would, in my view, include the following elements: allowing immediate expensing of all capital expenditure; denial of any deductions for interest or financing payments, which are such large sources of tax avoidance; and removal of opportunities for deduction of expenditures for imported intellectual property. That's pretty radical, but I think steps along those lines are going to be necessary for countries to be able to retain autonomy in taxation of the corporate income base.

I think that we are also going to have to make some major adjustments to personal taxation and social security regimes. The end point of that adjustment will be something like a guaranteed minimum income or a negative income tax. In Australia, we have gone so far with reduction of income tax for people on low incomes--raising of the tax-free threshold--and of extension of benefits to large categories of low-income people that this will be much less expensive than it once would have been.

I think the third element of policy that is going to be important in the developed countries to deliver the world we want to see is going to be much more systematic development of mechanisms for transfer of capital for development in developing countries, and recognising this is going to be important in the long run for preservation of our own social democracy.

Then, for environmental sustainability, and avoiding the environmental threat to development, we have had one enormous bit of good luck that I did not expect ten years ago. The cost of the zero-emissions alternatives to generating green-house gases through use of traditional energy has fallen very rapidly. I did a lot of my work for the state and federal governments on climate change ten years ago in expectation that there would be a substantial cost in the adjustment. But through good luck, and in consequence of good policy in Europe, and innovation in Korea, Japan, China, the United States, Europe, Australia and many other countries, which has started to establish a base for large-scale production of renewable energy, we have discovered that the cost of alternative energy is actually, in the end, lower than the cost of traditional energy. We have an opportunity for a low-cost adjustment that I did not expect ten years ago. There was never any law of nature that said it had to be that way, but now we know that it can be that way.

The question now is: will we have the policies that support the rapid introduction of the technology to achieve the rapid transformation of our economies to make economic growth consistent with stability in the climate? The technologies are there, and the policies are available and known to people who work on these things. But in many countries - worst of all, in Australia and the United States - established interests are resisting that change that could be economically as well as environmentally advantageous in the longer term.

We won't get global development without the main initiatives coming from the developing countries themselves. Policy in the developing countries themselves is crucial. But the developed world has some influence over those policies. To a considerable extent, official Australian influence in recent times has been malign. International rules against corruption, corrupt practices in business relationships, are very important, but they're very weak in Australia and, to the extent they exist in Australia, they're not enforced in Australia. While they're not strongly enforced in many countries, we seem to be an outlier in poor performance on those matters. That affects the prospects of good governance in developing countries.

And there are many opportunities for influence in favourable directions in policy and institutions in developing countries. Ours is strongest in the countries with dreadful development problems in our immediate neighbourhood - most importantly, Papua New Guinea. We have to make sure that, whenever we have a chance for influence, our influence is exercised in a positive and not a malign way. We have not met that test over the past half dozen years at least.

Ross Garnaut is Professorial Research Fellow in Economics at the University of Melbourne. This is an edited version of Professor Garnaut's keynote address to ‘Eco-Transitions’, a conference organized by the Centre for Research in Religion and Social Policy, University of Divinity, Melbourne.

This article was first published on 15th January 2018 at Republished with permission.

Got something to add?

  • Your Comment


In-Depth Articles

subscribe to engage.mail

follow us