Inequality Gap

Rethinking Prosperity

79863310 AP fight for wages lg
The financial crisis wasn’t the trigger of the West's deep-seated insecurity, but one of its symptoms. AP / Steven Senne [M]

It’s been a quarter of a century since “The End of History.” At least, that was the title of Francis Fukuyama’s 1992 book that famously announced the conclusive victory of Western liberal democratic models.

There isn’t much of that confidence left today. Instead, many people have been seized by deep-seated insecurity, particularly in the West.

The reason for this insecurity lies in the growing discrepancy between economic successes on one hand and corresponding social benefit on the other. Individual citizens no longer automatically benefit when the economy is booming, just as the average employee can no longer be sure of their job just because their company is turning a profit.

For a growing number of people, the two economic indicators of success – gross domestic product on the macro level and shareholder value on the micro level – have dramatically lost their meaning.

The financial crisis wasn’t the trigger of this development but one of its symptoms. The gap had been growing for some time. In the 1980s, globalization was still defined by national economies with comparable wage levels, similar social standards and more or less the comparable legal structures.

The equation then expanded to countries whose comparative advantage rested on an army of cheap labor. Measured on GDP per capita, it wasn’t just the West that was benefiting. The average level of prosperity worldwide grew enormously. But soon, this ceased to be the case for many people in industrialized countries. Their jobs were suddenly being done in Eastern Europe, India, China, Vietnam or Bangladesh.

The second driver of economic prosperity – technological progress – is a similarly double-edged sword. The internet has become the backbone of the economy. The cross-border exchange of information allows for global business models. But while this brings new opportunities for many, it also threatens to produce losers. Following the worldwide race for the cheapest human labor for standardized activities, those very jobs are now being automated and replaced by machines.

We should give up the idea that aggressive economic growth is always meaningful everywhere and at any price.

Despite growing overall economic prosperity, more and more people feel left behind, and it’s more than a subjective feeling. The Gini index, which measures income inequality, has been going up in most Western societies since the 1980s. Studies by former World Bank economist Branko Milanovic show that the real income of the middle class was virtually flat between 1988 and 2008.

If we want to prevent a growing number of people losing faith in the system, we need to strike a new balance in the relationship between business and society. There is no simple answer to how this should be done. But first, we must give up the idea that aggressive economic growth is, in and of itself, always meaningful everywhere and at any price – it isn’t.

The same holds true of our habit of measuring socioeconomic progress based on “averages.” Key performance indicators like the GDP per capita do have their use, but they don’t reflect the complex impact of economic processes on the welfare of individuals and communities.

Instead, it would be sensible to set clear social objectives alongside the purely financial ones and make the relationship between them transparent. Training would play a key role in this; it is a prerequisite of innovation power.

This is the only way the application of new technologies can create new industries, new activities, and therefore new jobs. Moreover, politics and business must regain a focus on the interests and needs of local communities, so that social progress and economic success are once again found at the local level.

We must recognize the dualities of the global and local, economic and social value creation by both people and machines, and better communicate them to society. That’s not social romanticism but rock-solid social economic pragmatism.

Processes of change and adaptation will continue to be painful. Yet we have good reason to look ahead with confidence. Populist and protectionist movements might gain the upper hand for now, that isn’t the end of history, either.

 

To contact the author: gastautor@handelsblatt.com

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