Economic Inequalities and Global Crisis: Painful Decline of Dominant Paradigm

1. Economic Inequalities and Global Crisis: Painful Decline of Dominant Paradigm Prof. KrastyoPetkov President of Union of Economists in Bulgaria Keynote speech, presented at: Global Next Leaders Forum 17 – 24 August, 2014 - BULGARIA

2. KrastyoIlievPetkov kr.petkov@unwe.eu; www.kpetkov.eu Professor in Economic Sociology at: European College of Economy and Management- Plovdiv University of National and World Economy- Sofia Participant in international expert missions in: Tunisia 2011 (NDA, USA); Ukraine, Kyrgyzstan, Georgia (ILO, ITUC, 2011-2014); India, Thailand, Peru (WIEGO, 2011-2013; Albania, Macedonia, Serbia, BiH (FES, 2009-2013) Lecturer in the GLI International Summer School, University of Manchester, Northern College, 2012

3. Content 1. Dominant neoliberal paradigm 2. Impacts on inequality 3. Critical concepts 4. Global crisis and inequality: two turning points 5. Alternative solutions 6. Political reflections

4. Part one Dominant neo-liberal paradigm

5. Manifesto from the French Les Économistes Atterrés (The upset economists- 2010) • “ The neoliberal paradigm is still the only one that is acknowledged as legitimate, despite its obvious failures. Based on the assumption of efficient capital markets, it advocates : > reducing government spending, > privatizing public services, > flexibilising the labour market, > liberalizing trade, financial services and capital markets, > increase competition at all times and in all places... As economists, we are appalled to see that these policies are still on the agenda, and that their theoretical foundations are not reconsidered”. • CRISIS AND DEBT IN EUROPE: 10 PSEUDO “OBVIOUS FACTS”, 22 MEASURES TO DRIVE THE DEBATE OUT OF THE DEAD END.

6. Washington consensusThe ten principles originally stated by John Williamson in 1989: 1. Low government borrowing. Avoidance of large fiscal deficits relative to GDP; 2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment; 3. Tax reform, broadening the tax base and adopting moderate marginal tax rates; 4. Interest rates that are market determined and positive (but moderate) in real terms; 5. Competitive exchange rates; 6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); 7. Liberalization of inward foreign direct investment; 8. Privatization of state enterprises; 9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions; 10. Legal security for property rights. *** Washington consensus was important for determining policy in Latin America, South East Asia, but had been almost fully implemented during 90-es in the CEE zone (6 out of 10 principals are being externally imposed, following IFI’sprogrammes for market reforms)

7. Apogee of the neoliberal paradigm:TINA slogan

8. Part two Impacts on inequality (brief overview)

9. Historical evolution: Return of the Great Depression • After 1928 by the middle of the twentieth century, the extreme social and economic inequality seemed to be disappearing. But, since mid 80-es, until the eve of the financial crisis inequalityhas surged, coming back to the level, typical for the Great Depression

10. Two complementary explanations • The Nobel Prize-winning economist Paul Krugman: there is a link between inequality and financial crises. He also pointed out, it is no accident that both major modern crises – the first beginning in 1929, the second in 2008 – coincided with historic levels of inequality. • Robert Reich, the former US Secretary of Labour • ‘The problem wasn’t that consumers lived beyond their means. It was that their means didn’t keep up with what the growing economy was capable of producing at or near full-employment. A larger and larger share of total income went to the people at the top.’

11. Income inequality, Gini coefficients of 1985 – 2008 Source: OECD, 2011

12. Extreme polarization of global wealth • Oxfam Report, 1.2014 In a new report, the nonprofit reports that just 85 people—the richest of the world’s rich—hold as much wealth as the poorest 3.5 billion. That’s half the world’s population. In other words, the top 0.00000001 percent are worth as much as the bottom 50 percent combined. The top 1 percent, meanwhile, control nearly half the world’s wealth, or 65 times as much as the world’s less-fortunate half.

13. Unequal countries suffer more!

14. Inequality in the EU: still high, but declining slowly (Is that true?) • Continental Europe did not deregulate as much, and preferred to seek growth in greater economic integration. But the price for protecting workers and firms was slower growth and higher unemployment. And, while inequality did not increase as much as in the US, job prospects were terrible for the young and unemployed, who were left out of the protected system. • http://www.project-syndicate.org/commentary/is-inequality-inhibiting-growth- • The subsequent euro-crisis, which was triggered primarily by the EU’s disastrous reaction to Greece’s unexpectedly high debts, stopped the economic recovery that started to emerge in 2010 dead in its tracks, especially for the GIPS countries (Greece, Ireland, Portugal and Spain), which at first had not been so hard hit . In contrast to the generally even poorer new member states from central and eastern Europe they were unable to return to growth because of the implementation of drastic austerity policies. • The future development of inequality and cohesion in the EU will depend on the extent to which the east and the south-east continue to grow and the euro-crisis countries emerge from the pit of austerity. Given the rising inequality within Greece and Spain, rich households in those countries will have to contribute to this. • ----------------------- • Crisis, Austerity and Cohesion, Europe‘s Stagnating Inequality • MICHAEL DAUDERSTÄDT AND CEMKELTEK , FES,April 2014

15. Inequalities in EU member states

16. Poverty in EU member states (Eurostat)

17. The rich, the poor and BulgariaCan money buy you happiness ? There are data on the effect of income on well-beingalmost everywhere in the world. In some countries (Haiti, South Africa, Iraq, Bulgaria and Russia, for instance) the correlation is closerthan in others (like Denmark, Britain, Us etc.,) but it is visible everywhere.

18. WHY INEQUALITY KEEPS RISING ? • The challenges are clear, but it is less obvious what has caused such inequality and what can be done about it – and what polices are needed. The single most important driver has been greater inequality in wages and salaries. This is not surprising: earnings account for about three-quarters of total household incomes among the working age population in OECD countries in most cases. -The earnings of the richest 10% of employees have taken off rapidly, relative to the poorest 10% in most cases. -The largest gains were reaped by the top 1% and in some countries by an even smaller group: the top 0.1% of earners. New data for the United States, for example, show that the share of after-tax household income for the top 1% more than doubled, from nearly 8% in 1979 to 17% 2007. Over the same period, the share of the bottom 20% of the population fell from 7% to 5%. • (Source: OЕCD,2011)

19. Part tree Critical concepts (still lack of alternatives)

20. Divided We Stand(OЕCD,2011) Concerns of growing income inequality loom large in public debate and policy discussion. Indeed,in most OECD countries and many emerging economies, the gap between rich and poor has widenedover the past decades.This occurred even when countries were going through a period of sustainedeconomic growth prior to theGreat Recession. Today, the economic crisis is putting additionalpressure on the distribution of incomes.Greater inequality raises economic, political and ethicalchallenges as it risks leaving a growing number of peoplebehind in an ever-changing economy.

21. EU : first responses

22. Widespread criticismEU Lisbon strategy: the big failure • 10 years after the launch of the Lisbon strategy not only poverty is eradicated, but it's not even decreased: - Officially in 2008 (before the financial crisis) it concerns 84 million people, an average of17% of the population (nearly 20% in the UK, over 20% in Bulgaria and Romania), - Differences in wages in the EU are such that mobility is possible only in one direction - from countries with very low wages to others. This reality creates a common social dumping, competition and tension between workers against migrants. Minimum wage in Bulgaria is 13 times lower than in Luxembourg - € 123 against € 1,642!) - Even in Germany 10% of people own more than 60% of private goods, while 70% of the poorestpeople have 9%. Conclusion: a serious failure of the entire European Union and the Member States in combating poverty and inequality.

23. Income inequality as a cause ofthe Great Recession? • Is there a link between rising inequality and the “Great Recession”? • The explanation is straightforward: As the benefits of rising aggregate income over the past decades were confined to a rather small group of households at the top of the income distribution, the consumption of the lower and middle income groups was largely financed through rising credit rather than rising incomes. This process was facilitated by government action, both directly through credit promotion policies and indirectly through the deregulation of the financial sector. But with the downturn in the housing market and the sub-prime mortgage crisis starting in 2007, the over indebtedness of the U.S. personal sector became apparent and the debt financed private demand expansion came to an end.

24. Intermediate conclusion Europe, more than the rest of the world, has entered a vicious cycle, in which inequality makes the crisis harder, and the crisis in turn has unequal effects on different social and income groups, therefore further deepening inequality and increasing the fragility of the economy.

25. Part four Global crisis and inequality: two turning points > Richard Wilkinson & Kate Pickett > Thomas Piketty

26. First turning point:Most social problems are worse in more unequal societies and that inequality lies at their root

27. What the book says? • The authors, Richard Wilkinson and Kate Pickett, argue that most of the important health and social problems of the rich world are more common in unequal societies. • Using data from 23 rich countries and 50 US states, they found problems are anything from three to 10 times as common in more unequal societies. • The Scandinavian countries and Japan are at one end of the scale as the most equal, while the US, UK and Australia are at the other.

28. The second turning pointPiketty provides an explanation of rising inequality based on increases in the gap between the marginal product of capital, which determinesthe rate of profit (r), and the rate of growth (g). Because capital ownership is so concentrated, a higher profit rate or slower growth rate increases inequality as the incomes of the wealthy grow faster than the overall economyPiketty pored through 200–300 years of the economic history of the largest capitalist economies—principally the United States, Britain, France, Canada, Germany, Sweden and Japan. Since the rich own most of the re-investable capital, their wealth accumulates faster than the wealth of the vast majority of people whose income depends on wages and salaries.

29. There is no problem with inequality per se • Thomas Piketty’s Capital in the Twenty-First Century In actual fact, up to a point inequality is fine and perhaps even usefulwith respect to innovation and growth. The problem is when inequality becomes so extreme that it no longer becomes useful for growth. When inequality reaches a certain point it often leads to the perpetuation of inequality over time across generations, as well as to a lack of mobility within society. Moreover, extreme inequality can be problematic for democratic institutions because it has the potential to lead toextremely unequal access to political power and the ability for citizens to make their voice heard.

30. The main contribution of Tomas Piketty • Jeff Faux, The Nation • “Contrary to what we’re taught in Economics 101, markets appear to have no self-correcting mechanism that can halt the worsening misdistribution of wealth. If allowed to go unchecked, a tiny number of capitalists will own just about everything, with social consequences that Piketty sees as “potentially terrifying.” • We have already returned to the levels of income inequality of the 1920s, and the concentration of wealth is heading toward the ratios of the 1890s. The social relations of the future, writes Piketty could resemble Jane Austen’s world, in which a tiny group of the wealthy employed vast armies of poorly paid servants. • Piketty is certainly not the first economist to criticize inherited wealth. And the idea that capitalism is unfair will not shock most people who work for a living. But Piketty’s credentials and exhaustive attention to statistical detail make him harder for the pundits and policy elites that protect the plutocracy to dismiss”.

31. 'Inequality Is the Root of Social Evil' • THE WASHINGTON POST, Nov. 26, 2013   Pope Francis denounces ‘trickle-down’ economic theories in sharp criticism of inequality   • The Pope Tweeted 'Inequality Is the Root of Social Evil! • As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems. Inequality is the root of social ills. • What did Francis say? He condemned the “economy of exclusion,” according to the Associated Press. He called for “worldwide ethical mobilization” with the poor. He cited “the legitimate redistribution of economic benefits by the state, as well as indispensable cooperation between the private sector and civil society” as ways to combat poverty. “Francis urged the U.N. to promote development goals that attack the root causes of poverty and hunger, protect the environment and ensure dignified labor for all,”

32. An international student call for pluralism in economics • It is not only the world economy that is in crisis. The teaching of economics is in crisis too, and this crisis has consequences far beyond the university walls. What is taught shapes the minds of the next generation of policymakers, and therefore shapes the societies we live in. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. This will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated. Change will be difficult - it always is. But it is already happening. Indeed, students across the world have already started creating change step by step. - We have filled lecture theatres in weekly lectures by invited speakers on topics not in the curriculum; - we have organised reading groups, workshops, conferences; -we have analysed current syllabuses and drafted alternative programs; -we have started teaching ourselves and others the new courses we would like to be taught. - We have founded university groups and built networks both nationally and internationally.

33. Part five Alternative solutions (variety of approaches)

34. TOWARDS POST WASHINGTON CONSENSUS • J. E. Stiglitz : Some elements of a post-Washington consensus: “One size fits all policies are doomed to failure. Policies that work in one country may not work in others. Indeed, even as the contrast between the success of the East Asian economies—which did not follow the Washington consensus—and those that did becomes increasingly clear, there remains the question, to what extent can the policies which worked so well there be transferred to other countries” Source: Paper presented at a conference in Barcelona in September 2004, “From the Washington Consensus towards a new Global Governance”. • DaniRodrik: Goodbye Washington Consensus, Hello Washington Confusion? “ Proponents and critics alike agree that the policies spawned by the Washington Consensus have not produced the desired results…Sorting intelligently among these diverse perspectives requires an explicitly diagnostic approach that recognizes that the binding constraints on growth differ from setting to setting”. Source:Journal of Economic Literature, Volume 44, Number 4, December 2006, pp. 973-987(15)

35. IFI’s: changing policies – in words! THE WORLD BANK GROUP GOALS ”END EXTREME POVERTY AND PROMOTE SHARED PROSPERITY” Ambitious goal: Promote shared prosperity: foster income growth of the bottom 40 percent of the population in every country. Small policy shift: Our shared prosperity indicator implies a direct focus on the income of the less well-off, as opposed to the common practice of focusing only on growth of GDP per capita and implicitly relying on the “trickle down” impact of growth on the bottom of the distribution. IMF REPORT Anti-poverty charity Oxfam welcomed the report, saying it shows "extreme inequality is damaging not only because it is morally unacceptable, but it's bad economics".It added: "The IMF has debunked the old myth that redistribution is bad for growth and demolished the case for austerity. That redistribution efforts -essential to fight inequality- are good for growth is a welcome finding. Low tax and low public spending are clearly not the route to prosperity.“ *** • In reality: Business as usual - IMF approach in Ukraine (Back to the 90-es) “The policies we have in place now have served us well, but the issues our clients face have changed (!!!) over the last 20 years,” said Kyle Peters, the WB vice president Back to the old dogma: shared prosperity, understood in this way, is not an agenda of redistributing an economic pie of a fixed size. Rather, it means expanding the size of the pie continuously and sharing it in such a way that the welfare of those at the lower end of the income distribution rises as quickly as possible

36. Community Consultation on the Proposed UN Development Goals for 2015-2030 Seven Crosscutting Themes: • Peace • Inequality • Climate Change • Cities • Young People • Girls and Women • Sustainable Consumption and Production Patterns

37. How can inequality be reduced?Possible approach • Attempted solutions that focus only on individual behaviour are doomed to at least partial failure – they do not change the circumstances that are behind the problems • Policy Options: some suggestions • 1. Decreasing the wage gap Introducing low pay ratios Paying a living wage Restricting top pay rates Promoting trade union and employment rights • 2. Reforming the tax system Increasing inheritance and property tax Introducing more progressive taxation policies Reducing tax relief on pensions contributions for the highest earners Cracking down on those operating through tax havens to eliminate tax evasion and reduce tax avoidance. • 3. Improving Public Services • Important: Income inequality arises first and foremost in the workplace and it is there that the remedies must start

38. Other alternative approaches • T. Piketty While education is tremendously important, sometimes it’s not sufficient in isolation. In order to prevent the top income groups and top wealth groups from effectively seceding from the rest of the distribution and growing much faster than the rest of society, you also need progressive taxation of income and progressive taxation of wealth – both inherited and annual wealth. Otherwise there is no natural mechanism to prevent the kind of extreme concentration of income and wealth that we’ve seen in the past from happening again. • J. Galbraith If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks.

39. Part six Political reflections (how change could happen?)

40. Failed/old modelEaston’s system model of political life

41. Fear of protests: why some politicians react? “The economic crisis has added urgency to deal with the policy issues related to inequality. The social compact is starting to unravel in many countries. Young people who see no future for themselves feel increasingly disenfranchised. They have now been joined by protesters who believe that they are bearing the brunt of a crisis for which they have no responsibility, while people on high incomes appear to have been spared. From Spain to Israel, from Wall Street to Syntagma Square, popular discontent is spreading rapidly. Due to the crisis, uncertainty and inequality-related issues have reached the middle classes in many societies”. • Divided We Stand, WHY INEQUALITY KEEPS RISING, (OЕCD,2011)

42. Popular discontent is spreading rapidly.

43. Toward a new strategy(tree phases of change)

44. One positive example: Progressive economy forum – 2014An increasing concentration of income andwealth in the hands of the few poses seriouschallenges to the foundations of well-functioningdemocracies as economic power begets politicalpower and influence.www.progressiveeconomy.euMARCH 2014 - Issue n°2

45. An international student call • Change must come from many places. So now we invite you - students, economists, and non-economists - to join us and create the critical mass needed for change. • Show your support and connect with our growing networks.

46. The end Thanks for your attention! Any questions…