Governance failures, poly-crisis highlight limits of global economic models

The global economy has been shaken by the breakdown of global governance. The UN is unable to prevent the ongoing genocide in Palestine and stop wars that have broken out in Europe, West Asia, and Africa. Global coordination of finance and trade has ended: Control of the dollar has given the US control of the global financial system. Climate change, a global problem, has become ungovernable. Demographic changes are another global problem requiring new solutions, as I will explain later. All these systemic problems must be solved simultaneously.

 

Daron Acemoglu, Simon Johnson, and James Robinson (AJR) have won the 2024 Nobel Prize in economics for their research on how institutions shape economic prosperity. Others have criticised AJR in Business Standard and other journals for their Western colonial bias. Less than 10 per cent of the global population lives in the G7, the former colonial powers. Voices of the rest — in G20+ and BRICS+ — demand to be heard. Other fundamental problems with AJR are, firstly, that ideas and institutions that guided progress in the past, in a different context, are not likely to work now. Secondly, their overall measure of progress is economic growth, which is an incomplete measure of the health of a society and its natural environment. In an economist’s calculus, institutional arrangements, such as the concentration of property rights to increase economic growth, are better than other institutions that enable equitable and sustainable use of resources but may dampen gross domestic product (GDP) growth.

 

AJR’s model examines the structures of economic and political institutions. Changes in the structures of social institutions, such as families and local communities, are neglected because current economic science prioritises the economy over society and nature. In economics so far, nature was a resource for economic growth and a dump for economic waste; human resources should be taken from families into factories to increase economic growth; and mothers from their children to serve in the economic workforce. With this approach to progress, the economy does grow but families and communities suffer.

 

A smaller population in a larger economy improves per capita economic productivity and per capita income. The movement of women into the money-earning workforce has increased GDP and  helped women no doubt. It has also contributed to the reduction in birth rates, which has changed demographics. Economic progress, along with improved nutrition and medical advances, has increased longevity in all countries, including poorer ones. Thereby, demographics have changed everywhere. Rich countries have aging populations: Too few younger people to earn and more older people to support. Their governments are now trying to induce women to have more children, but social attitudes have changed too much for this to be effective.

 

The problem in developing countries, such as India, with large numbers of youth that should give them a demographic dividend is they are unable to provide decent income-earning opportunities for young people. Technological advances have enabled enterprises to reduce employment and wage costs, and all enterprises, even in the public sector, are encouraged to use technology to improve their manpower productivity. On one hand, these countries have the human resources they need. On the other, enterprises are discouraged from employing them on their own rolls. Unemployed and underemployed youth are becoming a problem in developing countries.

 

Rich countries need more workers, while poorer countries have an excess. Migration from poorer to richer countries can be a global solution if rich countries admit more migrants. They are unwilling to do so. The pattern of their own economic growth, which poorer countries are expected to follow, has created societal problems for the rich. Populist movements are rising from both the Left and Right, driven by citizens who feel they have been ignored by the elite who make economic policies. The political Middle can muddle along with its economics because the Left and Right have different visions of a good society and cannot come together politically. Traditional identities matter more for the Right; for the Left, liberty for individual citizens to follow whatever customs they want. 

 

The “poly-crisis” the world is facing is a complex, multi-faceted, systems problem. Simplifying complexity by ignoring integral parts of a complex system, which specialists in their sciences, including economists, tend to do, can produce harmful solutions for the health of the system. Fixes to one part can backfire in other parts. Social and environmental conditions are not externalities to the economy. They are essential to its sustenance. The economy must serve society, rather than society being distorted for economic growth.

 

Economics must move out of the mathematical measurement boxes in which it has entrapped itself. Three concepts economists should reconsider are:

 

1. The meaning of “work” and the measurement of its value. Economists project that a “care-giving economy” will grow as populations age. Is the work mothers do to care for their children not work? How should they be compensated for the time they spend on this? As populations age, older persons will require more care. Who will provide this care? Who will pay for it? How will governments be able to provide this care when their own resources are strained with fewer young people to tax, with pressures to reduce taxes and balance their budgets?

 

2. The measurement of “productivity”. The commonly used measure of productivity is output per person in an enterprise and country. Therefore, the intellectually lazier method of improving productivity is to employ fewer people in an enterprise and have a smaller population in a country. A new measure is required — one that considers human beings not as a resource, placed in the denominator of the productivity calculation. Instead, it would put humans in the numerator as beneficiaries, and put investments and public policies in the denominator of the productivity calculation, as inputs for producing benefits for human beings. This will require innovations in economic models.

 

3. Scientific methods must change for research of complex social systems. Don’t count the poor and older persons as numbers in projections of demographics and economic growth. Give them dignity. Listen to them; they are not numbers. Their insights could make the world a better place for them and everyone, leaving no one behind.

 

The author is chairman, HelpAge International