The crisis of democratic capitalism Martin Wolf, Chief Economics Commentator, Financial Times WU-Lecture on Economics 19 th January 2017 Vienna University of Economics and Business
The crisis of democratic capitalism [H]istory teaches us two important things about levelling. One is that radical policy interventions occur in times of crisis. The second lesson is even more straightforward: policymaking can take us only so far. Walter Scheidel 2
The crisis of democratic capitalism [D]emocracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full. Dani Rodrik 3
The crisis of democratic capitalism Democracy and global capitalism The erosion of trust Where we go now 4
1. Democracy and global capitalism We tend to take for granted the symbiosis between democracy and capitalism (the market economy) There are reasons for believing that this symbiosis is a natural one: Historically: The rise of capitalism was associated with the elimination of serfdom and slavery and by ultimately successful movements for extensions of the franchise Behind this pressure were widely-shared prosperity, the spread of education, emergence of organised labour and the mobilisation of the adult population (male and female) for war Also rising prosperity created the opportunity for positive-sum politics 5
1. Democracy and global capitalism Ideologically: The underlying idea of capitalism that of that of the people engaging in truck, barter and exchange under the protection of the law implies that the choices of individuals have an inherent value. The underlying idea of democratic citizenship that of individuals engaged in collective decision-making - also rests on the assumption that individual choices have value, this time in making public choices. 6
1. Democracy and global capitalism Yet there are also both ideological and historical conflicts between democracy and capitalism? Democracy rests on an egalitarian ideal (one person one vote); capitalism rests on an inegalitarian ideal (one pound, one vote). Democracy is the domain of voice - capitalism is the domain of exit. High inequality risk turning democracy into plutocracy. If either democracy or the market economy are seen to fail, illiberal democracy emerges. Globalisation also - and crucially - erodes citizenship rent. 7
1. Democracy and global capitalism RISE, FALL AND RISE OF DEMOCRACY Number of countries 100 90 80 70 60 50 40 30 20 10 Global Trends in Governance (Source: Center for Systemic Peace, Polity IV dataset) 0 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Democracies Anocracies Autocracies 8
1. Democracy and global capitalism RISE FALL AND RISE OF DEMOCRACY 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Global Trends in Governance (proportion of countries) (Source: Center for Systemic Peace, Polity IV dataset) 0% 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Democracies Anocracies Autocracies 9
1. Democracy and global capitalism TRADE, WAR AND THE RISE OF DEMOCRACY Trade over World GDP at Purchasing Power Parity (per cent) 70% 60% 50% 40% 30% 20% 10% GLOBALISATION AND DEMOCRACY (Source: "Our World in Data" and Center for Systemic Peace) 0% 0% 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Klasing and Milionis (2014) Penn World Tables Version 8.1 Democratisation (Polity IV) 70% 60% 50% 40% 30% 20% 10% Proportion of democracies in world states (per cent) 10
1. Democracy and global capitalism Yet, despite the recent rise, the world is now in a democratic recession : According to Freedom House 2017 Annual Report, A total of 67 countries suffered net declines in political rights and civil liberties in 2016, compared with 36 that registered gains. This marked the 11 th consecutive year in which declines outnumbered improvements. Moreover, in 2016 it was established democracies countries rated Free in the report s ranking system that dominated the list of countries suffering setbacks. According to Foa and Mounck, Over the last three decades, trust in political institutions such as parliaments or the courts has precipitously declined across the established democracies of North America and Western Europe. Trust has been lost in the democratic (political) and capitalist (economic) systems 11
2. Erosion of trust It is impossible to separate cultural and social from economic factors: Citizenship is about identity, but it is also an economically valuable asset Changing gender roles have economic as well as cultural causes and consequences De-industrialisation has been an economic process, but one with deep cultural and social consequences Immigration, is also an economic process, but it, too, has cultural and social consequences Thus, it is right to look at economic factors This discussion focuses on members of the Group of Seven leading high-income countries 12
2. Erosion of trust Economic causes of loss of trust: Mass immigration Globalisation De-industrialisation Inequality Unemployment The crisis Post-crisis austerity Media 13
2.1. Erosion of trust: immigration The age of globalisation has been an age of mass migration, as was also true in the late-19 th century. Immigration reinforces the effects of globalisation of trade and capital. But it adds a poerful cultural dimension to these forces. In the context of the democratic state, immigration also raises questions about who we are. Citizens want to decide who can live with them or become citizens themselves. 14
2.1. Erosion of trust: immigration IMMIGRATION 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 17% 20% FOREIGN-BORN POPULATION (as per cent of total)(source: OECD) 12% 13% 11% 16% 8% 12% 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2000 2013 2001 2013 2000 2013 Canada Germany Sweden UK US France Italy Spain 11% 13% 10% 12% 4% 9% 5% 13% 15
2.2. Erosion of trust: globalisation One element of the hollowing out of sovereignty is supra-national decisionmaking. Another is the increasing effectiveness of exit by owners of capital and labour. This may collapse state revenue and ability to respond to pressures. (See Richard Baldwin, The Great Convergence.) Yet another element is the rise of supra-national business entities that no longer belong to a country. National capitalism has morphed into global capitalism. This has undermined the economic value of citizenship citzenship rent. 16
2.2. Erosion of trust: globalisation GLOBALISATION 35 RISE OF GLOBAL VALUE CHAINS (foreign value added share of gross exports, 1995 to 2011, per cent)(oecd) 30 25 20 15 10 5 0 1995 2011 17
2.3. Erosion of trust: de-industrialisation DE-INDUSTRIALISATION SHARE OF EMPLOYMENT IN MANUFACTURING 40% 35% 30% 25% 20% 15% 10% 5% 0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 US Germany 18
2.4. Erosion of trust: inequality A second and related challenge is rising inequality While this is not a universal phenomenon, it is quite general Inequality may well be a bad in itself But, above all, has political implications, since the possession of economic resources is always converted into political power 19
2.4. Erosion of trust: inequality INEQUALITY 0.6 INCOME INEQUALITY 2010 (Gini Coefficient) (Source: Luxembourg Income Study) 0.5 0.4 0.3 0.2 0.1 0 US Italy Canada Spain France UK Germany Market Income Disposable Income Difference 20
2.4. Erosion of trust: inequality 55% 50% 45% 40% 35% 30% INEQUALITY INCOME SHARES OF TOP 10 PER CENT (Wealth & Income Database) 25% 1913 1923 1933 1943 1953 1963 1973 1983 1993 2003 2013 US UK Japan France Germany 21
2.5. Erosion of trust: employment JOBLESSNESS 14 12 10 8 6 4 2 0 UNEMPLOYMENT RATES US Germany France Italy UK Eurozone 22
2.5. Erosion of trust: employment JOBLESSNESS 88% PARTICIPATION RATES FOR 25-54 YEAR OLDS 2015 (OECD) 88% 88% 86% 85% 86% 84% 81% 82% 83% 80% 77% 76% 72% 68% Italy US All OECD G7 Japan UK Canada Germany France 23
2.6. Erosion of trust: crises The age of market liberalisation has been an age of devastating financial crises The last ones, which began in 2007, imposed very large economic costs: elevated unemployment, a permanent decline in levels and rates of growth of GDP, and a huge rise in public debt But the crisis also imposed large political costs: conflict over how the losses should be allocated; and, above all, loss of confidence in elites businesses, politicians and economists 24
2.6. Erosion of trust: crisis DIVERGENT REAL INCOMES GDP PER HEAD AT PPP (TEDI database) 110.0 105.0 100.0 95.0 90.0 85.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 France Germany Italy Spain United Kingdom Canada United States Japan 25
2.7. Erosion of trust: crisis THE YEARS OF LIVING STAGNANTLY PROPORTION OF HOUSEHOLDS WITH FLAT OR FALLING REAL INCOMES FROM WAGES AND CAPITAL 2005-14 (Source McKinsey) 120% 100% 80% 97% 81% 70% 70% 63% 65% 60% 40% 20% 0% 20% Italy US UK Netherlands France Sweden Weighted average 26
2.8. Erosion of trust: austerity AUSTERITY 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0 STRUCTURAL FISCAL DEFICITS (per cent of GDP) (IMF) 2.0 2.5 3.0 3.7 3.7 Canada Italy Germany Japan France UK US 2010 2016 Tightening 4.4 5.7 27
2.9. Erosion of trust: media In the media, old problems are reinforced by new ones The old problem is concentrated ownership and the power of a dominant plutocracy The new problem is technology, which, in making the dissemination of information costless The result is the costless dissemination of non-information alternative facts aka lies Or the media equivalent of Gresham s law: bad information crowds out good information 28
2.10. Loss of trust: authoritarian capitalism From the Second World War to the end of the Cold War, successful capitalist economies were also democracies The rise of China appears to change this China, it is increasingly clear, is not going to be democratic. But it is apparently trying to be capitalist To some extent, its success and money is providing a pole of attraction for others Also important is the rise of illiberal democracy in Russia, Turkey, Poland, Hungary and now the US 29
2. Erosion of trust: conclusion ADDING UP SOURCES OF DECLINING TRUST Exposed to globalisation (supply chains) Rise of foreign born in population High inequality Rising inequality Big financial crisis Weak postcrisis recovery High unemployment Discourage d primeage workers Total Italy 3 3 2 2 3 3 3 19 UK 2 3 3 2 3 2 1 2 18 US 1 2 3 3 3 2 1 3 18 Canada 3 3 2 2 1 1 1 2 15 France 3 2 1 1 2 2 3 1 15 Japan 2 1 2 3 1 2 1 2 14 Germany 3 2 1 2 1 1 1 11 30
3. Where we go now Yet the world has been brought together by technology and the impact of humanity has radically increased This necessitates an ability to deliver global public goods: financial stability and open trade; security; and protection of the environment No state can deliver these things on its own, not even a superpower We have to create supra-national regimes These are technocratic or expert regimes Creating such regimes, while necessary, clashes with democratic sovereignty 31
3. Where we go now Our politics have become fragile: anything can happen Populism is an important political result Populism is not the same as the idea that the political and economic elites should pay more attention to the interests of the majority Such ideas make sense. This legitimate complaint creates a true problem for globalised societies All populists, be they of the left or right: Distrust established institutions 32
3. Rise of populism Distrust institutions that check the will of the people : courts, established media and the bureaucracy Reject experts Embrace conspiracy theories Suspect free markets, free trade and capitalism Are hostile to those not part of the people Share a desire for direct action, often including violence The elites are seen as corrupt and treacherous: They are, therefore, politically illegitimate And so are the institutions they control 33
3. Where we go now In sum, democratic capitalism is now subject to huge stresses and constraints How might this end? Collapse of democracy into plutocracy or outright authoritarianism Closure at the borders and national capitalism Collapse of democracy and closure at borders War Co-operation: Deeper co-operation on taxation, regulation and so a new democratic synthesis Co-operation across all jurisdictions 34