Beyond Austerity: Towards a Global New Deal

Fifty years ago, at New York’s Riverside Church, Martin Luther King made a passionate plea for a more equal, more just, more peaceful and more dignified world. Calling for “a radical revolution of values”, King concluded, “We must rapidly begin … the shift from a thing-oriented society to a person-oriented society. When machines and computers, profit motives and property rights are considered more important than people, the giant triplets of racism, extreme materialism and militarism are incapable of being conquered.”

There is a contemporary ring to King’s call for a more inclusive agenda. The “giant triplets” that he warned about are resurfacing, accompanied by a retreat into resentful nationalism and xenophobic comfort zones. The gaps between the rich, the middle class and the poor have almost certainly widened since King’s time. And across much of the world, the drive to achieve full employment with strong welfare provision was thrown into reverse gear decades ago, as governments effectively reinvented themselves as “enablers” rather than “providers”.

Ten years after the gales of financial destruction originating in Wall Street swept across the heartland of America and beyond, the world economy remains marooned in a state of substandard growth, while the social and economic inequities exposed by the crisis show few signs of moderating. Governments have closed down the most egregious loopholes and toxic instruments exposed by the crisis; but however good their intentions, the reality is that few who caused the crash have been held accountable for their actions, and little has been done to tackle its root causes.

As “hyperglobalization” with the help of the very visible hand of the State has recovered its poise, business as usual has set in; the push for “light touch” regulation is under way yet again, and austerity has become the preferred response to “excessively” high levels of public debt. Meanwhile robots, rents and intellectual property rights are taking precedence over the livelihoods of people and their aspirations. History, it seems, has a troubling knack of repeating itself.

Unlike the textbook world of pure competition, hyperglobalization has led to a considerable concentration of economic power and wealth in the hands of a remarkably small number of people.

This need not necessarily be antithetical to growth. But if history is any guide, it tends to generate political tensions that clash with wider public and social interests. Indeed, more clear-headed supporters of “the market”, since Adam Smith, have warned of the political dangers that can follow the concentration of economic wealth. It is, therefore, hardly surprising to find a popular backlash against a system that is perceived to have become unduly biased in favour of a handful of large corporations, financial institutions and wealthy individuals.

The real threat now is to the underlying trust, cohesion and sense of justice that markets depend upon in order to function effectively. No social or economic order is safe if it fails to ensure a fair distribution of its benefits in good times and the costs in bad times.

Insisting that “there is no alternative” is yesterday’s political slogan. People everywhere desire much the same thing: a decent job, a secure home, a safe environment, a better future for their children and a government that listens and responds to their concerns; in truth, they want a different deal from that offered by hyperglobalization. The 2030 Agenda for Sustainable Development, codified in a series of goals, targets and indicators, points in that direction. What is still needed is a supportive policy narrative and bold political leadership; there are hopeful signs that some of the discarded strategies and solutions that helped re-build the global economy after the Second World War are receiving a much welcomed twenty-first century makeover and are attracting a new generation determined to build a better world.

This time around, any new deal will need to “lift all boats” in both developing and developed countries and face up to the challenge that many of the imbalances inhibiting sustainable and inclusive growth are global in nature. Prosperity for all cannot be delivered by austerity-minded politicians, rent-seeking corporations and speculative bankers. What is urgently needed now is a global new deal.

Without significant, sustainable and coordinated efforts to revive global demand by increasing wages and government spending, the global economy will be condemned to continued sluggish growth, or worse. Now is the ideal time to crowd in private investment with the help of a concerted fiscal push to get the growth engines revving again, and at the same time help rebalance economies and societies that, after three decades of hyperglobalization, are seriously out of kilter. However, in today’s world of mobile finance and liberalized economic borders, no country can do this on its own without risking capital flight, a currency collapse and the threat of a deflationary spiral. What is needed, therefore, is a globally coordinated strategy of expansion led by increased public expenditures, with all countries being offered the opportunity of benefiting from a simultaneous boost to their domestic and external markets.

The established order is under attack from both ends of the ideological spectrum, and its legitimacy is being called into question by the wider public. The SDGs provide the political impetus for change. The aim should now be to harness this moment of consensus to ensure an appropriate combination of resources, policies and reforms needed to galvanize the requisite investment push and promote inclusive outcomes at both global and national levels.

Despite all the talk of its increasing irrelevance and imminent demise, the nation State still remains the basic unit of legitimacy and leadership in today’s interdependent world, and to which citizens ultimately turn for economic security, social justice and political loyalty. But no less than in the past, achieving prosperity for all should involve paying close attention to the biases, asymmetries and deficits in global governance that can stymie inclusive and sustainable outcomes. Effective internationalism continues to rest on responsible nationalism, and finding the right balance remains at the heart of any meaningful multilateral agenda.

With this in mind, there needs to be widespread support for a global new deal. The original New Deal, launched in the United States in the 1930s and replicated elsewhere in the industrialized world, particularly after the end of the Second World War, established a new development path that focused on three broad strategic components: recovery, regulation and redistribution. While these components involved specific policy goals tailored to particular economic and political circumstances, they made job-creation, the expansion of fiscal space and the taming of finance, a common route to success along this new path.

Building a new deal today could draw on those same components; and, as before, States require the space to tailor proactive fiscal and other public policies to boost investment and raise living standards, supported by regulatory and redistributive strategies that tackle the triple challenges of large inequalities, demographic pressures and environmental problems. However, the specific challenges of inequality and insecurity in the twenty-first century will not be tackled by countries trying to insulate themselves from global economic forces, but rather by elevating, where appropriate, some of the elements of Roosevelt’s New Deal to a global level consistent with today’s interdependent world.

Elements to consider for the New Deal

Ending austerity: This is a basic prerequisite for building sustainable and inclusive economies. It involves using fiscal policy to manage demand conditions, and making full employment a central policy goal. Monetary expansion should also be used differently, so as to finance public investments which add to inclusive and sustainable outcomes. As part of a general expansion of government spending that covers physical and social infrastructure, the state can act as an “employer of last resort”; specific public employment schemes can be very effective in job creation, especially in low-income countries, where much of the workforce is in informal and self-employed activities. Both public infrastructure investments and employment schemes are important for reducing regional imbalances that have arisen in developed and developing countries.

Enhancing public investment with a strong caring dimension: This would include major public works programmes for mitigating and adapting to climate change and promoting the technological opportunities offered by the Paris Climate Agreement, as well as addressing problems of pollution and degradation of nature more generally. It also means dealing with demographic and social changes that erode local communities and extended families by making formal public provision of child care and elderly care a necessity. In both respects, public investments should be designed to enable and attract more private investment, including SMEs and in more participatory ownership forms such as cooperatives.

Raising government revenue: This is the key to financing a global new deal. A greater reliance on progressive taxes, including on property and other forms of rent income, could help address income inequalities. Reversing the decline in corporate tax rates should also be considered but this may be less important than tackling tax exemptions and loopholes and the corporate abuse of subsidies, including those used to attract or retain foreign investment.

Establishing a new global financial register: Clamping down on the use of tax havens by firms and high-wealth individuals will require legislative action at both national and international levels. Interim efforts in this direction could include a global financial register, recording the owners of financial assets throughout the world.

A stronger voice for organized labour: Wages need to rise in line with productivity. This is best achieved by giving a strong voice to organized labour. At the same time, job insecurity also needs to be corrected through appropriate legislative action (including on informal work contracts) and active labour market measures. More innovative supplementary income support schemes could be considered for achieving a fairer income distribution, such as a social fund that could be capitalized through shares issued by the largest corporations and financial institutions.

Taming financial capital: Crowding in private investment requires taming financial institutions to make them serve the broader social good. In addition to appropriate regulation of the financial sector, it is important to tackle private banking behemoths, including through international oversight and regulation, as well as to address the highly concentrated market for credit rating and the cosy relationship between rating agencies and the shadow banking institutions that have allowed “toxic” financial products to flourish.

Significantly increasing multilateral financial resources: This should include meeting ODA targets, but also ensuring better capitalized multilateral and regional development banks. In addition, the institutional gap in sovereign debt restructuring needs to be filled at the multilateral level.

Reining in corporate rentierism: Measures aimed at curtailing restrictive business practices need to be strengthened considerably if corporate rentierism is to be reined in. The 2013 OECD BEPS initiative is a start, but a more inclusive international mechanism for the regulation of restrictive business practices will be needed. Earlier attempts in the United Nations, dating back to the 1980s, would be a good place to begin. Meanwhile, stricter enforcement of existing national disclosure and reporting requirements for large corporations would be useful. A global competition observatory could facilitate the task of systematic information gathering on the large variety of existing regulatory frameworks, as a first step towards coordinated international best practice guidelines and policies, and to monitor global market concentration trends and patterns. Competition policy more generally should be designed with an explicit distributional objective.

Respecting policy space: Meaningful reform of the many restrictive investment and intellectual property policies enshrined in thousands of bilateral – and the growing number of regional – trade and investment agreements, will be impossible without a fundamental overhaul of the current international investment regime. This should begin with rethinking its current narrow purpose of protecting foreign investors in favour of a more balanced approach that takes the interests of all stakeholders on board and recognizes the right to regulate at the national level. The international investment dispute settlement and arbitration system needs to be fixed, and if necessary, replaced by a more centralized system with proper appeal procedures and grounding in international law. An Advisory Centre on International Investment Law could help developing country governments navigate disputes with multinational corporations on more egalitarian terms.

In 1947, drawing on the values of the original New Deal, the international community sought to rebalance a world economy shattered by depression and war: the International Monetary Fund (IMF) opened its doors to business, the World Bank provided its first restructuring loan, the General Agreement on Tariffs and Trade (GATT) concluded its first multilateral trade deal, George Marshall launched the most successful development cooperation project in modern history, and the United Nations opened its first regional office and convened its first major conference (on trade and employment). Seven decades later, an equally ambitious effort is needed to tackle the inequities of hyperglobalization in order to build inclusive and sustainable economies.

Excerpted from Trade and Development Report 2017 published by United Nations Conference on Trade and Development (UNCTAD)