Welfarenomics Road to Sustainable Capitalism & Welfare State

1. Welfarenomics Road to Sustainable Capitalism & Welfare State Sang-MokSuh Distinguished Chair Professor, Inje University For Presentation at the Asia-Pacific Research Center Stanford University October 4, 2013

2. Contents • Welfarenomics: Basic Concept & Structure • Road to Sustainable Capitalism • Road to Sustainable Social Welfare

3. 1. Welfarenomics:Basic Concept & Structure “Division of labor has caused a greater increase in production than any other factor. This diversification is greatest for nations with more industry and improvement, and is responsible for universal opulence in those countries.” Adam Smith, The Wealth of Nations, 1776 “Humans have a natural tendency to care about the well-being of othersfor no other reason than the pleasure one gets from seeing them happy.” Adam Smith, The Theory of Moral Sentiments, 1759

4. Complementary Nature of Welfare & Economics • Social welfare has evolved as means of solving social problems, arising from industrialization, urbanization and business downturn◦ Settlement Movement in the late 19th century(Toynbee Hall) to tackle urban poverty◦ Social Insurance by Bismarck in the 1880’s to avoid labor unrest ◦ Beverage Report(1943) & welfare state(since 1945) → Protected capitalism from communism◦ Gramin Bank by Muhammad Yunus(1983) to help the rural poor • Social welfare has enabled capitalism to evolve over time to a better form◦ Without social welfare, capitalism would have been displaced by socialism or communism • Economic growth has provided social welfare with necessary financial resources → growth is a prerequisite for welfare improvement → social safety net helps smooth functioning of markets → virtuous circle of growth and welfare • Social welfare & economics are the opposite sides of a same coin

5. Opposing Views on Welfare & Economics • Pendulum-like movement of growth & equity (or market & gov’t)◦ Kalestsky(2010), 『Capitalism 4.0』, Bloomsbury◦ Capitalism 1.0(Adam Smith): Relied primarily on growth & market◦ Capitalism 2.0(Keynes & Beverage): Emphasized equity & gov’t intervention◦ Capitalism 3.0(Hayek & Friedman): Criticized too much gov’t intervention and emphasized market◦ Capitalism 4.0: More balanced & pragmatic approach towards market & gov’t • Positions on ‘market versus gov’t’ are the basic criteria for determining ‘conservatives versus liberals’◦ As politics enters into the picture, the debate gets more heated and the division gets deeper • Thus, there is a growing need for revising the model of European social welfare state as well as the model of neo-liberal market economy

6. Korean Capitalism in Chopping Waves • Rapid decline in economic growth rate◦ 10.3% during Park regime, 10.0% during Chun regime◦ 8.7% during Roh T. W. regime, 7.4% during Kim Y. S. regime◦ 5.0% during Kim D. J. regime, 4.3% during Roh M. H. regime◦ 2.9% during Lee regime, less than 1% during the last 2 years • Worsening inequality and polarization◦ Until 1990 Korea achieved ‘growth with equity’◦ Inequality is worsening since 1990 , particularly after 1997◦ Gini ratio increased from 0.250 in 1995 to 0.310 in 2012◦ Middle class declined from 75.4% in 1990 to 67.5% in 2010◦ Relative poverty increased from 7% in early 1990’s to 12.1% in 2012 • Levels of social stress are also rising◦ % of happy people declined from 77.9% in 1992 to 70.3% in 2010◦ Only 27.7% of people think ‘reward process in Korea is just’◦ Korea has the highest suicide rate and lowest fertility rate

7. Age of Integration & Fusion • Evolution of learning & science◦ Before the 16th century: science, mathematics & philosophy integrated as natural philosophy(Greek scholars, Leonardo da Vinci)◦ Since the 16th century, specialized fields have developed as each field develops its own unique structure of knowledge◦ Since the late 20th century, attempts have been made to integrate various fields of knowledge & science • Examples of integration & fusion◦ Mechatronics(mechanics + electronics)◦ Bio-engineering(biology + engineering): unveils mystery of life & genes◦ Design management: creative management(IDEO)◦ MIT Media Lab: technologies for humans◦ US Science Foundation: NBIC(Nano + Bio + Information Science + Cognitive Science)◦ CTEK(Converting Technologies for the European Knowledge Society): engineering + humanities & social sciences • Why not ‘welfarenomics’◦ integration of welfare & economics

8. Theories on Cooperation • Co-opetition: Brandenburger & Nalebuff(1996), 『Co-opetition』, Currency/ Doubleday◦ In the current business world, companies benefit more through cooperation instead of individualistic action◦ Cooperation contributes to market expansion but distribution of benefits is determined in the competition process • Network theory: Burt(1992), 『Structural Holes & Good Ideas』, HarvardNye(2004), 『Soft Power』, Basic BooksRifkin(2011), 『Third Industrial Revolution』, Palgrave◦ Nodes within network play their roles through competition & cooperation and the value of network is proportional to square of the number of nodes◦ Silicon Valley as a role model for the networked economy • Stakeholder theory: Freeman(1984), 『Strategic Management: A Stakeholder Approach』, Pitman(originated from SRI in the early 1960’s)◦ In the process of business strategy-making the role of stakeholders is rising, as compared to that of shareholders◦ From the long-term perspective, companies benefit more by taking a stakeholders’ perspective rather than shareholders’ perspective

9. Basic Concept of ‘Welfarenomics’ • Modification of the neo-liberal market economy model in order to build a sustainable capitalistic system◦ Strengthening the role of government in strategy formulation & implementation◦ Enhancing the social value of business activities through the ‘CSV(creating shared value) management’◦ Forming an ecosystem for mutualism by activating civil society & promoting civility • Modification of the existing European welfare state model in order to build a sustainable welfare state◦ Building a foundation for the ‘welfare to work’ system through developing customized ‘welfare-employment delivery system’ and job training & placement program for the under-privileged ◦ Forming a habitat for social innovation through developing social finance market & social entrepreneurs◦ Applying management principles & techniques to the field of social welfare

10. Structure of Welfarenomics

11. Structure of Welfarenomics Sustainable Welfare Sustainable Economy Social Welfare Economy

12. Six Principles of Welfarenomics • Principle of freedom & democracy◦ John Locke, Two Treatises on Government 1689 • Principle of competition & division of labor◦ Adam Smith, The Wealth of Nations, 1776 • Principle of creativity & innovation◦ Joseph Schumpeter, Capitalism, Socialism & Democracy, 1942 • Principle of hard-working & thrifty◦ Max Weber, The Protestant Ethics & the Spirit of Capitalism, 1904 • Principle of networking & ecosystem◦ Jeremy Rifkin, The Empathic Civilization, 2009 • Principle of sympathy & servant leadership◦ Adam Smith, The Theory on Moral Sentiments, 1759◦ Robert Greenleaf, The Servant Leadership, 1980

13. 2. Road to Sustainable Capitalism “The Capitalistic system is under siege. In recent years business increasingly has been viewed as a major cause of social, environment, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community. Even worse, the more business has begun to embrace corporate responsibility, the more it has been blamed for society’s failures. The legitimacy of business has fallen to levels not seen in recent history. This diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle.” Michael Porter & Mark Kramer, Creating Shared Value, Harvard Business Review, Jan.-Feb. 2011

14. Strengthening the Gov’t Capacity inStrategy Formulation & Implementation • Varieties of capitalism and the role of gov’t◦ Hull & Soskice(2001), 『Varieties of Capitalism』, Oxford ◦ Liberal market economy: US & UK◦ Coordinated market economy: Germany & Japan◦ Gov’t-led market economy: Korea & China • Convergence of capitalism◦ Liberal market economy + some elements of coordinated market economy: Ireland◦ Coordinated marketeconomy + some elements of liberal market economy: Denmark & Netherland • Korean model for welfarenomics◦ Liberal market economy + some elements of gov’t-led market economy

15. Increasing Social Values of Business Activities • Porter & Kramer(2011), “Creating Shared Value”, Harvard Business Review, Jan-Feb • Creating Shared Value(CSV)◦ Firms undertake projects in the areas where economic value and social value intersect ⇒ pursue both economic & social values at the same time • Three methods Develop new products & markets to meet social demands: developing environmentally friendly products Redefine productivity in terms of social values: saving energy in the process of production & distribution Support related projects & improve neighboring environment: supporting farmers and building agricultural infrastructure • Requirements for CSV management◦ Firm conviction by CEO, open thinking for innovation & learning, CSV management system

16. Creating an Ecosystem for Co-evolution • Moore(1996), 『The Death of Competition』, Harper BusinessEtzioni(2001), 『Next: The Road to the Good Society』, Basic Books • Ecological mutualism◦ Species seek mutualism because extinction of the weak can destroy ecological balance • The civil society should play the key role in this process◦ Watchdog ⇒ Observing social norms◦ Advocate ⇒ Raising social issues◦ Service Provider ⇒ Providing social services◦ Expert ⇒ Providing expertise for solving problems◦ Educator ⇒ Providing education & training for improving ability◦ Incubator ⇒ Incubating long-term ability for problem-solving◦ Spokesman ⇒ Speaking for the weak & under-privileged◦ Rights’ Keeper ⇒ Keeping the civil rights ◦ Supporter for Collective Responsibility ⇒ Supporting basic values◦ Standard Setter ⇒ Setting behavior standard for markets and gov’t • Cultivating civility through public education

17. 3. Road to Sustainable Welfare State “The Overall aim of third way politics should be to help citizens pilot theirway through the major revolutions of our times: globalization, transformations in personal life and our relationship to nature.” “There is no single agent, group or movement that, as Marx’s proletariat was supposed to do, can carry the hopes of humanity, but there are many points of political engagement which offer good cause for optimism” Anthony Giddens, The Third Way(1998), Beyond Left and Right(1994)

18. Building a Ground for ‘Workfare’ • Giddens(1998), 『The Third Way』, CambridgeLewis & Surrender(2004), 『Welfare State Change』, Oxford • ‘Work is the best welfare’ • Social investment concept: ‘Welfare as an investment for human resources’ • Strengthened conditionality for welfare benefits- Tony Blair’s ‘Welfare to Work Program’: New Deal for the Youth, Handicapped, Long-term Unemployed, etc.- Clinton’s ‘Personal Responsibilities & Work Opportunities Reconciliation Act of 1996 • Need for an effective delivery system to provide welfare-employment services, customized to individual’s needs- New trend towards integrating the welfare & employment branches of the gov’t • Need for active labor market policies- ‘Flexicurity’ policies by Denmark and Netherlands - EITC(Earned Income Tax Credit) by US

19. Nurturing a Habitat for Innovative Welfare • Yunus(2010), 『Building Social Business』, Public AffairsHoresh(2000), 『Social Policy Bond』, iUniversity Press • Social innovation, along with technological innovation, has played a key role for the socio-economic development in recent history◦ Social insurance, labor unions, social enterprises, social finance, social impact bond etc. • To facilitate social innovation, we need◦ Leader who has leadership as well as understanding on various related fields ◦ Financial sponsors, either public agency or private philanthropic institution ◦ Open habitat, promoting active participation in social innovation by citizens and groups • How to build the Silicon Valley for social innovation?◦ Encourage social entrepreneurs as major promoters of social innovation◦ Develop social capital market◦ Introduce SIB(Social Impact Bond) to maximize the social impact of social projects

20. Building a System for Welfare Management • Brandenburg(2012), “Impact Investing’s Three Measurement Tools”, Stanford Social Innovation Oct. 3 • User orientation: convenience & accessibility○ Building information system on welfare○ Constructing effective delivery system • Emphasis on efficiency & effectiveness○ Introduction of evaluation system○ Measurement of social outcome○ Introduction of voucher system for welfare services • Application of various management techniques○ Balanced scorecard○ Strategic mapping○ SWOT analysis • Education on welfare management

21. Basic Structure of Welfare Management