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The Great Reckoning for Capitalism Beckons

By Graham Vanbergen

As the politics of Europe rapidly changes, Graham Vanbergen quotes renowned economists Stiglitz, Collier and Coyle to conclude that the failure of capitalism is now so evident it is consuming democracy and economies from the inside out like a malignant cancer. A revitalising alternative is there for the taking. The question is – will the opportunity of a new model of progressive capitalism end up being lost?

It is evident that the social contract built up over 70 years from the wreckage of the last world war has been broken in many Western countries. Implicit agreement among civil society to cooperate for social benefits, for example by sacrificing some individual freedom like paying taxes for protection by the state was fully understood. That also meant everyone had to contribute with the exception of those physically unable to do so.

However, it is just as clear after four decades of market fundamentalism, where monied fanatics seized control of the state through lobbying and corruption, that neoliberal capitalism in European countries is now failing the majority of their electorate. 

What the citizenry overwhelmingly want is exactly what has been financialised over the years as its crucial services to civil society were slowly withdrawn. Affordable housing, the withering losses of decent work for decent pay, of quality health care, of a good education – are mourned as the symptoms of a decaying liberal democracy on its current crash and burn trajectory.

The death throes of this trajectory has expressed itself as little more than disaster capitalism. Real capitalism has failed in countries all over Europe. The result is dissent. The rise of the far-right is its manifestation and visible for all to see in places like Italy, France, Germany, Austria, Sweden, Estonia, Hungary, Denmark, Romania, Greece and others, where the fuse has already been lit. Brexit is a dangerous gamble by right-wing insurgents for Britain.

Now, fundamental questions about the future of the world’s most powerful economic model are impossible to neglect. The problem, in the absence of workable or even feasible alternatives, is how to reform the very system that is currently tearing down the institutions that uphold civil society and consuming democracy and economies from the inside out like a malignant cancer.

A crossroads has been reached and the wrong decision at this important junction will be ruinous over the medium and long-term for many Western countries. This is the great reckoning for neoliberal capitalism. 

Two things fundamental to the Western way of life are now at stake. First is representative democracy. Corporate and political malfeasance and what amounts to little more than anarchy by the rich and powerful have demonstrated that voting means little if the change voted for never materialises. Second, is that through this deception our shared prosperity and shared values are diminished to the point of worthlessness. The breakdown of social cohesion is its first victim and Brexit is a master-class demonstration of this, as this political dichotomy cannot be solved, much like a maze with no way out.

With Brexit we now know that a global social media network, allied with largely American billionaires cheated democracy. They encouraged and funded (with cash funnelled through tax havens or think tanks for anonymity) right-wing elements to rise up against an imaginary foe (such as religion), then blame unfettered immigration for the loss of jobs, reducing incomes and services such as healthcare, school places and a housing crisis. The forces of extreme capitalism, that of a largely white privileged political class expecting fortunes to follow revolving door careers, which populate the seats of power in Westminster, have themselves created all of these divisive social problems.

Voting for populist leaders is another symptom of the unfolding public disaster. In the absence of good political leadership, populists seize the opportunity. Public dissent then becomes an issue as they drive home a growing sense of economic injustice.

Voting for populist leaders is another symptom of the unfolding public disaster. In the absence of good political leadership, populists seize the opportunity. Public dissent then becomes an issue as they drive home a growing sense of economic injustice. Political powerlessness grips the national mood and public protest turns to anger and fear and the inevitability of violence becomes a tangible national threat. All of these symptoms of political and economic failure are now dominating Britain’s once cool calm character.

Since Thatcher and Reagan agreed in the 1980s on deregulation and trickle-down economics – its concept has since almost universally failed (not because it was wrong but because it went too far) and with it so has social cohesion, our sense of community, national identity and tolerance. Unrestrained materialism and unfettered profit seeking has fed into the unfolding climate crisis; itself creating anger amongst what was a traditionally peaceful and moderate centrist movement. The police are now threatening to prosecute over 1,100 climate change protestors from the recent Extinction Rebellion marches in London as civil liberties organisations gear up to protect them from overreach by the state. The $6 trillion fossil fuel industry is set to be seriously challenged by a green revolution.

Other indicators of extreme capitalism are in plain sight. What we have been left with is a crisis of daily life for almost half the population. Rapidly rising child poverty and in work poverty along with a social care crisis, health crisis and housing crisis should not be the economic outcomes of the wealthiest Western nations in the world. In America, the wealthiest, almost all of the measures of well-being and good governance have faltered or failed with indicators such as life expectancy now in full reverse. Britain is now striding towards that same scenario. The recent United Nations report on the state of poverty in Britain makes for sobering reading describing UK Government policy as having led to: “systemic immiseration of a significant part of the population”. It confirms the distressing output of political and corporate mismanagement and greed as a Dickensian era of poverty threatens to emerge once again.1 The political deception has been that of the centrists though, which is being rapidly abandoned as a resurgence of more extreme forms of future government beckons. In Britain, the shock of Brexit has since riled its entire electorate. Half are angry at the referendum having been offered in the first place, the other half angry at its result not being delivered. Left and right, socialist or capitalist – the binary choice offered has ended in failure.

What Britain and many other Western countries need right now is what some well-known economists call – progressive capitalism. Its primary role is to restrain the excesses of political lobbying, politics, excessive concentrations of money and undue influence it has on society as a whole.

As Joseph Stiglitz – Nobel laureate of economics says – “We have conducted a 40-year experiment with neoliberalism. The evidence is in, and by any measure, it has failed. And by the most important measure – the wellbeing of ordinary citizens – it has failed miserably. We need to save capitalism from itself. A progressive capitalist reform agenda is our best chance.2

Sir Paul Collier, CBE, FBA – is a British Professor of Economics and Public Policy in the Blavatnik School of Government and the director of the International Growth Centre. He agrees that neoliberalism has failed and suggests a tax on globalism, not as far-fetched an idea as you might think. He proposes that it be used to reconstruct former industrial bastions like Detroit in the USA and Sheffield in the UK, thereby relying on geographic redistribution to restore the social balance lost under the deindustrialisation era of the last four decades. In essence, what Collier confirms is that a narrow elite has relied on finance, technology, and political coercion to force its position at the cost of everyone else.3

Diane Coyle is Professor of Public Policy at the University of Cambridge and former advisor to the UK treasury. She agrees that the current economic model of the West has all but failed. “The post-World War II social contract in many of today’s developed economies is breaking down. And even more uncertainty and insecurity are on the way.” Coyle goes further to suggest change is now needed more than anything – “With productivity flatlining and public anger growing, it is clear that existing policies are not up to the challenge. Without a new approach, it is difficult to imagine a prosperous future for Western societies.”4

There are quite a few highly qualified economists coming round to this view. One thing is clear though; meddling at the edges will change nothing. The entire framework of economic policy needs to change. We could start by abandoning what has failed an entire generation – that the free market is the only organising principle of output and decision-making. The recipients of excessive corporate wealth are desperate to keep the gravy train going and channel ever-greater sums of money through think tanks and front charities to espouse their message to corrupt politicians and a compliant media, themselves owned by off-shore billionaires. However, the result of their collective failure is evident everywhere you look.

Britain is now a model exercise in political trajectories. Failed economic policy has eventually led directly to national outrage.

Britain is now a model exercise in political trajectories. Failed economic policy has eventually led directly to national outrage. This, in turn, has led to (incompetent and often weak) political leaders attempting to deflect criticism by inflating imaginary threats that then turn into ideological battles. In Britain, Brexit has already ended in a toxic stalemate. The only real options left will forever fail half the population, therefore, refuelling a cycle of public anger. In the meantime, the economy is at risk. Inward investment has all but collapsed as a result of three years of wrangling with the impossible.

It is also more than just evident that the forces of unrestrained ‘free-market’ fundamentalism are seriously threatening democracy and capitalism. Changing course and breathing new life into economic policy is the only way for them both to thrive as the current orbit of extraction wealth and rising inequality will continue its march next by co-opting extreme nationalism, promoting nativist ideologies, and funding authoritarian tendencies.

The West is at a political and economic crossroads. This great reckoning forces us to challenge what that has been put off for years – that the economic pendulum has swung too far in favour of a tiny minority. The current neoliberal economic model was originally designed to expand the middle-classes but has achieved the opposite whilst dramatically increasing a new underclass not just of the poor and unemployed but working families and households. Change is coming, that much is clear, the direction of that change is not. 

Featured Image: Hundreds of protesters gathered in Cardiff city centre before marching in a “mass opposition to Brexit” organised by group Cardiff for Europe. Image by Josh Lowe www.jomec.co.uk

About the Author

Graham Vanbergen is the founder and contributing editor of TruePublica.org.uk, ThinkPublica, and NewsPublica.com. He is also the author of BREXIT – A corporate coup d’état.

 

References
1. UN poverty report – highlights : https: //truepublica . org.uk/united – kingdom/un-report-on-uk-poverty-systemic-immiseration-of-millions-across-the-uk
2. Joseph Stiglitz – Progressive Capitalism: https://www.nytimes.com / 2019 / 04 / 19 /opinion/sunday/progressive-capitalism.html
3. Paul Collier – The future of capitalism: https://www.harpercollins.com / 9780062748669/the-future-of-capitalism/
4. Diane Coyle – How the free market is betraying advanced economies : https ://www.project-syndicate.org/commentary/free – market – neoliberal – policy – west – by – diane – coyle – 2019 – 04

Pursuing “Outrageous Ambitions” for the Greater Good

Interview with Judith Kelley, Dean of the Sanford School of Public Policy at Duke University.

 

The Sanford School of Public Policy at Duke University is one of America’s leading schools of public policy located in Durham, North Carolina – a city with a unique mix of rich history, diverse culture, and vibrant research, medical and arts communities. With its unique and world-class interdisciplinary policymaking degree programs, Sanford was recently recognised as the top graduate school in the southern U.S. in its core specialty, public policy analysis. Sanford‘s eclectic and hands-on approach towards research and policy formulation helps scholars to be transformational leaders who are committed to innovative policy solutions to create positive change. To understand more of Sanford’s core values, we sat down with Sanford School of Public Policy’s Dean Judith Kelley.

 

Good day, Dean Kelley! You are known for your research on democracy and human rights, international relations, and human trafficking, to name a few. Can you describe how an expert political scientist and academic leader like you would jumpstart a day? Do you have particular morning routines?

I am fortunate to live close to my office, so part of my routine is riding my bicycle to work. The fresh air and regular morning exercise energise me both physically and mentally.

 

Just recently, the Sanford School of Public Policy was recognised as one of the top U.S. graduate schools, and ranked fifth in its core specialty, public policy analysis. What makes Sanford’s public policy programs stand apart from other graduate schools? What are the focuses of the curriculum and the fundamental components of your program?

One of the biggest strengths of our graduate programs is our outstanding faculty. Not only are they world-class scholars, they also are actively engaged with the policy world and dedicated to providing excellent teaching and mentoring to our students. Our program provides students many opportunities for collaborative teamwork, as well as interaction with actual clients and current policy problems. Our students can pursue a wide array of policy interests, but all of them graduate equipped with both quantitative and qualitative tools of analysis.

 

What facets of the curriculum do you personally view as immensely useful in generating effective solutions to crises related to international relations and public policy? What other components of the program or areas are in development?

A key component of our program is training in ethics. Many international disputes are tied to differences in value judgments – decisions about what priorities are most important at a particular point in time to a nation, a region, or even to humanity as a whole – therefore, it is essential for policymakers to be able to understand why other cultures’ values may differ from their own without being incorrect. There are many other immensely useful elements, including economics, stakeholder analysis, project design and appraisal, and strategic management.

Cybersecurity is an area in which our program is growing. As the 2016 U.S. elections demonstrated, the potential for serious societal consequences due to information manipulation has never been greater.

 

We believe diversity is essential to ensure the robust exchange of ideas – the exchange that is at the heart of Duke University’s efforts to advance human knowledge and understanding.

One of the university’s values and principles is diversity and inclusion. How important is this doctrine in helping the Sanford School in its aspiration to be the leader in its field? How does fostering diversity in the community impact the formulation of public policies?

We believe diversity is essential to ensure the robust exchange of ideas – the exchange that is at the heart of Duke University’s efforts to advance human knowledge and understanding. And, just as intellectual discourse is richest when it includes many voices, public policies have the best chance for success when they are based on careful consideration of many viewpoints.

In present times of political uncertainty and social upheaval, the universities are major actors in the international environments and in shaping the future of governance. How does the Sanford School equip graduate students to cope with the complex economic and political dynamics, and address the demands of the increasingly multi-polar world?

At Sanford, we are fortunate to have an incredibly international student body, as well as alumni in more than 96 countries. Students work side by side with people whose experiences differ widely, and that kind of collaboration is an everyday part of an international affairs career. Collaboration to solve complex global policy problems starts with respect, tolerance, and active listening to all perspectives. These values and skills are critical to navigating complex contentious times like these – and the Sanford School works to both model and teach them.

 

Collaboration to solve complex global policy problems starts with respect, tolerance, and active listening to all perspectives.

The Sanford School’s graduate programs are uniquely designed to offer flexibility and allow students to explore and expand their skills. One academic requirement is to undergo an internship. How effective is this practical experience? Can you share a story of one of your successful graduates where they were able to utilise the internship experience in their own field of specialisation?

One student that comes to mind is Ichiro Toda, who graduated from our MIDP program in 1998. He was working for a Japanese government agency when he came in to the program, but he really wanted to expand his skillset and he took on an internship at the Inter-American Development Bank. He said the skills and experience he gained in those two months were enough to raise his profile at his workplace and, when he returned, he received a new assignment to work with the IADB. Years later, he actually got a position at the IADB, and is now in a senior position at the World Bank. He credits the internship with changing the course of his career! 

 

 

Studying international relations and public policy is a complex and evolving topic that allows one to have a deeper understanding about the dynamics of relationships between countries. Can you share with us a particular example of a successful Sanford graduate who was able to translate the theory-based knowledge and apply it to solve real-world crises?

Our accomplished alumni hold influential positions around the world. They include the founder of The Global Fund for Children, a UNHCR humanitarian affairs officer working in Syria, U.S. Foreign Service officers fighting human trafficking, and the founder of a global nonprofit helping improve health-care access. One alum, Samir Nuriyev, is now the Chair of the State Agency on Housing Development in Azerbaijan and is using what he learned about economics, policy analysis, and service delivery to provide affordable housing for the people in his country.

 

With the rising economic inequality, destabilisation, populism, and political gridlock across all nations, what tools and strategies should the present and aspiring leaders of our society use to address these compounding challenges?

Being future-oriented and thinking imaginatively are essential today. Big problems call for big ideas. At the Sanford School, thinking big is in our DNA – our founder, Terry Sanford, challenged students to pursue “outrageous ambitions” for the greater good. Our students embrace and carry on that entrepreneurial spirit.

 

On a lighter note, it is important nowadays to have a balance of work and personal life. Amidst all your responsibilities as the dean at a prestigious university, how do you juggle your work and personal obligations?

Leading a policy school is a wonderful opportunity to help others succeed and to be part of important debates, but it is demanding and therefore it is absolutely essential to find ways to unwind. I love being outside, so I garden and hike. I also read novels, both as relaxation and a way to enhance my understanding of the lives of others.

 

From a political scientist’s perspective, what is an ideal society? And what does success mean to you?

I am not sure I know the answer to what an ideal society is, but I think I am with Churchill when he noted that, “Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time …” As to what success means to me: It is having a part in helping others succeed. The faculty and the students of Sanford do great things and that, to me, is success.

 

Thank you very much, Dean Kelley. It was a pleasure speaking with you.

About the Dean

Judith Kelley, PhD, is Dean of the Sanford School of Public Policy at Duke University. A political scientist and expert in international relations, she studies how states, international organisations, and NGOs can promote political reforms within problem states. Her newest book is Scorecard Diplomacy: Grading States to Influence their Reputation and Behavior.

The Challenges and Importance of Institutions Building in the Developing Countries

By Dr. Kalim Siddiqui

There has been on-going debate about the utility of the ‘free market’ system versus ‘government intervention’ in promoting development policies and wellbeing for general populace. In this article, the author examines the question as to what pattern of development should be adopted if developing countries need to build institutions.

I think institutions are very important in the building of a democratic and economically prosperous country. All the current developed countries have very efficient and transparent institutions to promote growth and prosperity within them, and it is for this reason the developing countries should learn from developed countries regarding the importance of institutions to promote economic advancement. Institutions have to be transparent and professional, such as ensuring an independent judiciary, law enforcement agencies, and bureaucracy in order to attract inflows of foreign capital, facilitate economic development and domestic transformation of the society in general. This will also curtail corruption and malpractice.1 Such policy measures will promote equity and the fair distribution of the fruits of economic growth, as happened in the recent past in the East Asian economies, where the state has played an important role in successfully building institutions.2

The establishment and functioning of any institution is critically dependent on the social, economic and political support it receives from the government. It is assumed that the well-directed and efficient functioning of institutions will ensure a better quality of life for people at large.

Institutions are created as a part of any national building process. Our focus here should be on state sponsored institutions such as the judiciary, police, education, and government officials. The establishment and functioning of any institution is critically dependent on the social, economic and political support it receives from the government. It is assumed that the well-directed and efficient functioning of institutions will ensure a better quality of life for people at large.

Over the last few decades, there has been on-going debate about the utility of the ‘free market’ system versus ‘government intervention’ in promoting development policies and wellbeing for general populace. The question was put forward as to what pattern of development should be adopted if developing countries need to build ‘institutions’. Everyone agrees that there is a need to apply the rule of law, good governance, political stability, transparency and accountability. These policies are important to implement in order to achieve the target of raising the living conditions of the common people. The question arises, though, as to what the purpose of an institution actually is: is it for keeping law and order to maintain the status quo, or for a transformation and real change in society?

Foreign Intervention and Undermining of Sovereignty

A progressive country is where real power rests in the hands of the people, and those in authority are accountable to the people through various structures of accountability. Developing countries need democratic governance, which is transparent, has checks and balances, and the decision-making process engages a wide range of stakeholders and citizens. The democratic process should also enable the weakest and most marginalised sections to participate in decision-making processes and to claim their stakes.

However, foreign intervention in the developing countries hinders the development of independent institutions, and protects the strategic interests of their former colonizers (metropolis). For example, in the first quarter of the 20th century, the British did two major things in the Middle East which affected not just the entire region but the rest of the world; namely, they undermined the peace, prosperity and development of the region. 

First, the colonisation of Palestine fitted well with the interests and policies of the British Empire on the eve of the First World War. With the backing of Great Britain, the colonisation project expanded, and became a solid presence in the country after World War I. . The British control was strengthened with the establishment of the British mandate in Palestine (i.e., between 1918 and 1948). The Arabs in Palestine protested British colonialism and Jewish immigration from Europe. Their revolt in 1936, which lasted for three years, failed to change British policy, which was already decided in 1917 when the British foreign secretary, Lord Balfour, promised Zionist leaders that Britain would help to establish a homeland for the Jewish people in Palestine, which is also known as Balfour Declaration (Said, 1993). More than one hundred years have passed since the Balfour declaration was signed, which reminds the promise then made by the British of a Jewish “national home”, while completely ignoring what were notoriously described as the “non-Jewish communities”, then constituted about 92% of the population of the country.3

Under the British mandate, the number of Jewish immigrants increased rapidly, and by the mid-1930s, the Jewish population had risen to around a quarter of the total population, but possessing only 4% of the total land. In 1948, the Zionist organisations decided to expel native Arabs and, by doing so, would create a Zionist state. As Pappé (2009) argues, from its early inception Zionist thinkers propagated the need to ethnically cleanse the indigenous population of Palestine if the dream of a Jewish state were to be realised. The preparation for implementing these two goals of statehood and ethnic supremacy accelerated after the Second World War. Hussein Sharif’s revolt achieved only minor victories over the Ottoman army and failed to mobilise people in any part of the Arab world, despite being subsidised by the British to the tune of  £11 million (around $400 million in today’s money). British officers such as Colonel T.E. Lawrence served as military advisers to Hussein during the revolt. Meanwhile, one month before the Arab revolt broke out, Britain and France had secretly decided to divide the Middle East between their zones of influence, in what was known as the Sykes-Picot Agreement, in 1916.4 

Second, Britain provided money and support to Abdul Aziz Ibn Saud to consolidate power in the Najd and finally the Mecca and Medina region, which is now known as Saudi Arabia. The Middle East was seen by the British government as critical to both its strategic and commercial interests. Britain then fully backed the takeover by the Islamic extremist of Wahhabi sect, namely Abdul Aziz Ibn Saud in Saudi Arabia in 1915, while at the same time also assisted the Zionist organisation to take over Palestine and to establish Israel. Both these acts by the British imperialists promoted religious extremism and violence. And both tactical moves were undertaken with the aim of securing the region for imperial strategic interests, in particular the Suez Canal and safe routes to India. British officials described Abdul Aziz Ibn Saud as a desert Bedouin warrior, determined to unify the country and save it from the chaos of tribal warfare. Later, in the 1960s and 1970s, when the US and British hegemony came under threat from nationalism and communism, Saudi Arabia exported radical Islam and its Wahhabi extremism to assist its allies.

In 1915, the British aim was to prevent the German and Ottomans from establishing in the Sinai region, and protect the route to Indian subcontinent. For British Empire, it was crucial to keep rival European powers away and to maintain and control the region; as such acts were crucial to boosting its industrial and commercial strength. Meanwhile, Germany, under Kaiser Wilhelm II, had been taking increased interest in the Middle Eastern region. However, Britain had plans to block Germany from entering this region being upset by the potential development that Germany would seize the Suez Canal to prevent Britain from transferring troops from the Indian subcontinent. The Suez Canal was built in 1869, which made travel route from Europe to Asia easier and cheaper.

Under the British mandate, the number of Jewish immigrants increased rapidly, and by the mid-1930s, the Jewish population had risen to around a quarter of the total population, but possessing only 4% of the total land. In 1948, the Zionist organisations decided to expel native Arabs and, by doing so, would create a Zionist state. As Pappé (2009) argues, from its early inception Zionist thinkers propagated the need to ethnically cleanse the indigenous population of Palestine if the dream of a Jewish state were to be realised. The Zionist para-military forces became crucial for achieving this aim. The Zionist para-military forces such as Betar, which Menachem Begin joined in 1929 and Stern gangs of Yitzhak Shamir, later on both became Likud Party leaders of Israel. These armed gangs also included Irgun, and with the full support of newly created state of Israel launched war against native Palestinian and Arab population. But still in 1949, they faced a Palestinian population more than three times as large and owning 93% of land. These Zionist armed gangs were well disciplined and organised and also they had far superior weapons and training than natives. As a result of their attacks, they destroyed more than 400 Palestinian and Arab villages and towns and expelled 750,000 people. Due to all this chaos, violence and expulsion by 1960, the ratio of land ownership had been reversed. 

The presence of the Britain and the US in the region has given them of the world’s largest and easiest accessible oil and gas deposits. As Scott (2015:79) argues of a ‘dark quadrant of unaccountable power’, which provides a “proof of inscrutable governmental, financial, and corporate relationships between the United States and Saudi Arabia. There is a “black hole” at the centre… in which the interests of government, petrodollar banks, intelligence agencies, and multinational oil companies, are all inscrutably mixed.”5 In fact, the US dollar gold convertibility was abandoned by the President Richard Nixon in 1971.This was a policy change to end dollar convertibility to gold and implement wage and price controls and the policy was intended to address the international dilemma of a looming gold run and the domestic problem of inflation and also to correct the balance of payments and lower the unemployment rate. It meant that foreign governments could no longer exchange their dollars for gold. 

However, few years later in 1973, the oil prices quadrupled, which provided huge increase in oil revenues to the oil exporting countries. These countries informally agreed that trade in oil would be conducted in the US dollars and also their surplus money will be deposited in Western financial institutions. Moreover, the increased revenues and growing conflicts suited well with the interests of the arm exporters. As Nitzan and Bichler (2002) have noted that the wars in the Middle East have provided huge steadily increasing markets for weapon exports, where oil revenues have been major markets after the 1973. It appears that the rising markets for weapons in the region help to maintain the US primacy in sector and financing the deficits by which rising military expenditure is covered.6

The Western strategy was to create on-going conflict in the region and also to support a policy of destroying a strong states and institutions coincide with the US need to control the region’s energy sources and the requirements of maintaining the US dollar global hegemony.

The Western strategy was to create on-going conflict in the region and also to support a policy of destroying a strong states and institutions coincide with the US need to control the region’s energy sources and the requirements of maintaining the US dollar global hegemony. As Desai (2007:452) stresses: “measured in value terms, oil is the largest trade in the world – provided the USA can ensure that it continues to be denominated in US dollars. This is not the least reason for the US administration’s ire against Saddam Hussein. Only two years before the war in Iraq that country’s oil trade had been denominated in euros… To the extent that world trade ceases to be denominated in dollars, the world looses a major motivation to hold dollars and the ability of the USA to consume more than its produces, including the destructive consumption of the military, diminishes.”7

Role of State and Market in the Economy

Whether resource allocation could be achieved through the market or state or a combination of both has been matter of debate among economists and policy makers. However, both mechanisms may sometimes deviate from their norms. This means the necessary and sufficient conditions for fulfilling ‘Pareto optimum’ through the pricing mechanism may not be met because of externalities, imperfect markets and information deficiencies. Neo-classical economists have emphasised efficiency in terms of improving institutional change through the reduction of transaction costs while relying on pricing mechanisms to act as the driving force in resource allocation, if this safeguards property rights. Institutions which can lower transaction costs are crucial to performance of economies, including negotiations to reduce costs, monitoring and enforcement of contracts, all of which need proper institutions to meet their targets. Institutions only focus on rights and obligations in economic transactions, while organisations such as lobby groups, political and social organisations that support the interests of different groups will influence these organisations. Cultural and ethical values are always present in the very process of economic decision making. Karl Polanyi (1957:148) had a deep understanding of the importance of both institutions and the economy; he insisted that “the inclusion of non-economic is vital”.8

Neo-classical economists have largely focussed on ‘getting prices right’ and, according to them, this should be a guiding policy. However, such overemphasis on one issue can only have the desired consequences when there is already an emphasis on property rights and it is assumed that this will lead to the production of competitive market conditions. The state can create a favourable environment in which the markets can function. This emphasises one role of the state, however, namely that of a wide range of interventions in the shape of developmental processes. Income inequality, in turn, grows for a structural reason. Neoliberal policies entail the withdrawal of state support from peasant agriculture and petty production in general.9 This undermines those sectors, forcing peasants to migrate to the cities in search of jobs. At the same time, these policies remove all restrictions on the rate of technological-cum-structural change, so labour productivity rises rapidly making employment growth insufficient to absorb even the natural growth of the workforce, let alone the distressed peasant migrants. Neoliberal policies aggravate wealth inequality in several ways. First, they widen income inequality. Since the ratio of income that is “saved” (for adding to wealth) is higher within the upper-income groups, a rise in income inequality raises both the overall savings ratio in the economy and also the extent of the concentration of wealth in the hands of the rich. A neoliberal regime typically entails handing out tax concessions and tax rebates to big corporations in order to usher in “faster growth”. The obverse of this is the constraint on public spending on education and health and the withdrawal of state support for peasant agriculture as noted above. Such tax concessions to corporations, not to mention tax evasion and non-repayment of loans to public-sector banks, promote wealth inequality.

An innate individual rationality dominates neoclassical theory. Institutions in the neoclassical model typically seek to identify a measurable variable in order to estimate the impact of institutions on rational behaviour. As a consequence, these theorists set out to investigate whether culture ‘affects’ economic outcomes but paradoxically as Guiso et al (2006:29) note, “maintain the standard economic assumption that each individual has one identity and maxims the utility of this identity”. 

According to Ha-Joon Chang (2002), the main ideas of neo-classical economists is that the state intervention cannot be seen as an impartial and omnipotent social guardian, and they consider both state and organisations to be run by self-seeking politicians and bureaucrats who are under pressure from interest groups, and thus do not act in a neutral manner. These result in government failure in the form of regulations, rent-seeking and corruption, and for them the costs of governmental failures are typically greater than the costs of market failures (Siddiqui, 2019). They argue that only limited areas such as law and order, defence and infrastructure and the state should play a minimal role. Chang criticises neoliberal views on state and policies. According to Chang, a state action can be considered an intervention in one society but not in another. To answer this, Chang notes that few people in advanced countries will now consider a ban on child labour as constituting state intervention, i.e., restricting entry into labour market, while many developing countries would regard such action as unfair intervention. For some academics, the biggest failure of the market is to generate high levels of inequality. However, Ha-Joon Chang (2002:544-45) argues, “in neo-classical economics, this is not considered market failure because the ideal neo-classical market is not supposed to generate equitable income distribution in the first place”.10 For neo-classical economists, the market is essentially the economy, and if the market fails then the economy fails.11 However, institutionalists regard the market as only one of the many institutions that make up the capitalist economic system, and market failures may not matter as much because, for them, there are many institutions other than markets and state intervention through which economic activities are organised.

The privatisation of essential services such as education and healthcare makes them effectively more expensive for lower income groups. Hence, they have to spend more from their already meagre incomes on these services and are unable to save and add to their wealth to the same extent as might have previously been possible.

The privatisation of essential services such as education and healthcare makes them effectively more expensive for lower income groups. Hence, they have to spend more from their already meagre incomes on these services and are unable to save and add to their wealth to the same extent as might have previously been possible. This also contributes to growing wealth inequality. The emphasis on the effect of an institutional change on control of surplus by a specific class also suggests that the question of efficiency to improve institutional change cannot, in fact, be separated from redistribution issues. This means the issues of collective action, bargaining power and class interests are important to effecting any meaningful change. On market as institution, Ha-Joon Chang (2002:546) notes: “the capitalist system is made of a range of institutions, including the markets as institutions of exchange, the firms as institutions of production, and the state as the creator and regulator of institutions governing their relationships…, as well as other informal institutions such as social convention. Thus, focusing on market (and market failures), as neo-classical economists does, really gives us a wrong perspective in the sense that we lose sight of a large chunk of the economic system and concentrate on one, albeit important, only part”.10

Further Chang (2002) emphasises that the market was not seen as important alone or the dominant part of human life until the rise of capitalism, and the emergence of the market was almost always deliberately engineered by the state, especially in the early stages of capitalist development. Even in Britain, where capitalism first developed, spontaneous state intervention played a critical role in the emergence of the market and the modern market system. As Karl Polanyi (1957:140) noted, “the road to free market was opened up and kept open by an enormous increase in continuous, centrally organised and controlled interventionism. To make Adam Smith’s ‘simple and natural liberty’ compatible with needs of human society was a most complicated affair. Witness the complexity of provisions in the innumerable enclosure laws; the amount of bureaucratic control involved in the administration of the New Poor Laws which for the first time since Queen Elizabeth’s reign were effectively supervised by central authority; or the increase in governmental administration entailed in they meritorious task of municipal reform…”8

Acemoglu and Robinson (2012) described an important distinction between “inclusive” and “extractive” institutions. Their book Why Nations Fail emphasises the category of ‘extractive institutions’, which it contrasts with institutions of private property. Under extractive institutions dictators and their ruthless regime, whether they suppressed market or monopolised control of the economic sectors, undermine the market economy. The authors, however, were looking for single causes rather than at the multitude of factors which influenced the nature of the interactions that ultimately influenced economic growth. Their work attempted to build an interesting case with the more pluralistic institutions that gradually emerged after the English Revolution of 1688, and for them this was the underlying reason why the Industrial Revolution began in Great Britain rather than in Holland, Spain, Portugal or France. The competition between European monarchies compelled them to adopt new management and strategies to emerge as most powerful, while among the empires of the Asian subcontinent there was no such competition at that level, like the Mughals or Mings. Despite this, Asian empires were more technologically and socially advanced in the 17th century than those in Europe. Capitalism was associated with slavery and colonialism, and European large companies owned mines and plantations in the colonies which gave them the opportunity to extract large profits.

Amartya Sen (1999) argues in his book Development as Freedom that investments in health and education can make a big difference, and can ultimately improve people’s living conditions. The author cites the examples of the 1979 economic reforms in China when, despite the low per capita income, a huge public investment in health and education were part of what made the reform era growth spurt possible. According to Sen, investment in education expanded dramatically at the higher levels in the 1980s and 1990s, and the social capability of local Chinese people, including the Chinese diaspora in North America, Taiwan, Hong Kong and Singapore, also proved to be huge assets to post-economic prosperity.18

According to Samuels (1995), institutionalists emphasise about the role of the organisations and institutions in the controlling and facilitating of the economy, a system which is wider than the market. They are also concerned with the distribution of power within society and the manner in which the markets interact with other institutions. The institutionalists’ criticism of neo-classical economists includes their treatment of individuals as independent and self-subsistent and their use of pure market. The institutionalists consider individual and culture mutually interdependent, and they also take into the power structure in the country. They also argue that the neo-classical assumption of the operation of ‘pure and automatic markets’ creates the illusion of an autonomous free market operating independently of the people’s control, while the institutionalists emphasise that the market, per se, is itself a system of social control and the specific market performs in such a manner because of institutions have social control over the markets. On Institutionalist, Samuels (1995:571) argues “The conception of the market as the guiding mechanism of the economy,… It simply is not true that scarce resources are allocated among alternative uses by the market. The real determination of whatever allocation occurs in any society is the organizational structure of that society – in short, its institutions. At most, the market only gives effect to prevailing institutions. By focusing attention on the market mechanism, economists have ignored the real allocation mechanism…Although institutionalists disagree as to how much and what precisely is important in the neo-classicists’ analysis of the operation of pure market mechanism in allocating resources, they all agree that markets  are organized by and give effect to the institutions which form them”.19  

Joseph Schumpeter (1987) emphasises the importance of institutions and government supportive polices to facilitate technological innovation, diffusion, interdependence and the cumulating nature of technological change. Innovation consists of a good, new method of production, the opening of a new market, the discovery of a new source of supply of raw materials or semi-manufactured goods, and the introduction of a new organisation in an industry. The main motivating factor behind an innovating entrepreneur was profit expectations and entrepreneurs played an important role in determining the rate of economic growth. Schumpeter argued that the existence of non-competitive markets is inevitable, and a dynamic and successful economy is driven by constant technological innovation.

Thorstein Veblen was an US economist who sought to apply an evolutionary approach to the study of institutions with The Theory of the Leisure Class (1899) describing the life of the wealthy, which he termed conspicuous consumption. The industrial system, he wrote, required men to be diligent, efficient, and cooperative, while those who ruled the business world were concerned with making money and displaying their wealth; their outlook was survivalist, a remnant of a predatory, barbarian past. He profoundly influenced the development of institutional economics and was among the first theorists to identify advertising, financial manipulation, and stagnation as essential features of a mature business economy. His central emphasis hinged on the evolution of human institutions that reflected both industrious and aggressive dispositions and habits. Modern business elites, for Veblen, distort and waste the benefits of technology in order to slake chronically dissatisfying quests for ever-increasing power and status, as signified by wealth. Veblen wanted economists to attempt to understand the social and cultural causes and effects of economic changes.

In India, the formation  of an independent state as a consequence of the anti-colonial struggle constitutes a major milestone in the course of the associated struggle.

Institution Building is Post-Colonial India

In India, the formation  of an independent state as a consequence of the anti-colonial struggle constitutes a major milestone in the course of the associated struggle.12 However, it requires even greater determination to take this struggle forward towards the formation of economic independence and to defend the gains of independence, and ultimately to build a self-reliant economy (Patnaik, 2007). Soon after gaining its independence, the Indian government assumed that public-controlled economic development would distribute these gains more evenly and protect the interests of the poor. For this, the Nehru government decided to establish institutions to support parliamentary democracy based on universal adult suffrage, a secular polity of a separation of religion from politics, and with a leading role assigned to the public sector. For this, a national planning commission was established. There existed strong communal organisations such as the RSS and the Hindu Mahasabha who did not play any role in the struggle for independence, but rather sided with the British and tried to divide the anti-colonial struggle along religious lines. However, within the Congress Party, there were some who adhered to anti-minority views, and disagreed with Nehru and Azad. As Patnaik notes, (2007:19) “[They] might not have subscribed to the RSS notion of a Hindu Rashtra, on a whole range of specific issues of secular views such as those espoused by Jawaharlal Nehru came into conflict with theirs. Likewise, the introduction of parliamentary democracy based on universal adult franchise was a revolutionary measure in a country characterised for millennia by a strictly hierarchical caste system whose utter inhumanity was manifested in phenomena like ‘untouchability’”.13

Commenting on Jawaharlal Nehru’s strategy, the first Prime Minister of independent India, Patnaik (2015) argued, that for an economic strategy emphasising the development of basic and heavy industries, was as an important step for accelerating economic growth, especially when export prospects were uncertain. Then the option was that to achieve the growth of an economy with a set of interdependent sectors was to remove this hurdle. Then, a higher growth rate would initially require the bulk of the resources to be directed towards launching industrialisation, which amongst Indian leaders had already been identified during the independence movement as meaning the basic and heavy industry sector. This strategy was criticised for emphasising investment allocation in favour of heavy and basic industry and ignoring agriculture. However, this ignores the fact that the government sought to increase its output through increased public investment in areas such as canal irrigation and the power sector, rather than through land reforms, which could have achieved rural equality and minimised Hindu caste discrimination. However, the government then needed those rural elites, along with the capitalists, to consolidate its power.14

The Indian government of the 1950s created institutions such as the Planning Commission and also a number of higher academic institutions such as the engineering IIT (Indian Institute of Technology) to facilitate public sector and modern industrialisation, which was then considered a bulwark against foreign capital domination of the Indian economy as Indian capitalists were too weak to replace metropolitan capital and the state had to step in to address this purpose. State-owned financial institutions, replacing the metropolitan ones, were essential to building up a domestic productive base that was different from that of the colonial economy, where financial institutions had mainly served British managing agencies, trading houses and the plantation sector. The development of capital goods production under the aegis of the public sector was an essential step towards self-reliance, and away from reliance on metropolitan products. Technological self-reliance was developed within a host of sectors, from setting up fertiliser plants to oil refineries, to conducting off-shore oil exploration and extraction through the public sector alone. State-owned research and development units became the hub of research activities, and state-sponsored technology institutes became the main source of training skilled manpower.15 

However, Nehru’s strategy failed in two crucial and interrelated domains. The first was in the area of land reform. No radical land redistribution occurred after independence, and the pre-independence promise of ‘land to the tiller’ remained unfulfilled due to a number of factors including poor institutions and a lack of will amongst the political elite and government officials. However, there were some very modest attempts to implement land reform, and the result was limited to removing large intermediaries and absentee landowners rather than transferring ownership rights to actual cultivators and agricultural labourers. And as a result, this policy failed to break land concentration in rural India. The more egalitarian land distribution in the Indian countryside would have created a wider market for industrial goods, which in turn would have been more employment-intensive. This did not happen. Instead, the landless got further marginalised, as the process of industrialisation, based on a skewed income distribution (arising from a skewed asset distribution) restricted the growth of employment opportunities. The second failure was that growth became largely dependent upon the provision of the continuous stimulus of government investment. A ruthless process of ‘primitive accumulation of capital’ was unleashed by the bourgeoisie, and the government had to subsidise the industries and also overlooked tax evasion.

Some have considered interest rather than class to be the basis for the motivating and organising principle of political economy, attaching greater significance to the well-off and religious and caste factors in Indian society (Rudolph, 1988), while the critics have noted that such an analysis ignores the relationship between production and property rights. Property relations have influenced government policies, for example, in India in the 1960s, to accelerate agricultural output and productivity, also known as the ‘Green Revolution’ with minimal disruption to the prevalent land relations and without upsetting rural class relations. Of course, external agencies such as the Ford Foundation supported such policy measures. This experience indicates that government can develop infrastructure and institutions to accomplish and achieve its target of higher output. These institutions helped to develop new seeds, provide subsidized water, chemical fertilisers, institutional credits, and allow price support for a few selected agricultural commodities. These institutions were critical to the success of government agricultural policies.16

The government, in order to continue growth, though of course to different degrees, undertook measures to squeeze the workers and sections of the peasantry, which adversely affected aggregate demand, the growth process of its main stimulus. Thus, the government resorted to external borrowing in the mid-1960s and again in the 1980s, which temporarily helped to overcome economic difficulties but ultimately undermined the aim of building a self-reliant economy in and of itself. In 1991, India received an IMF loan on the conditions that the country would implement policy measures including opening up the economy to foreign corporations, the deregulation of industries, privatisation of public companies, liberalisation of foreign trade regimes, and would encourage foreign investors (Siddiqui, 2016). However, after 1991, in a neoliberal reform the state moved away from its earlier position of claiming to be alone in guarding welfare. The development process was opened up to greater reliance upon market forces, thereby shifting the focus from ‘equity’ to ‘growth’ by the market. Due to resource constraints, the government was forced to rely on foreign capital (Siddiqui, 2014). The desire to build industrialisation was far less prominent in African and Latin American countries. In India, the economic crisis and the state’s inability to mobilise domestic resources, i.e., to raise taxes on the large land owners and capitalists led to a fall in public investment, which seemed to be the key factors in undermining the construction of a successful industrial sector. A decline in public investment in the power sector, irrigation, infrastructure, and a skewed distribution of demand and slow growth in employment were the major contributory factors. This meant a lack of adequate income inhibiting the stimulation of demand for industrial goods.

The economic inequality in India grew particularly sharply after the 1991 economic liberalisation, with policies focussing on GDP growth at any cost. This has led to an increasing proportion of wealth in the hands of fewer people at the top, who could then use this wealth to influence elections. Hence, polity came to be increasingly controlled by large corporates, and policies were tailored to meet the economic interests of such large corporates rather than the people. Noam Chomsky referred to this as ‘manufacturing consent’. Since Modi came to power, elections are being increasingly influenced by monetary power. 

Consequently, economic inequalities have grown enormously and the Indian GINI index, which measures economic inequality, is perhaps the highest in the world. It was recently reported that the wealth of the nine richest Indians is equivalent to the wealth of the bottom half of the Indian population as a whole. All this, coupled with the control exercised by a mere few corporations over a large section of mainstream media, has accentuated the manufacture of consent in India. A recent Oxfam report (2018) on India stressed about the sharp increase in wealth inequality in India in recent years. In 2017 alone, the top 1% of the population owned 73% of the addition to wealth that occurred. A year ago, the top 1% owned 58% of the stock of wealth. Thus, its share, which is already phenomenal, is still increasing. One can infer from the Oxfam report that the rich have disproportionately cornered the “benefits of liberalisation”. This is a rather incorrect reading of what happened, however; “liberalisation” itself is responsible for the growth in inequality, as is clear from the fact that it is not just India, but the world as a whole, that is witnessing increasing wealth inequality.

In conclusion, appropriate institutions play very important roles in the success of any economic policy.  The ‘national’ economic planning under the aegis of the postcolonial state and under the framework of a ‘mixed economy’, which was supposed to develop a self-reliant economy, has failed. At present, with the recent wave of globalisation, the international situation has fundamentally altered. The strategy of the bourgeoisie to pursue autonomous development independent of the West is impossible because of the demise of the Soviet Union, and because of the emergence of a new form of international finance capital which denies national autonomy17 and with which the bourgeoisie cannot sever links. It is a myth propagated by neo-classical economists that the market can be free from politics. At present, within the developing countries, a very small minority of the population enjoy all the social and economic privileges, and therefore any meaningful development would be impossible without radical changes in government institutions and policies. The miracle economies of East Asia,18 such as Japan, South Korea and, more recently, China and Malaysia,20 have pursued widely divergent but still highly state interventionist policies in order to achieve the rapid expansion of their manufacturing sectors and the overall economic transformation of their economies.21

Governments, however, not only try to prevent economic crises but must also take steps to ensure that the capital gains made through such bubbles do not just remain fictitious but are converted into real assets. They do so by incessantly throwing new assets into the market through the privatisation of natural resources such as water, education and health, and through the sale of public sector assets. The current ecological crises and rising inequality within these countries compel us towards a search for alternative economic solutions that facilitate a shift away from the singular goal of higher growth rates and of material affluence. Such a shift can only be accomplished by considering different rationalities and patterns of behaviour, which will indeed require different kinds of institutions to meet the associated objectives.

About the Author

Dr. Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, UK. He has taught economics since 1989 at various universities in Norway and UK.

References
1. Siddiqui, K. 2019a. “Corruption and Economic Mismanagement in Developing Countries”, The World Financial Review, January-February.
2. Siddiqui, K. 1995. “Role of the State in South-East Asia”, The Nation, 27 May.
3. Said, E.W. 1993. Culture and Imperialism, New York: Vintage Books.4. Pappé, I. 2009. The Modern Middle East, London: Routledge.
5. Scott, P.D. 2015. The American Deep State, Wall Street, Big Oil and the Attacks on U.S. Democracy, Maryland: Rowman & Littlefield.  
6. Nitzan, J. and S. Bichler. 2002. The Global Political Economy of Israel, London: Pluto Press, Chapter 5.
7. Desai, R. 2007. “The Last Empire? From Nation-  Compulsion to Nation-Wrecking Futility and Beyond”, Third World Quarterly, 28 (2): 435-456.
8. Polanyi, K. 1957. The Great Transformation, Boston: Beacon Press.  
9. Siddiqui, K. 2012a. “Developing Countries’ Experience with Neoliberalism and Globalisation”, Research in Applied Economics, 4(4):12-37, December.
10. Chang, H-J. 2002. “Breaking the Mould: An Institutionalist Political Economy Alternative to the Neo-liberal Theory of the Market and the State” Cambridge Journal of Economics, 26: 539-559.
11. Siddiqui, K. 2018a. “Capitalism, Globalisation and Inequality”, The World Financial Review, November/December, pp. 72-77. ISSN 1756-3763.
12. Siddiqui, K. 2019b. “A Century of India’s Economic Transformation: A Critical Review”, Journal of Perspectives on Financing and Regional Development (JPPD), 7(1): 1-22, Jan.-Feb. 
13. Patnaik, P. 2007. “Jawaharlal Nehru and the Formation of the Post-Colonial State”, Contemporary Perspectives, 1 (1): 17-32, January – June. 
14. Patnaik, P. 2015. “The Nehru–Mahalanobis Strategy”, Social Scientist, 43 (3/4): 3-10, March-April.
15. Siddiqui, K. 2018b. “India’s Economic Reforms and Challenges for Industrialisation”, Journal of Perspectives on Financing and Regional Development (JPPD), 6(1): 1-21, July. ISSN: 2338-4603(print); 2355-8520 (online).
16. Siddiqui, K. 2016a. “Will the Growth of the BRICs Cause a Shift in the Global Balance of Economic Power in the 21st Century?” International Journal of Political Economy, 45(4):315-338, Routledge Taylor & Francis. 
17. Siddiqui, K. 2014. “Flows of Foreign Capital into Developing Countries: A Critical Review”, Journal of International Business and Economics 2(1):29-46, March.
18. Siddiqui, K. 2016b. “A Study of Singapore as a Developmental State” in edi. Young-Chan Kim. Chinese Global Production Networks in ASEAN, pp.157-188, London: Springer
19. Siddiqui, K. 2012b. “Malaysia’s Socio-Economic Transformation in Historical Perspective”, International Journal of Business and General Management, 1(2):1-50, November. ISSN: 2319-2267.
20. Samuels, W.J. 1995. “The Present State of Institutional Economics”, Cambridge Journal of Economics, 19: 569-590.
21. Toye, J. 1985. “Dirigisme and Development Economics”, Cambridge Journal of Economics, 9 (1): 1.14.

Lessons from Ellen MacArthur and the Circular Economy on How Leaders can Build and Sustain Transformation?

By Peter Hopkinson and William S. Harvey

The growth of interest in the circular economy has been meteoric with new initiatives emerging weekly. A key figure in this movement has been Dame Ellen MacArthur, a renowned and iconic round the world yachtswoman. In this article, the authors explore how MacArthur and her foundation have created a framework for a new economy, leading to a major movement concerning global resource challenges and how the economy operates, and what business leaders can learn from her successes in building and sustaining transformation within the circular economy.  

In 2012 a report was launched at the World Economic Forum (WEF) demonstrating the economic and business case for a circular economy. Five years later, a report focussing on the application of the circular economy to address a New Plastics Economy was the highest downloaded report in the history of the WEF. In October of this year over 2,000 delegates gathered in Yokohama for the second World Circular Economy Forum. The European Union second circular economy package, impacting on industrial supply chains within and beyond the region is under consideration. (see Atasu et al., 2018 in HBR).1 Over 100 universities worldwide now feature the circular economy in one or more programmes and 17 academic journals have recently issued themed calls on the circular economy. 

By any measure, the growth of interest in the circular economy has been meteoric with new initiatives emerging weekly. Business leaders are starting to embrace the term and are moving beyond symbolic support statements to exploring how to implement the circular economy, as examples from Danone, Philips, Renault  (See exhibit on next page) and  Ricoh  testify. This presents significant short-term challenges but also long-term opportunities and rewards. (see Tse et al. 20162 and Esposito et al., 20183 in HBR). 

A key figure in this movement has been Dame Ellen MacArthur, a renowned and iconic round the world yachtswoman, who at the age of 24 completed the Vendee Globe, the world’s toughest race. As the fastest person to circumnavigate the globe single-handedly, breaking the record in 2005 (age 28) her elite sporting status was assured. However, soon afterwards and finding herself in the Antarctic on a sabbatical after one especially gruelling race, she reflected on the abandoned industrial remnants of the whale oil industry.

“There were ships filling the harbours, some of which still line the shores today, and spare propellers and patterns for producing engine parts (…) This was a massive industry with thousands of tons of steelworks employing thousands of people and now it’s a dead, empty space.” This eventually led to her setting up the Ellen MacArthur Foundation with a mission to accelerate a transition to a circular economy. 

Why is this different from many other charismatic and high achieving leaders who have established charities, foundations and done good deeds as part of an epiphany or career change? What can business leaders learn from the successes of building and sustaining transformation within the circular economy? MacArthur and her foundation have transcended a single issue focus and created a framework for a new economy, leading to a major movement concerning global resource challenges and how the economy operates.

It is one thing to identify what needs to transform, but another thing to overcome resistance to inertia. In order to fulfil its potential, both purposeful and inspirational leadership is required across every facet of business and society to persuade everyone on this planet that everything that we extract, produce and consume cannot be disposed of over time (linear economy), but must reintegrate back into our system (circular economy). How can this seismic shift in thinking and behaviour be achieved? To answer this question, we need to look at what has been achieved and how, and whether the transition can indeed be accelerated and sustained.

 

2008-2011. Origins

Following her Antarctica experience, MacArthur began to move away from competitive ocean racing, and spent three years travelling the world for a different purpose: to find out more about how economies work and whether it might be possible for an economy to operate in a fundamentally different way. This meant re-thinking an economic model that extracts resources, converts them into products and services which are then consumed and either disposed or replaced with new products and services. MacArthur termed this the ‘linear economy’, a throughput model that relied on relatively cheap accessible resources and fossil fuel energy, mass production and consumption and little regard for the accumulation and consequences of external costs. Some of the clues were already visible in previous iterations of ‘new economic thinking’ such as natural capitalism and performance economy, which had attracted their own followings, but failed to gain traction with business or policy makers or scale. More significantly, MacArthur noted the rise of the 4th industrial revolution and the need to harness scientific and technology revolutions in innovations and deep insights from complexity science created new opportunities to apply systems thinking to the challenge of resource depletion and natural capital degradation. 

At the outset MacArthur’s message was simple – the linear economy is failing and we need a new economic model. This was not about saving the planet or an environmental agenda, but targeting a generation to think differently about the future and providing a positive alternative to a take-make-dispose model. 

 The core definition of a ‘circular’ economy was formulated during this time – an economy that is restorative and regenerative by design, a phrase that has stuck and been endlessly repeated to highlight the shift from a degenerative and depletive model to one that radically shifts the way we think about resources, energy and materials in the economy. MacArthur launched her foundation in 2010 supported by British telecom/Cisco National Grid, Kingfisher and Renault, which built on her prior reputation, referred to in the academic literature as reputation endowment.4 MacArthur’s sailing background created a compelling narrative around finite resources and framed as re-thinking the future economy. This was a statement of intent that this was no green or eco initiative but aiming to be on the front pages of mainstream and business global newspapers such as the New York Times5 and the Financial Times.6

2011-2014. The butterfly effect

The circular economy burst into life in 2011 when the Ellen MacArthur Foundation (EMF) presented its vision to an initially sceptical McKinsey resource efficiency team. Three months later McKinsey came back and concluded that they had ‘run the numbers’ and could demonstrate a compelling case for an economic and business opportunity at scale. Over the next 12 months more analysis and evidence was collated and the famous butterfly diagram7 was created to translate the circular economy into a simple, coherent graphic to explain the sources of value creation from multiple reverse loops. The diagram formed a centre piece of a 2012 report,8 which was launched at the WEF with a headline figure of $630 billion net material saving within the European economy from shifting from a linear to a circular economy across a number of materially intensive industrial sectors. This represented 47.8% of the EU’S GDP. On the back of this event, the EMF formed their CE100 a membership group of progressive global corporates, innovation and start-ups keen to learn more and how CE worked in practice.

As a small organisation, the Foundation had a philosophy of using their limited resource to create initiatives with the potential for exponential scaling. They termed this systemic innovation – applying their core principles and building blocks of a circular economy to areas of the economy with the greatest potential for impact.

2014-Today. Systemic innovation and widening engagement

Two further reports (2014, 2015) featuring analytics by McKinsey provided additional evidence in support of the business case for the circular economy. This led to spectacular growth in interest with new initiatives, networks and programmes. As a small organisation, the Foundation had a philosophy of using their limited resource to create initiatives with the potential for exponential scaling. They termed this systemic innovation – applying their core principles and building blocks of a circular economy to areas of the economy with the greatest potential for impact. One of the earliest programmes from 2015 was to address the leakage of plastics from the world economy. The New Plastics Economy programme convened many of the world’s largest brands and key players in the global plastics value to collaborate on the challenge and lead the redesign of the existing linear system to a new type of circular plastics system. An ambitious agenda, the EMF found that the partners wanted to find solutions but had been tackling these alone and lacked a systems perspective, that was crucial to aligning incentives and actions towards a common goal. The New Plastics Economy report9 launched at Davos in 2016 ramped up interest in the circular economy, coinciding with the surge of national media10 attention on the scale of the leakage of plastics into the world’s oceans.

By 2017, the circular economy had become a well-established term in Europe with the Foundation’s work playing an instrumental role in the emergence of the initial 2016 European Union circular economy package and subsequent iterations. Academic research is now firmly established after a slow start, with over 100 Universities and other prominent businesses partnering with the EMF.11 The circular economy is increasingly recognised as a key business opportunity addressing systemic challenges facing many companies and value chains. Leading companies such as Philips have set themselves targets of 15% sales from CE by 2020 and an impressive 100% by 2025. 

Google Data Centre Server Operations – Circular Economy


Lessons learned and where next?

The circular economy movement has achieved major accomplishments in the last decade, which has been an outcome of four factors. First, a compelling vision of a better future, namely a transition from a linear to a circular economy that creates social and financial incentives for organisations. 

Second, a prominent leader who has already achieved respect and legitimacy in another field and used this to build attention around the movement. Ellen MacArthur’s success as a world-record-breaking around-the-world sailor has helped her to capture the attention of others around the circular economy.

Third, partnering with key organisations to build awareness and acceptance. Ellen MacArthur’s work with McKinsey and the World Economic Forum, among others, for instance such as global partners and university networks, has been important in gaining the necessary examples and evidence to give others the confidence to participate in the movement.

Fourth, providing visualisation. The EMF Butterfly diagram has provided companies such as Google, a framework for starting to think about the multiple reverse value creation loops at a practical level (See diagram on the left page). The framing and adaption of this initial diagram have been instrumental in helping wider audiences to understand and visualise what the circular economy is and why it is important. This plays a similar role to a company’s brand, namely something that is recognisable and understood to hold and generate significant value.

In order for existing groups to support and new groups to fully participate, a movement needs to provide a vision for the economic and social value of individual participation and the costs of non-participation.

Finally, notwithstanding the successes of the past, the next stage of any movement requires two further steps. First, it needs to be salient to a wider group of stakeholders. Thus far, the circular economy movement has been successful at engaging certain businesses, universities, and policymakers. Its success moving forward will require engagement with a much wider group of stakeholders given the systemic nature of the movement. Second and related, in order for existing groups to support and new groups to fully participate, a movement needs to provide a vision for the economic and social value of individual participation and the costs of non-participation. The media strapline in 2016 of ‘more plastic than fish in the sea by 2050’ is the kind of shock headline that captures public attention. However, sustaining a movement requires ongoing recognition from a wider group of actors that re-designing the economic system will provide greater value for them over time compared to the status quo. A 2018 exhibition Harvest,12 by British artist Mella Shaw at the Saatchi Gallery, features hundreds of detailed clay ‘plastic’ bottles and containers and leaping fish to highlight the appalling toll discarded plastics are taking on our marine-life, perhaps signals the next wave of the movement’s wider audience engagement.

This is not a doom and gloom movement. Leaders thinking about the future of their businesses in the age of VUCA  (Volatility, Uncertainty, Complexity and Ambiguity) are increasingly turning to circular economy as an alluringly feasible, attractive and attainable strategy compared to the linear model. There remain considerable challenges and obstacles to scaling initiatives and overcoming linear lock-in, but increasingly many business leaders view this transition as inevitable rather than impossible.  

About the Authors

Peter Hopkinson is Director of the University Exeter Centre for Circular Economy that brings together academic researchers, business, policy makers and civic society to support the transition to a circular economy. He set up and ran the world’s first MBA in circular economy and a global on-line executive education programme for leading global businesses, innovation companies and educators. He is most concerned with developing the scientific evidence base for circular economy theory and practice at varying scales and within different industrial contexts.  

William S. Harvey is Professor of Management and Associate Dean of Research at the University of Exeter Business School. Will researches on reputation and leadership within organisations. His work has appeared in world leading journals such as Harvard Business Review, Journal of Management Studies and Human Relations.

References
1. https://hbr.org/2018/07/rethinking – sustainability – in – light – of – the – eus – new – circular – economy – policy
2. https://hbr.org/2016/02/how-businesses-can-support-a-circular-economy
3. https://hbr.org/product/introducing – a – circular – economy – new – thinking – with – new – managerial – and – policy – implications/CMR677 – PDF – ENG
4. http://www.oxfordhandbooks.com/view/10.1093/oxfordhb / 9780199596706 . 001 .0001 / oxfordhb-9780199596706-e-19
5. https://www.nytimes.com/2018/09/06/business/burberry-burning-unsold-stock.html
6. https://www.ft.com/content/360e2524-d71a-11e8-a854-33d6f82e62f8
7. https://www.ellenmacarthurfoundation.org/circular-economy/infographic
8. https://www.ellenmacarthurfoundation.org/publications/towards-the-circular-economy – vol – 1 – an – economic-and-business-rationale-for-an-accelerated-transition
9. http://www3.weforum.org/docs/WEF_The_New_Plastics_Economy.pdf
10. https://www.theguardian.com/business/2016/jan/19/more – plastic – than – fish – in – the – sea – by – 2050 – warns – ellen – macarthur
11. https://www.ellenmacarthurfoundation.org / our – work / activities / universities /network – universities
12. https://www.recirclerecycling.com/mellashaw/

Patent Incentives in China A Changing Focus

By Tim Jackson

Like many countries China provides support for its innovative sector. As part of the wider ‘Made in China 2025’ policy to move China’s economy from a manufacturing to an innovation base, this has included direct financial incentives to file for patent protection locally and internationally. Perhaps unsurprisingly, Chinese companies have caught on quickly.

Like many countries, China provides support for its innovative sector. This support has been provided in a variety of forms, from financial to legislative, and includes direct financial incentives to file for patent protection. This forms part of the wider Made in China 2025 (MiC2015) policy to move China’s economy from a manufacturing base to an innovation base in 10 years. To achieve this, a fundamental change to the way businesses were run was needed. It was not enough to have access to foreign technology, the businesses needed to want to innovate. Part of that process involved understanding and using the patent systems that were in place to promote innovation. To assist this, Chinese companies were provided with incentives to use those systems. This included the direct financial incentives to file for patent protection locally and internationally.

Part of the inefficiency of any incentive system is the potential for it to be abused. This has undoubtedly happened in China, but it has probably been accepted as a necessary risk of promoting a wider use and understanding of the patent system.

Chinese companies caught on quickly. In 2017 CNIPA received a total of 1,381,594 patent applications (invention/design/utility model). Of these, 1,245,709 were from Chinese applicants (90.2%). WIPO reported that in 2018 China filed 53,345 PCT applications (second only to the US at 56,142). To put this in some perspective, in 2007 China only filed 5,470 PCT applications. However you read the numbers, there is no doubt that Chinese companies have learnt to use the patent system. From China’s MiC2025 perspective, the provision of incentives has been a success. It may not have been efficient, but it has been effective. 

Part of the inefficiency of any incentive system is the potential for it to be abused. This has undoubtedly happened in China, but it has probably been accepted as a necessary risk of promoting a wider use and understanding of the patent system. The open nature of the incentives and the acceptance of those risks involved have now both changed.

SIPO (now CNIPA) issued a Notice in September 2018 which directly addressed this issue (http://www.ipraction.gov.cn

This Notice starts by noting that the 19th National Congress of the Communist Party of China had pointed out that China’s economy had shifted from a highspeed growth stage to a high-quality development stage and in line with that said:

• Only granted patents will be funded

• The total amount of funding received by the patent grant recipient shall not be higher than the official fees and the total patent agency fees actually incurred.

• Funding for patent agency fees will only be provided for fees from agents with patent agency qualifications.

• Repeated or multi-level access to subsidies is not allowed.

• Patent agencies and applicants who file abnormal applications will be dealt with seriously.

The clarification of funding of patent applications is clearly intended to ensure that excessive subsidies are not able to be accessed. The potential for sanctions has appeared before in documents of this type. This time the combination of clarification and sanction has been linked to the move to China’s high-quality development stage and the option for sanctions has been acted on.

In March 2019, CNIPA published a list of patent agencies that had been sanctioned for their involvement in filing abnormal applications. Filing practices included:

• Filing 126 patent applications between November 2017 and March 2018 of which 74 applications were clearly the same

• Filing 75 apparently identical patent applications between April 2017 – July 2018 

• Filing 88 patent applications for simple replacement of different parts in IoT cases on September 20, 2017

• Filing 123 invention patent applications with obvious technical effects from March to May 2018

Some patent agencies had their licences removed, and one agency’s licence was suspended for 12 months. An “Apologize and Rectification Statement” from the agency whose licence was suspended has also been released (http://www.iprchn.com/cipnews/news_content.aspx?newsId=114927). It is clear from the text of this apology statement that Chinese patent agencies will need to be more diligent in ensuring that patent applications are not filed without adequate content review to meet their obligations to CNIPA. We have also heard of patent applicants being required to undertake a self-examination process for incorrect filing of patent applications. Withdrawal of incorrect applications/patents is being allowed to be made voluntarily and without punishment.

Internationally this change in emphasis will be welcomed. It should result in improved trust in the Chinese patent system and, while FTO searches will still be needed, more certainty around product release. From China’s perspective, the changes reflect a growing confidence in its innovation sector. The quality aspects of the sector are being recognised and will continue to be supported. Enough businesses in that sector now understand the need to innovate and are using the local and international patent system effectively to benefit from that innovation. China’s ambitions under the MiC2015 policy will benefit as a result.  

For more on the controls on China’s patent agencies and promotion of quality applications: https://m.baidu.com/

About the Author

Tim Jackson is a Principal at international IP consultancy Rouse in China and the Head of Patent Strategy and Development. Based in Shanghai, he has worked in the IP field for over 25 years specialising primarily in patents, along with copyright, registered designs and trade marks.

Soft, Hard, or no Brexit: The Damage is Done

Woman giving speech about Brexit issue

By Niccolò Pisani and Omar Toulan

Regardless of the final Brexit outcome, the damage to the UK has been done. In this paper, we look at five specific areas where this effect is evident: economic performance, investment confidence, talent attraction, reputational influence, and political effectiveness.

The drawn-out and ineffectual process to reach a solution has not only increased the anxiety over an uncertain outcome but also weakened the confidence in the government to be able to manage this or similarly complex issues.

While the doomsday scenarios first put forth following the Brexit referendum may not have come to fruition as of yet, the fact of the matter is that regardless of whether March 29th resulted in a soft, hard, or no Brexit outcome, the damage to the UK has been done. The drawn-out and ineffectual process to reach a solution has not only increased the anxiety over an uncertain outcome but also weakened the confidence in the government to be able to manage this or similarly complex issues. As such, the nearly 3 year lead up to Brexit has in itself resulted in a number of detrimental outcomes for the UK which can be categorised as impacting the nation’s: 1. Economic Performance; 2. Investment Confidence; 3. Talent Attraction; 4. Reputational Influence; and 5. Political Effectiveness.

1. Economic Performance

Whereas in the years leading up to the referendum the UK economy was experiencing solid economic growth of 2-3%, that trend has since reversed, dropping from 2.1% in Q1 of 2016 to 1.3% in Q4 of 2018.1 Cumulatively, it is estimated that the UK’s GDP is more than 2.5% smaller than it would have been had the referendum not happened. Business investment has likewise slowed and today stands at roughly 15% (or more than 6 billion pounds) below what it would have been had the trend of the previous years continued.2 This downward economic performance has been accompanied by an increase in inflation from less than 0.5% to over 2.5% during the same time period. This increase in inflation is in part due to the increased price of imports following the devaluation of the British pound which has reached a peak of nearly 20% against the euro post referendum.3

2. Investment Confidence

Not only has the UK slowed down economically, but its attractiveness as a destination for capital has also taken a hit. The above-mentioned reduction in investment is partially accounted for by a slowdown in inward foreign direct investment (FDI) into the UK, which while increasing by 6% in 2017, was below the European average of 10% and well below countries such as France which saw inward FDI increase by 31%. This allowed Paris to overtake London as the most attractive European capital for new investment. The result has been a drop in the UK’s share of European inward FDI from 21% to 18%. Hard hit amongst the different sectors of the economy has been the financial industry where banks have not only been moving jobs but also assets out of the country. US banking giants including Goldman Sachs, JP Morgan, and Citigroup have transferred over 250 billion euros of balance sheet assets to Frankfurt.4 This exodus is not restricted to foreigners, with Barclays transferring 166 billion pounds in assets to its Irish subsidiary. This is reflective of a broader trend by British firms to increase their investments into the rest of Europe, which grew by a record setting 35% in 2017. This reduction in the attractiveness of the UK as an investment destination is reinforced by a 25% reduction in the number of new firms locating their headquarters in the UK.5 The impact of these trends is not only fewer jobs and economic activity but also a drop in tax revenue for the government.

It comes as no surprise that international investors are hesitant when it comes to the UK real estate market, with many of the UK’s top 50 most shorted stocks in 2018 being associated with real estate investment trusts.

Brexit uncertainty has also already damaged the attractiveness of the UK when it comes to the real estate market. Commercial space in particular has suffered with the movement of jobs by major banks and industrials to other European capitals.6 Likewise, certain EU agencies such as the European Medicines Agency, which has been based in London’s Canary Wharf since 1995, has decided to move its 900 employees to Amsterdam.7 This negative impact has extended to the housing market as well. Recent figures by Bloomberg show that home prices have declined since the vote to leave, especially in London where prime residential houses have gone down by 20% from the peak in 2014.8 As for the rental market, of major European capitals, London is the only one to have experienced a decrease in rents between 2015 and 2018.9 Thus, it comes as no surprise that international investors are hesitant when it comes to the UK real estate market, with many of the UK’s top 50 most shorted stocks in 2018 being associated with real estate investment trusts.10

3. Talent Attraction

Aside from reducing its attractiveness from the point of view of different forms of capital investment, Brexit has also had an impact on the UK’s and in specific London’s role as a hub for attracting talent from all over Europe. This pipeline of talent has experienced a dramatic reduction in flow since the referendum. The inflow of migrants to the UK from other EU countries has dropped by more than 60% since the Brexit referendum.11 While this may have helped to contribute to a reduction in the unemployment rate, it threatens the abilities of firms to find the talent needed to fuel future growth.

Nowhere is this risk more prevalent than in the university system which until 2016 had greatly benefitted from its increasing internationalisation. As recent national-level figures suggest, the UK education sector has been experiencing a setback since the Brexit referendum. While the UK Higher Education Policy Institute has forecasted that applications from European students could crash by as much as 60% when Britain leaves the EU,12 the hard reality is that the damage to the internationalisation of education and research has already manifested itself. Recent figures show that there has been a 9% decrease in the total number of EU postgraduate research students enrolling at the 24 world-class, research-intensive universities that are members of the Russell Group, including the University of Cambridge and University of Oxford.13 This is in sharp contrast with the steady growth in the recruitment of international (and particularly European) students in the pre-Brexit era. The loss of appeal of leading UK universities in the face of the international community is alarming not only because education as a sector contributes over 21 billion pounds to UK GDP every year and is responsible for over 900,000 jobs;14 but also because it inhibits the UK’s ability to attract the best talent on a global basis. As EU students are increasingly opting for alternative countries (such as the Netherlands) that offer more certainties in terms of the possibility to continue working after the completion of their studies, the UK is already finding itself as a less competitive option in the global war for talent.

4. Reputational Influence

While the UK remains the fifth largest economy in the world, its reputation has traditionally allowed it to have more influence than that rank represents. That reality is in the process of changing.

Aside from the hard measures described above in terms of the impact of the referendum on the UK’s economic performance and attractiveness, the Brexit process itself has impacted in a subtler way the global reputation of the country. The UK’s influence in the global arena has to some extent been artificially preserved due to the legacy of empire and more recently its role within the EU. Brexit, however, has laid bare the true state of UK influence. The Brexit process itself has resulted in claims that the country’s broader diplomacy efforts have been distracted by the ongoing negotiations.15 Looking at international bodies such as the UN, the UK has traditionally played a special role. While the UK is not in danger of losing its current status as a permanent member of the Security Council, as a non-EU member the UK will no longer be a voice for a larger group of countries on the Council. All of that influence will now likely transfer over to France. While the UK remains the fifth largest economy in the world, its reputation has traditionally allowed it to have more influence than that rank represents. That reality is in the process of changing.

5. Political Effectiveness

Finally, an impact which has as much to do with the 3 years following the referendum as the referendum itself is the effect of Brexit on the British political establishment. From the resignation of Prime Minister Cameron to the political withdrawal of key Brexit champions such as Simon Farage and the effective dissolution of UKIP, the British political system has been left to deal with Brexit without many of the key actors who brought the country into this situation in the first place. The inability of the government which has followed to arrive at a timely agreement with the EU has taken its toll on public perceptions, with the percent of the population believing that the current political system needs a “great deal of improvement” rising from 23% in 2016 to 29% in 2018.16 This image is only reinforced by events such as May’s January 2019 defeat of her Brexit proposal by a crushing 230 parliamentary votes, the largest defeat by any Prime Minister in the democratic era.17 The government’s apparent inability to reach any consensus has challenged the cohesion of the existing political parties as Brexit is an issue for which there is no clear alignment by party lines. The most recent reflection of this reality has been the defection of MPs from both the Conservative and Liberal parties to form the new pro-EU Independent Group, now with more members than the swing Democratic Unionist Party.

The government’s apparent inability to reach any consensus has challenged the cohesion of the existing political parties as Brexit is an issue for which there is no clear alignment by party lines.

This inability of the government to come to a timely resolution of Brexit has also crowded out other pressing issues from reaching the agenda of government, and raised fears of national turmoil associated with a hard Brexit, ranging from a return to violence in Northern Ireland to calls for a second referendum on Scottish independence. It is clear that Brexit is testing the stability of the British political establishment.

While much of the attention regarding Brexit was focused on March 29th and what would happen next, the reality is that the vote on the referendum in 2016 and the 3 years since have already had a real, damaging effect on the UK. Here, we have focused on five areas in particular: economic performance, investment confidence, talent attraction, reputational influence, and political effectiveness. This is not to say there are not others. What is clear, though, is that regardless of whether the outcome was a soft, hard or no Brexit, many of the damages feared have come to fruition irrespective of the final outcome. What this reminds us, is that focusing all our attention on planning for the future may at times blind us to changes in the present. 

Feature Image: Image by Toby Melville from Reuters

About the Authors

Niccolò Pisani is Assistant Professor of International Management at the University of Amsterdam in the Netherlands. His research focuses on the international management domain and the topics of his scholarly enquiry range from global business strategy to international corporate social responsibility. His research has appeared in a variety of academic journals and practitioner-oriented outlets.

Omar Toulan is Professor of Strategy and International Management at IMD Business School in Switzerland. Professor Toulan holds his PhD from the Sloan School of Management at MIT. His areas of expertise include strategic management, international business, growth strategies, and managing the multinational. Prior to entering academia, Professor Toulan worked as a management consultant for McKinsey and Company, as well as a researcher at the U.S. President’s Council of Economic Advisers.

References

1. Trading Economics (2019). United Kingdom GDP annual growth rate. Trading Economics (Accessed February 10). www.tradingeconomics.com

2. Raphael, T. (2019). Brexit knocks the wind out of the U.K. economy. Bloomberg Opinion (January 19). www.bloomberg.com

3. Raphael, T. (2019). Ibid.

4. Burroughs, C. (2019). Brexit isn’t even here yet, but here’s a list of the damage that’s already been done. Business Insider (February 5). www.businessinsider.com

5. Ernst & Young (2018). UK remains top destination for inward investment, but Germany and France are closing the gap as Brexit bites. Ernst & Young Newsroom (June 11). www.ey.com

6. Reid, H. (2018). ‘Safe as houses’? Brexit looms over UK real estate market. Reuters (August 23). www.reuters.com

7. Deutsche Welle (2019). EU Medicines Agency makes Brexit move to Amsterdam. Deutsche Welle Top Stories (January 9). www.dw.com

8. Reid, H. (2018). Ibid.

9. Raphael, T. (2019). Ibid.

10. Reid, H. (2018). Ibid.

11. Andrew, J. (2019). Top universities feel squeeze as EU student numbers drop: Higher education. Financial Times (January 3). www.ft.com

12. Fazackerley, A. (2018). 2VCs on … will Brexit damage UK universities? The Guardian (September 20). www.theguardian.com

13. More information and the complete list of the 24 leading US universities that are part of the Russell Group is available at: www.russellgroup.ac.uk

14. Fazackerley, A. (2018). Ibid.

15.Gifkins, J., Ralph, J., Jarvis, S. (2018). Diplomats reveal concerns over UK’s waning influence on UN Security Council. The Conversation (September 26). www.theconversation.com

16. Statista (2019). Which of these statements best describes your opinion on the present system of governing Britain? Statista (Accessed February 10). www.statista.com

17. Stewart, H. (2019). May suffers heaviest parliamentary defeat of a British PM in the democratic era. The Guardian (January 16). www.theguardian.com

Turning Vicious Cycle to Virtues of Islamic Banking

By Vita Arumsari and Yunice Karina Tumewang

For a country like Indonesia that has the largest Muslim population in the world, Islamic banking is moving in slow progress – with only less than 6% contribution on the country’s total national banking asset and only 8% of the total population knowledgeable on the Sharia-compliant financing. Yet, Indonesia still poses a great potential on boosting the Islamic banking sector, the authors argue.

Indonesia, the largest target market for Islamic finance with more than 200 million Muslim citizens, is struggling so hard to be placed at the 10th rank, left behind by the neighbouring country Malaysia which leads the Global Islamic Economy Indicator for the fifth year in a row (Reuters, 2017). As witnessed today, the development of Islamic banking as the core sector of Islamic finance is still far from satisfying the expectation. According to Financial Service Authority (OJK, 2017), the total asset of Islamic banking is only around IDR 400 trillion or equal to 5.18% of national banking asset. In line with that, the market share of Islamic banking is merely 5.78% of the national banking. Whereas on the total fund collected from society, Islamic banking is only able to acquire IDR 341 trillion compared to the total society fund in national banking which is not less than IDR 5,289 trillion. On the side of distributing fund to society, the number is quite the same, IDR 291.18 trillion from Islamic banking compared to IDR 4,782 trillion from total national banking.

The under-performance of Islamic banking might be due to the limited product diversification offered, the low level of differentiation of Islamic banking from its counterpart, and the low literacy level of Islamic banking among society.

According to Head of Commissioner Board of Indonesia Deposit Insurance Corporation (LPS) Halim Alamsyah, one of the factors hindering the acceleration of Islamic banking is that they merely focus on the role as an ordinary intermediary function, rather than maximising their potential role as an investment or social agent. Hence, it made no difference with the conventional one. They, supposedly, can do better if they are more willing to manage the social funds for investment on real-sector activities, which is highly Sharia-compliant and socially-impactful.

Taking a closer look at the contracts of Islamic banking, more than 50% of total transactions are using murabahah agreement, which vulnerably becomes ribawi if continuously run in a long-term. Obviously, fatwa shopping becomes an issue in this case, as it is hard to find an appropriate rule of conduct for this dominant transaction. Most Sharia Advisory Board sitting in multiple banks and other professionalism issues is largely considered as the root cause of this problem. Moreover, until now, Islamic banking is still not allowed by our regulation to have inventory in their business for keeping the commodity to be sold. Hence, it is very hard for Islamic banking to fully manage the risk according to Sharia as well as to comprehensively agree with PSAK 102 as the accounting standard for murabahah transaction.  

Based on the survey conducted by OJK (2017), it reveals that literacy of Islamic finance in Indonesia only reached 8.11%, which means that among 100 people, there are only 8 people who have knowledge about the Sharia-compliant finance. While the inclusion level of society taking financing benefit from the Islamic finance sector is only 11.06%, which means that there are only 11 out of 100 people who make financial transaction in a Sharia-compliant sector.

Overcoming the problems mentioned above, tackling fatwa shopping should be done as the priority and systematically. Firstly, by standard legalisation – once the decision is made, there is no bargaining process even to the other Ulama. Secondly, there should be transparency from the SSB to the society. This covers the reason behind the issued permit. In other words, we let society keep an eye on the Islamic financial institutions. Thirdly, audit compliance should be stated similar to the financial audit where they should be featured in the financial report for the sake of transparency. Banks should have minimum procedure or characteristics that should be implemented. Lastly, beyond the minimum procedures, they can innovate much as they like to attract customers as long as they do not cross the borders.

Expanding the products variety not limited to murabahah is urgently needed. Product application other than murabahah might be costly in terms of human resources and operational cost. But, we should emphasise that profit and loss sharing are the unique characteristics of Islamic products that cannot be left behind. Based on this fact, banks apply this principle only for the ‘giant’ customers. On the other hand, for retail financing customers, it is more practical, theoretically and practically to decide the margin without supervising the amount of income they generated. If banks find it too hard, why don’t we create an Islamic financial institution (IFI) to cater to the need of profit and loss sharing principles? If in the end, Islamic financial institutions and banks feel overwhelmed, why don’t we implement IFIs using social funds to see first if it is worth the risk?

Finally, socialising in the grassroots level is vastly needed. The question is, how to make it feasible for educating hundred millions of Indonesians? Educating regional leaders who will then educate its people is inevitably crucial. This kind of system is similar to multilevel marketing where each leader needs to look for a group of people to be educated. Involving the society to the Islamic Financial Institutions is also important. By doing so, they can understand better what is going on inside the IFIs. But one thing should be understood, the government should be aware that once the society has comprehensive knowledge about IFIs, they would require pure products. If the government cannot provide this, it can trigger a movement towards Islamic finance institutions. To cater to this, the government should ensure, particularly OJK, to educate DPS to be more selective and strict about the feasibility of the products based on the Islamic financial principle.

With two-way collaboration between the government in voicing Islamic finance as the new alternative of banking and the society as the main player, we could turn around the vicious cycle into virtues of Islamic banking.

All in all, Islamic finance is more than willing to create a fully Sharia-compliant system. However, no matter how great the system and intention are, it is impossible without gaining trust, support, and cooperation from the society. Furthermore, Indonesia as the largest country with Muslim population ideally should be able to cater to the need of the citizens to practise Islam as a whole (kaffah). By doing this, it will not be impossible for Indonesia to be the hub of Islamic finance in 2030. With two-way collaboration between the government in voicing Islamic finance as the new alternative of banking and the society as the main player, we could turn around the vicious cycle into virtues of Islamic banking.

About the Authors

Vita Arumsari, S.ST., M.Sc.  is a lecturer at Politeknik Negeri Semarang. She is a graduate of Islamic Finance in Durham University, UK.

Yunice Karina Tumewang, S.E., M.Sc. is a lecturer at the Accounting Department, Universitas Islam Indonesia

Waqf, Some Notes for its Revitalisation

By Ebi Junaidi and Khaled Abulfateh

A waqf is an inalienable charitable endowment under Islamic law, which typically involves donating a building, plot of land or other assets for Muslim religious or charitable purposes with no intention of reclaiming the assets. Many predicted that waqf is the next best thing in Islamic finance, bringing the Islamic social finance into mainstream role in development. The big question is how to actually revitalise the waqf system into the contemporary world?

A vivid description of how the role of waqf under Ottoman Empire by a Turkish historian, Bahaeddin Yediyildiz, has been highly quoted lately in many publications within the topic of Islamic Economics and Finance. The description was: 

“Thanks to the prodigious development of the waqf institution, a person could be born in a house belonging to a waqf, sleep in a cradle of that waqf and fill up on its food, receive instruction through waqf-owned books, become a teacher in a waqf school, draw a waqf-financed salary, and, at his death, be placed in a waqf provided coffin for burial in a waqf cemetery, in short, it was possible to meet all one’s needs through goods and services immobilised as waqf.” 

Indeed, the description strongly convey the ability of waqf to “guarantee” the citizen’s life from the first day he/she was born until his/her death; something that many Islamic countries and Muslim-majority countries lack. Many predicted that waqf is the next best thing in Islamic finance, bringing the Islamic social finance into mainstream role in development. The big question is how to actually revitalise the waqf system into the contemporary world? This article tries to address this question because the role of waqf system in the contemporary world has diminished in most Islamic countries, whereas waqf has never been as vital in some Muslim-majority countries.

Historically, awqaf institutions ceased to be crucial in the development of societies in the present world because of several factors. First, managers of awqaf did not have the flexibility to “change the stipulations of the founder, thus awqaf were locked into services demanded” centuries ago when the economic system underwent rapid changes, which “turned these institutions into unproductive organisations” (Asutay, 2018). 

Second, colonialism by Western power and corruption of awqaf managers caused the centralisation of awqaf institutions, implying that the government started controlling these properties. The process of centralisation had significant consequences such as the “embezzlement of waqf funds” (cited in Asutay, 2018). Therefore, waqf in modern times has lost its momentum as it does not show good performance in alleviating poverty and enhancing socio-economic development. One of the challenges facing the waqf sector is its inability to be financially sufficient and socially effective. Several Muslim countries, however, are endeavouring to revitalise the waqf sector. For example, Kuwait demonstrated exceptional performance in utilising waqf institutions to finance welfare services through major governance and administrative reforms (Asutay, 2018).  

The need for revitalising the waqf system is therefore essential because it can tackle poverty from a micro and macro perspective. According to Ahmed (2004), awqaf institutions should develop effective programs for productive and unproductive labour to alleviate poverty from a micro-perspective. He suggests that productive labour should be supplied with financial, human and physical capital because they experience financial difficulties as their resources are under-utilised. For instance, financial capital assists them in setting up their own business; provision of human capital can improve their skills in utilising their physical capital (e.g. computers), which enables them to earn higher income. As for the unproductive ones, awqaf institutions should provide them with stipends to satisfy their needs. From a macro perspective, awqaf institutions can enhance social welfare services delivered to the poor, initiate education programmes, and supply public goods.  

Waqf is created by donating an asset that has the feature of perpetuity with no intention of recovering it back. The literal meaning of waqf is “[causing] a thing to stop and stand still” (Cizakca, 2004). According to Abu Hanifah, waqf is a “dedication of specific property in the ownership of the waqif and appropriation of its profits or usufructs in the charity for the poor or other good deeds” (cited in Asutay, 2018). From an economic perspective, it is a philanthropic foundation that strives for providing income and welfare services for future generations by forgoing current consumption for the purpose of alleviating poverty and improving the socio-economic system (Kahf, 1998:7, cited in Asutay, 2018). 

There are two types of awqaf in terms of its nature: the first is income generating properties where its revenues are spent on charitable activities; the second is properties utilised directly to produce benevolent services such as hospitals (Asutay, 2018). Waqf can also be categorised into public and private endowments. The former serves the society as a whole, such as endowing schools. The latter only benefits the founder’s family members and relatives (Asutay, 2018).

It is quite shocking to know that the past success and vital role of waqf are not widely known within the Muslim community itself. Some might have heard about waqf, but most commonly known it in a much-reduced form.

Unfortunately, the above definition of waqf and all the categories it has are not common knowledge among Muslims. It is quite shocking to know that the past success and vital role of waqf are not widely known within the Muslim community itself. Some might have heard about waqf, but most commonly known it in a much-reduced form. Raditya Sukmana, a researcher from Center of Islamic Social Finance, indicated that people in Indonesia “equalised” waqf to the provision of land for cemetery and Masjid only. By this definition, the economic role of waqf is totally underestimated, if not unrecognised. 

Waqf literacy, indeed, is the first and major challenge of the efforts to revitalise waqf and put it to the vital role within the contemporary context. Unfortunately, socialisation effort made towards public is still insufficient to give a harmonised understanding. Cash waqf, for instance, as a non-fixed asset based waqf, was introduced under different names to public in Indonesia (Siswantoro, Rosdiana and Fathurahman, 2016). It is recorded that there are at least eighty-two waqf institutions that try to mobilise this waqf type, and yet terminologies used for this waqf type are varied from productive waqf, common waqf, and money waqf (p.4348). The organisational form of this institution is also considerably different, ranging from cooperatives, zakat institution, mass organisations, foundations, until Baitul Maal wat Tamwil (BMT). These factors, to some extent, have been the source of confusion for the people. 

The lack of waqf literacy as described above, together with the possible confusion due to unharmonised terminology, are contributing to the gap of potential waqf giving and its realisation. In Indonesia, for example, it was expected that total cash waqf giving might achieve 180 trillion Rupiah (equal to around 12.6 billion USD) in 2018, yet the realisation was as little as 400 billion Rupiah only (equal to 28 million USD) or slightly just above 0.2 percent. 

The second needed movement to revitalise waqf is creating credible and accountable waqf management. Asutay (2018), asserts that the revitalisation of waqf system can be achieved through managerial reforms. According to Kahf (2007), the waqf sector should only be managed by mutawallis (waqf managers) to be more effective in providing social welfare service, while awqaf institutions managed by the government are predominantly focused on providing religious services. It is also crucial for awqaf institutions to improve their current management techniques by adopting strategic human resource management to effectively achieve their operational objectives. 

It is important to note that as an institution that based its life on trust, waqf institutions’ governance needs to be reflected in their financial report.

A vital element to create an accountable management is creating a good monitoring system. For this, disclosure of financial report to public cannot be neglected. It is important to note that as an institution that based its life on trust, waqf institutions’ governance needs to be reflected in their financial report.

Revision of classical fiqh of waqf is considered as the third requirement towards waqf revitalisation. Waqf was once also being claimed to be the cause of the underdevelopment of the Muslim world due to its rigidity that creates dormant assets (Kahf, 2007). The rigidity, in this manner, is that of the use and the function of the donated assets that could not be changed from its enacted intention by the waqif (waqf giver) no matter how irrelevant it is in the current situation. 

In line with Kahf (2007), White (2006) also argues that the revision of classical fiqh of waqf is of paramount importance to revitalise the waqf sector. A reform proposed by White (2006) is to remove “the requirement that the family waqf be established for ultimately … charitable purposes” to achieve more flexibility because it was historically and contemporarily used to protect the inheritance of the founder, to safeguard it from oppressive rulers, and to avoid taxes. Thus, waqf should revert back to serve the poor. Another reform is that the requirement that the waqf endowment must be a tangible asset should be eliminated to be adapted to the modern world (White, 2006). Such reform would enable the privileged to make waqf on stocks and intellectual property, because they represent a large amount of wealth in the contemporary world.

Furthermore, it is essential to integrate innovative and modernistic methods into the waqf sector. Boudjellal (2008) suggests that awqaf institutions should provide financial and profitable channels through “utilising Shariah compliant financial instruments” such as sukuk to attract fundholders who want profit and institutions who want an adequate return for their waqf (cited in Asutay, 2018). In addition, Cizakca (2004) emphasises the importance of essentialising cash waqf in the philanthropic organisation as a way of providing microfinance through gratuitous loans. 

Waqf can also provide social welfare services by “establishing a Waqf whose revenues are to be used to finance the poor supportive programs” (Ali, 2014). Haneef et al. (2015) proposed an Integrated Waqf-Based Islamic Microfinance Model to enhance socio-economic development by alleviating the multidimensional facets of poverty. The model encompasses the following elements:  

The Waqf fund will be invested in income generating assets to fund future activities through its profits. 

Islamic microfinance provides Shariah-compliant microfinance to the poor.  

Human resource development is used to achieve sustainable outcomes in the long run through enhancing the human and social capital of poor clients and waqf employees by providing them with educational and training programmes.  

Project financing means that waqf funds are invested in Shariah-compliant projects.  

Takaful is used to absorb the risk that would have been borne by poor entrepreneurs when facing financial difficulties. Takaful fund comes from contributions and returns of investments.  

This model assists in overcoming certain issues such as “high cost of capital, low quality of human resources, vulnerability of poor borrowers arising from lack of sustainable income” (Haneef et al., 2015).  

Although the role of waqf in society declined in modern times, it still has a strong potential to develop capacity, alleviate poverty, and sustain the socio-economic development of Muslim societies. The reason is that the waqf system can eliminate poverty by tackling it from a micro and macro perspective. Nonetheless, to achieve the full potential of the waqf institution, there is a crucial need to revitalise it through the necessary reforms and through integrating innovative approaches that would modernise the waqf system.

About the Author   

Ebi Junaidi is a School of Economics Lecturer at Universitas Indonesia. He is currently pursuing his PhD in Islamic Finance at Durham University Business School. His research areas are: Waqf, Trust, Venture Capital, Risk Attitude, and Financial Decision. He is now the Chairman for Indonesia Islamic Economics Society-United Kingdom Representative. 

Khaled Abulfateh is a graduate from the American University of Sharjah. He is currently pursuing his MSc in Islamic Finance at Durham University Business School. His research areas are: FinTech, Moral Economy, Waqf, Sukuk, and Islamic Social Finance. 

References
1. Ali, K. (2014). Integrating Zakah, Awqaf and Islamic Microfinance for Poverty Alleviation: Three Models of Islamic Microfinance. Working Paper. Jeddah, KSA: Islamic Research and Training Institute. 
2. Asutay, M. (2018) The structure of Islamic political economy: social welfare institutions. Working Paper. Durham Centre for Islamic Economics and Finance, Durham University Business School
3. Boudjellal, M. (2008). The Need for a New Approach to the Role in Socioeconomic Development of Waqf in the 21st Century. Review of Islamic Economics, 12(2), 125–136.  
4. Brahimi, A., Ahmad, K., Siddiqi, M. N., & Qaḥf, M. M. (2009). Encyclopaedia of Islamic economics. London: Encyclopaedia of Islamic Economics.
5. Dodik Siswantoro1, Haula Rosdiana2, and Heri Fathurahman2, Redefinition of Cash Waqf (Endowment) Terminology in the Indonesian Context: A Comparison with Malaysia and Singapore, Advanced Science Letter, Vol 22, 4348-4350, 2016.
6. Haneef, M., Pramanik, A., Mohammed, M., Amin, M., & Muhammad, A. (2015). Integration of waqf-Islamic microfinance model for poverty reduction: The case of Bangladesh. International Journal of Islamic and Middle Eastern Finance and Management, 8(2), 246-270.
7. Kahf, M. (2007). Infaq in the Islamic economic system. Retrieved from http://monzer.kahf.com/papers/english/Infaq_in_the_Islamic_Economic_System.pdf 
8. Kahf, M. (2007). The Role of Waqf in Improving the Ummah Welfare. Paper presented at the Singapore International Waqf Conference 2007, held in Singapore, March 6-7.  
9. White, A. (2006). Breathing new life into the Islamic waqf: What reforms can fiqh regarding awqaf adopt from the Common Law of Trusts without violating Shari’ah?. Real Property, Probate and Trust Journal. 41(3), 497-527.

5 advantages to getting benefit loans

Life can get expensive sometimes. As well as regular spending on essentials like food, phone, gas and electricity, plus clothes, transportation and things like a TV license there are events like birthdays, Christmas and a holiday to pay for.

Getting by week to week can be a huge challenge, especially if something unexpected happens like the washer breaking down, or the kids needing a new school uniform and shoes. It can be even harder when you are depending on benefits to get by.

Taking out a loan is one way to help when you need some extra cash, fast, but it’s not always easy to actually secure one. This is especially true if you are on benefits, as there may seem to be few options open for borrowing money when you don’t have a decent monthly income. But that isn’t always the case. There are some reputable companies who offer benefit loans, and here we look at five advantages of taking up this kind of opportunity.

 

Advantage 1 – You can avoid payday loans

It’s a sad fact that too often those who have low incomes struggle to find loans at a halfway decent rate, so fall into the trap of borrowing from doorstep lenders, (who are basically loan sharks), or from payday loan companies which require large repayments over a short term term, and generally charge sky-high interest on top.

 

Advantage 2 – Borrowers can enjoy a more realistic and flexible repayment plan

Benefit loans can be agreed over a longer period of time, which in turn reduces the monthly repayment to a figure which is more realistic. This could well help the borrower falling deeper into a debt spiral where more and more is borrowed simply to maintain the repayments.

 

Advantage 3 – The loan can help replace essentials

Few people can function properly without things like white goods, and using a benefit loan to replace a fridge, cooker or washing machine mean they will probably have paid the loan off long before the equipment breaks down and needs to be replaced again.

 

Advantage 4 – A benefit loan can help when transitioning into work

Many unemployed people worry about taking a job because they have not got suitable clothes for a work environment, or perhaps no tools or other essential equipment. Transportation to and from work can be tricky too in that initial period before payday, so a benefit loan in those situations is a great option.

 

Advantage 5 – They can help you enjoy special events

It’s easy to say that people on low incomes should just forget things like Christmas, birthdays, mention proms, which are fast becoming part of both primary and secondary school culture? Never mind wanting to do something simple like take the kids to a caravan for a few days in the holiday.

A decent lender will assess your application based on all the regular income you have, so if some or all are from regular benefit payments, including disability living allowance, working and family tax credit, as well as regular unemployment allowance, you will not be disadvantaged based on where the cash is coming from.

 

Chile: The Capitalist Alternative to Venezuela in Latin America

By Rainer Zitelmann

Chile and Venezuela are the two counter-models in Latin America. Chile embodies the capitalist path, while Venezuela the socialist path. But Chile has also had its own troubles: First under the socialism of Allende and later under the dictatorship of Pinochet.

The contrast between these two Latin American countries could hardly be starker: Chile ranks 20th out of 180 countries in the 2018 Index of Economic Freedom, while Venezuela is at the very bottom, even behind Cuba and beaten to last place only by North Korea. While Chileans are better off today than ever before, Venezuelans are suffering from inflation, economic decline and growing political oppression. In the course of the 20th century, Venezuela went from being one of the poorest countries in Latin America to becoming the richest. In 1970, it ranked among the 20 richest countries in the world with a higher per-capita GDP than Spain, Greece and Israel, and only 13% lower than the UK.

Much as with Hugo Chávez’s ascent to power 28 years later, left-wing intellectuals all over the world drew fascination and pride from Salvador Allende’s election as Chilean president in September 1970. The Unidad Popular candidate was the first hardline Marxist ever to come to power as the result of a democratic election – albeit with a slim majority of 36.5% of the vote – rather than a violent revolution or a lost war, as was the case with the Soviet-imposed regimes in East Germany and North Korea after World War II.

The Unidad Popular was assisted in its ascent to power by the oligarchic nature of the Chilean economy and the huge income gap between the 1.5% share of total income that went to the poorest 10% and the 40.2% share for the richest 10%, while inflation stood at 36.1% in 1970.

Allende’s nationalisations lead to ruin

In his first official act as president, Allende nationalised the copper mines that were Chile’s most important source of income. Rather than paying compensation to the multinational corporations that had previously run the mines as part of the “negotiated nationalisation” agreement signed with Allende’s predecessor, Eduardo Frei Montalva, in 1969, Allende’s government presented them with deductions for “excessive profits” beyond “normal business practice” that exceeded the sale value of most of their holdings. Banks and other companies were also nationalised in quick succession. By the time Allende was ousted in 1973, 80% of the country’s industrial production had been moved to the public sector. Rents and prices of basic food items were fixed by the government, which also provided free healthcare.

The socialist government’s use of public spending to bolster its popularity saw social expenditure rise by almost 60% in real terms in a period of only two years. Between 1970 and 1973, employment in central government and public-sector firms expanded by 50% and 35% respectively. These measures were paid for, not from increases in tax revenue but by increasing public debt and expanding the money supply. The budget deficit grew from 3.5% of GDP in 1970 to 9.8% in 1971. A 10.3% increase in public-sector investment was counterbalanced by a 16.8% drop in private-sector investment – which is not surprising given the rate of expropriation of private business owners: 377 productive firms were nationalised between 1970 and 1973.

Economically, nationalisation was a failure. Highly skilled workers and experienced executives left the country in droves and were replaced by loyal party members. “Many nationalised businesses also recorded frequent incidents of undisciplined behaviour and absenteeism. In companies that hadn’t been moved into state ownership yet, the workers themselves took initiative by occupying production facilities.”

Anti-Marxist women wave white handkerchiefs in Santiago, Chile as they demand the resignation of Salvador Allende (September, 1973). Photo courtesy of: AP Photo

The socialist government’s use of public spending to bolster its popularity saw social expenditure rise by almost 60% in real terms in a period of only two years.

In addition, almost 16 million acres of land were expropriated. In some instances, collectives were set up in accordance with the familiar socialist model. Farmers made landowners by the 1960s reforms now had to work in agricultural collectives as public-sector employees. Expropriations or occupations happened at a rate of 5.5 agricultural estates per day; “every other day a productive firm was nationalised or taken over”. Productivity took a dip, and by 1972 Chile had to spend a large share of its export revenue on food imports. The attempt to restructure the agricultural sector in accordance with socialist principles was as much a failure in Chile as it had been in China, East Germany and North Korea. Overall, the Unidad Popular’s economic policy was a failure. This is true in the fiscal arena even more so than in the agricultural and industrial sectors. The government was no more able to control inflation than its predecessor had been – in fact, generous public spending only made it worse. Inflation, which had stood at 36% in 1970, skyrocketed to 605% in 1973, a pattern that would repeat itself in Venezuela three decades later – as would the protests that started breaking out in Chile. During a three-week state visit by the Cuban leader Fidel Castro in late 1971, thousands of Chilean women joined a ‘March of the Empty Pots and Pans’ on the presidential palace. They were attacked by Marxist activists and dispersed with tear-gas grenades by the police, resulting in dozens of injuries. In October 1972, half a million small business owners, farmers and self-employed professionals took part in anti-government protests.

The era of military dictatorship

The attempt to restructure the agricultural sector in accordance with socialist principles was as much a failure in Chile as it had been in China, East Germany and North Korea.

In September 1973, the Chilean army, led by Allende’s appointed army chief Augusto Pinochet, overthrew the socialist government. Allende killed himself shortly before the leaders of the coup d’état stormed the presidential palace. General Pinochet established a military dictatorship. Freedom of the press and other democratic rights were abolished; those who opposed the regime were arrested and tortured. In stark contrast to the authoritarian and anti-liberal thrust of his domestic policy, Pinochet’s economic orientation was, for the most part, liberal and pro-market.

Chile’s transformation into a free-market economy under Pinochet was masterminded by a group of economists who subsequently became known as the ‘Chicago Boys’. They were admirers and former students of Milton Friedman, the Nobel Prize-winning economist and fervent proponent of free-market capitalism, at the University of Chicago. On their return to Chile, they drafted 189 pages of economic analysis and reform proposals for the attention of the generals, who initially “did little with the proposals”. It was only when the military’s own efforts failed to stem inflation that Pinochet appointed several of the Chicago Boys to positions of power.

Friedman himself gave a number of seminars and public talks in Chile during a six-day stint in March 1975. His perceived role as Pinochet’s adviser has given rise to a lot of harsh criticism. In truth, Friedman only met the Chilean dictator once, and subsequently wrote him a letter in which he recommended a programme for fighting hyperinflation and liberalising the economy. He gave similar advice to communist rulers in the Soviet Union, China and Yugoslavia. But, while his supposed involvement with the Chilean regime triggered a global campaign against him, nobody seemed to be bothered about his role in advising communist regimes.

On the whole, Friedman was impressed by the economic policies implemented by the Chilean economists he had inspired – among them Sergio de Castro Spikula, who was Pinochet’s minister of economic affairs and later became finance minister – although he was critical of Castro’s decision to peg the Chilean currency to the US dollar. Castro and his followers started to instigate an economic agenda centred on reducing public spending, deregulating the finance and economic sector, privatising state-owned enterprises (except for the copper industry) and opening the economy to foreign investors, and generally reversing the policies of the Allende government: “The state and everything linked to the public sector was turned into the central cause of all the problems, the less it interfered in the economy, the greater and faster would be the growth of social welfare. This formed the background to the numerous economic reforms introduced during the military regime: privatisations and reprivatisations, reform of the state and fiscal reform, liberalisation, deregulation, opening up the economy and Central Bank autonomy.”

From 400 state-controlled enterprises and banks in 1973, the number dropped to around 45 firms (including one bank) in 1980. Fiscal and tax reforms and deregulation measures introduced in the mid-1970s minimised government influence across the board by abolishing price controls, wealth and capital gains taxes and cutting income tax. VAT, set at a standard rate of 20% charged on all goods and services, became the government’s main source of tax revenue. This resulted in an ‘economic miracle’ of a similar magnitude to those achieved by Margaret Thatcher and Ronald Reagan: lower tax rates led to a growth in revenue from 22% of GDP in 1973–1974 to 27% in 1975–1977, and the transformation of the chronic fiscal deficit into a surplus in the period from 1979 to 1981.

A comparison between key indicators for 1973 and 1981 clearly shows just how successful these policies were. Inflation, which had stood at above 600% in 1973, had dropped to only 9.5% by 1981, although progress had been slow. During the same period, Chile had seen its economic growth rate recover from -4.3% to a healthy 5.5%, while exports almost tripled from USD 1.3 billion to USD 3.8 billion. More impressive still was the growth of non-traditional exports (excluding copper and other natural resources) from USD 104 million to USD 1.4 billion. Real wages, which had dropped by over 25% in 1973, grew by 9% in 1981.

“Chile led the continent in climbing out of this recession. It was the only debt-crisis country that got back to the pre-crisis levels of GDP before the end of the decade of the ’80s, so for most of the countries, it was the full decade that they called the ‘lost decade’.”

The fiscal and economic policies introduced by the Chicago Boys were key to Chile’s long-term recovery and its current economic stability. In the short term, however, their outcomes were less straightforward: as with Thatcher’s and Reagan’s reforms, positive long-term effects came at the price of an initial rise in unemployment.

With foreign investors increasingly putting their faith in the Chilean economy, exports started rising while the deficit decreased and the economy grew by a total of 32% over four years. Chile’s economic miracle was hailed in the world of global finance and celebrated in the business press. Mass consumption increased as standards of living improved across the population, as reflected in the dramatic rise in the number of cars registered between 1976 and 1981.

In the early 1980s, a massive debt crisis swept across Latin America. In 1982, Mexico defaulted on its sovereign debt. In the same year, Chile – along with other Latin American countries – was plunged into recession by a drastic decline in capital inflow. In 1982–1983, Chile experienced its worst recession since the 1930s, with GDP plummeting by 15% and unemployment rising to 30% in real terms. The root causes of the 1982–1983 crisis are the subject of an ongoing debate. What is clear, though, is that Chile was able to get over the crisis much faster than its Latin American neighbours: “Chile led the continent in climbing out of this recession. It was the only debt-crisis country that got back to the pre-crisis levels of GDP before the end of the decade of the ‘80s, so for most of the countries, it was the full decade that they called the ‘lost decade’.”

Once the crisis was over, the government carried on with more reforms. The second round of reprivatisations took into account the lessons learned from the first, which had largely been a debt-based privatisation process. This time, companies were transacted on the stock exchange, giving them a debt-free start. The privatisation of the largest firms in public ownership – excluding the state-owned General Minerals Corporation – started in 1986, generating a total asset value of USD 3.6 billion.

The Chicago Boys. Photo courtesy of: Carlos Massad

 

After Pinochet: free-market economics and democracy

The political system started changing following Pinochet’s 1988 defeat in a plebiscite on the extension of his rule for another eight years. The 1989 general elections were won by a democratic alliance led by the Christian Democrat Patricio Aylwin Azócar, who ruled as president from 1990 to 1994. Friedman emphasises the role that economic liberalisation, which in turn led to political liberalisation, played in the transition from dictatorship to democracy: “The Chilean economy did very well, but more important, in the end, the central government, the military junta, was replaced by a democratic society. So the really important thing about the Chilean business is that free markets did work their way in bringing about a free society.”

In 2010, Chile became the first South American nation to join the Organisation for Economic Co-operation and Development – a clear sign that, unlike most other countries in the region, Chile is part of the ‘First World’ of developed countries.

Although the liberalisation of the economy was clearly a contributing factor in ending the dictatorship by strengthening the Chilean civil society, Friedman’s claim that the victory of democracy was a direct and inevitable consequence of the economic reforms is an unsubstantiated exaggeration. The fact that in other countries economic liberalisation has so far failed to produce a transition to democracy makes his contention difficult to uphold.

Nonetheless, there is no denying the long-term positive effects of the economic reforms instigated by the Chicago Boys. Although watered down somewhat by subsequent governments, these reforms laid the foundations for Chile’s current economic success and led to the country’s high ranking in the Index of Economic Freedom. Even the socialist incumbents Ricardo Lagos Escobar (2000–2006) and Michelle Bachelet (2006–2010 and 2014–2018) did not fundamentally alter Chile’s orientation as a free-market economy. In 2010, Chile became the first South American nation to join the Organisation for Economic Co-operation and Development – a clear sign that, unlike most other countries in the region, Chile is part of the ‘First World’ of developed countries. This is all the more remarkable given that, prior to the reforms, Chile was among the most protectionist economies in the world.

The fact that neither the Christian Democrats who governed Chile during the 1990s nor the socialist governments elected in the 2000s made significant changes to the reforms introduced under Pinochet has to count as one of the strongest arguments in favour of their efficacy. As shown in Chapter 5, a similar observation holds true for the UK and the US, where neither Tony Blair’s Labour government nor Bill Clinton’s White House meddled with the substance of the reforms introduced by Thatcher and Reagan.

Critics of Pinochet’s Chicago Boys reforms like to point to the rising social inequality that accompanied their undeniable economic success – to which Chile’s former economy and finance minister Sergio de Castro responds: “In 1970, for instance, infant mortality was 80 to 1,000. By 1990, at the end of the military regime, it had dropped to 20 to 1,000. That is due to the economic health of the country and the fact that the government was able to spend more money on the poor.”

However, other economic and social indicators do show a high degree of inequality in Chilean society persisting into the present. The Gini Index, which measures the income distribution among residents, ranks Chile among the 20 most unequal countries in the world. The majority of Chileans seem to value the economic progress achieved in their country more highly than the ‘social equality’ bemoaned by critics – as evidenced by the successive socialist governments that largely adhered to a free-market course and by the 2010 election of Sebastián Piñera for president. A former close ally of the Pinochet government whose brother had been instrumental in rolling out a privatised social security system, Piñera was a staunch believer in the free market. His election victory, the German newspaper Handelsblatt commented at the time, “might herald the beginning of a new era of pure capitalism in Latin America”. Piñera lost the 2013 presidential elections against Michelle Bachelet, who in turn was voted out of office in 2017 to make way for Piñera’s second term, which started in March 2018.

In late June 2017, the leftist German weekly newspaper Die Zeit ran a feature on Chile that runs the gamut from dismay to grudging admiration: “Capitalism has an unusually powerful hold here, and the impact on social cohesion and the weaker members of society is equally strong. If you can’t keep up, you don’t belong: this mindset is part of the legacy bequeathed on Chile by the military dictatorship of Augusto Pinochet, who ruled the slim country on the edge of South America between 1973 and 1990. Long after Pinochet’s death, his Chicago Boys live on … So far, his democratic successors in government have continued his policy of very little market regulation.”

On the other hand, even the Die Zeit journalist is forced to concede: “At six per cent, unemployment is about as low as in Germany, and inflation is almost non-existent too. Chilean government bonds have a good rating. Compared to their Latin American neighbours’ reputation for economic chaos, Chileans are considered good business partners. They also have a functioning infrastructure, solid rates of construction and investment and well-organised transport networks. Improvements in the standard of living over recent years have benefited even the poor.”

Unlike socialism, capitalism is not a system invented by intellectuals – and, thus, its sudden imposition from one day to the next is doomed to fail even under a dictatorship.

It’s true: with a population of just under 18 million, Chile has a per-capita income almost twice as high as Brazil, while the percentage of the population living below the poverty line dropped from 20% in 2003 to 7% in 2014. During the same period, the poorest 40% saw their incomes rise more steeply than the national average. In 2017, Chile was the top-ranking Latin American country in the Global Competitiveness Report compiled by the World Economic Forum. It has the most stable banking system in the region and some of the best conditions for private enterprises worldwide. The most open economy in Latin America, it has signed free-trade agreements with countries that together produce 75% of the global economic output. Over the past 30 years, Chile’s economy has achieved annual growth rates of around 5%.

In the period between 1990 and 2005, Chile recorded one of the highest economic growth rates in the world – far higher than any other Latin American country and on a par with South Korea. In conjunction with the consistent privatisation of infrastructure assets from public transport over hospitals, prison and telecommunications to water and sewage management, low corporate tax rates and deregulated capital markets created incentives for investors.

On the negative side, Chile’s economy continues to depend to a very large extent on copper. The country has the largest copper deposits in the world and around a 30% share of global copper production. The price of copper has hardly been stable over the past 20 years, soaring from a record low of USD 1,438 per ton in 1998 to a record high of USD 8,982 in 2008 before plummeting to USD 2,767 later the same year, followed by a 150% increase over the next year and a period of extreme fluctuations ever since.

These trends are obviously problematic for a country whose economy is largely dependent on copper. But unlike Venezuela, where the fluctuating oil price that initially triggered the economic boom and allowed Chávez to give away social benefits with both hands was subsequently blamed for the country’s dramatic economic downturn, Chile’s free-market economy was much better equipped to cope with the drops and fluctuations in the price of copper. Venezuela, too, might have thrived in spite of its high degree of dependency on oil – if it hadn’t been for its state-controlled socialist economy.

Chile’s development over recent decades not only demonstrates that capitalism is superior to socialism. Crucially, the Chicago Boys’ attempt to roll out a capitalist system over night in the 1970s also highlights a key difference between the two. Unlike socialism, capitalism is not a system invented by intellectuals – and, thus, its sudden imposition from one day to the next is doomed to fail even under a dictatorship.

Rather, capitalism grows organically and spontaneously. As discussed in Chapter 1, China’s successful transition from socialism to capitalism took many years of spontaneous bottom-up initiatives supported by changes in policy instigated by Deng Xiaoping and others. While the Chicago Boys’ reforms constituted an important change of direction that marked the beginning of Chile’s road to economic success, it took the country several decades to transition to a full-blown capitalist free-market economy.

This article is an excerpt from The Power of Capitalism by historian and sociologist Rainer Zitelmann.

Feature Image by rlatin from Flickr

About the Author

Dr. Rainer Zitelmann is a historian, political scientist and sociologist. He was a research assistant at the Free University of Berlin and head of department at Die Welt, one of Germany’s leading daily newspapers. He has written and published 21 books, many of which have enjoyed international success.

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