Stakeholder Capitalism

No phenomenon displays this “wealth and health” nexus in America more than COVID-19, which affected those with fewer means much more than others. New York City provides a striking example. In the early weeks of the pandemic, many of the wealthier Manhattanites could seek shelter in an upstate or out-of-state property, get care in a private hospital, or otherwise protect themselves from the virus. Poorer New Yorkers, by contrast, were much more exposed. They were more likely to work and live in at-risk environments, less likely to have adequate health care coverage, and largely unable to physically move elsewhere. As a result, one early study found, “Coronavirus-related hospitalizations and deaths were highest in the Bronx, which has the highest proportion (38.3%) of African Americans and the lowest annual median household income ($38,467) and proportion (20.7%) of residents with at least a bachelor's degree.”82 That pattern repeated itself elsewhere in the United States—and indeed the world.

But despite the global trend of diseases like COVID hitting poorer communities harder, in other advanced economies, health disparities have so far remained much more constrained, and life expectancy continues to rise. This should hardly come as a major surprise, as outside the US virtually all advanced economies have some form of universal health care. Among the 36 member states of the Organization for Economic Co-operation and Development, for example, only Mexico had a lower percentage of people covered than the US, and most countries achieved a 100 percent coverage rate,83 either through public or primary private health insurance.

The global record on social and economic mobility are more mixed. The World Economic Forum's 2020 Global Social Mobility index found that “there are only a handful of nations with the right conditions to foster social mobility” and that “most countries underperform in four areas: fair wages, social protection, working conditions and lifelong learning,” even as achieving higher levels of social mobility is an important part of implementing a stakeholder-based model of capitalism. Specifically, the report said:

Looking at all economies and average income levels, those children who are born into less affluent families typically experience greater barriers to success than their more affluently born counterparts. Furthermore, inequalities are rising even in countries that have experienced rapid growth. In most countries, individuals from certain groups have become historically disadvantaged and poor social mobility perpetuates and exacerbates such inequalities. In turn, these types of inequalities can undermine the cohesiveness of economies and societies.84

Other studies found similar dynamics. A 2018 World Bank report showed that only 12 percent of young adults in regions like Africa and South Asia have more education than their parents—often a prerequisite to climb higher up the socioeconomic ladder.85 Other regions, including East Asia, Latin America, and the Middle East and Northern Africa, did see their average economic mobility improve, according to the report. But it also warned, “While mobility tends to improve as economies get richer, there is nothing inevitable about this process. Rather, as economies develop, mobility is likely to increase if opportunities become more equal, which typically requires higher public investments and better policies.”86In other words: lacking public investments—an increasingly likely reality for budget-strained governments—economic mobility in many countries could get worse, rather than better.

So, what would Simon Kuznets have to say about all these findings, many of which go against his own theory?

We do not need to speculate. According to his colleague at the National Bureau of Economic Research Robert Fogel, Kuznets repeatedly warned that his “allusions to fragmentary data were not evidence but ‘pure guesswork.’”87 Kuznets, in other words, was all too well aware that his findings in the 1950s may have been only valid in very specific circumstances, which indeed this golden era of capitalism turned out to be. Fogel also noted that even at the time, Kuznets found “factors that arose during the course of growth, and that created pressures both to increase and to reduce inequality.”

Branko Milanovic, a former lead economist at the World Bank, recently tried to build a new Kuznets curve in light of these insights. Kuznets notably pointed to technology as a factor that could have a positive or a negative effect on inequality. Milanovic derived from it an inequality curve that seems much more complete, given the evolution we've seen in recent decades. He calls it the Kuznets Wave, and it shows that inequality fluctuates, as waves of technological progress and policy responses to them take hold (see Figure 2.5 below).

In this graph, Milanovic's First Technological Revolution roughly equates to the first two Industrial Revolutions, which saw the implementation of trains and steam power, and the internal combustion engine and electricity, respectively. The second technological revolution equates roughly to the Third and Fourth Industrial Revolutions, which brought us the computer and artificial intelligence, among other innovations. His point is clear: technology has a tendency to increase inequality, but as we adapt to it and take measures to deal with the inequality it creates, we can achieve a reduction of inequality later. We will come back to this notion in Part II of the book.

Figure 2.5 Expected Pattern of Changes in Inequality versus Income per Capita, Based on State of Technological Revolution

Source: Redrawn from Piketty, Saez, and Zucman (2018), World Inequality Report 2018..

But in spite of Kuznets’ early warnings and Milanovic's more recent work, policymakers around the world went ahead and implemented policies that favored top-line growth over inclusive development and quick technological deployment over more considered technological governance. That was a mistake, because the current times of rapid technological development have a natural tendency to increase inequality. It has therefore become much more important for policymakers to take countermeasures to slow or halt this trend. That we haven't done so constitutes Kuznets’ second curse and implies many people around the world are paying a very high price for the technological progress we have made recently.

The Third Kuznets Curse: The Environment

There is a third and final Kuznets curse, and it has to do with the environment. As the Kuznets curve was gaining traction in the 1960s and 1970s, some people started to worry about externalities caused by the West's high economic growth rates: an increase in pollution, environmental degradation, and depletion of resources. With consumerism taking hold in the West and populations growing quickly globally, one could reasonably ask what toll our socioeconomic system took on our global commons. This was the age of cars and factories laying a thick layer of smoke over cities, the discovery of a growing hole in the protecting ozone layer of the earth's sky, the introduction of nuclear plants and waste, and the widespread use of plastics and other harmful materials such as asbestos in construction.

In a similar vein to Kuznets’ temporary observation on inequality, however, some economists thought there was not all too much to worry about: no sooner had they discovered the environmental pollution had been rising than hopeful signs emerged that it too would go down over time. Indeed, as production methods became more sophisticated, they also became cleaner and more resource efficient. On a per-product basis, environmental harm seemed to follow an environmental Kuznets curve. Give it another few years or decades, the thought went, and this problem, like inequality before it, would solve itself. Unfortunately, that isn't how things turned out.

A Degrading Environment

The final reality we must confront, and perhaps the most devastating, is the continued and increasing degradation of the environment caused by our economic system and the life-threatening risks posed by global warming, extreme weather events, and continued overproduction of waste and pollution.

While most reports on the environment today home in on global warming, that is only a subset of a much larger issue. The economic system we have created is utterly unsustainable, notwithstanding the hopeful signs in environmental Kuznets curves. The World Economic Forum first raised awareness on this emerging problem in 1973. Then, Aurelio Peccei, who was the president of the Club of Rome, a think tank, gave a speech in Davos about his famous study on “The Limits to Growth.” The publication of this study a year earlier had “caused a sensation for calling into question the sustainability of global economic growth.” The authors, who had “examined several scenarios for the global economy,” outlined in Davos “the choices that society had to make to reconcile economic development and environmental constraints.”88

They warned that with the current growth trajectory, there would be a “sudden and serious shortage” of arable land in the next decades.89 They warned that there was only a limited supply of freshwater on earth and that with increasing demand, competition and conflict would arise over who would get access to it.90 And they warned that many natural resources, such as oil and gas, were overused and that they led to exponential rates of pollution.91

But their warnings were to no avail. The worst of the scenarios the Club of Rome laid out did not come true, so much of the message was forgotten. After a lull in the 1970s, economic production has reached record levels almost every single year since, and left an ever-larger ecological footprint. Despite the Club of Rome's inaccuracies about short-term resource depletion, today we can see just how much foresight the Club of Rome had. In 1970, a mere two years before The Limits to Growth was published, humanity's global ecological footprint was still below what the earth could regenerate, albeit only by a small margin. If we had continued to produce and consume the way we did then, we may have stayed in equilibrium, keeping the earth habitable and fertile for many generations to come.

But things took another turn as the global population kept rising. Today, the world has about double the number of people it did in the early 1970s. And with standards of living going up as well, the Global Footprint Network (GFN) calculated92 that by 2020 humanity had used “nature's resource budget” for the entire year by sometime in August, meaning that we overused natural resources during the equivalent of four to five months each year (see Figure 2.6). (The COVID-19 crisis, including the months of mandatory confinement and the halting of many economic activities, did positively affect the “overshoot day,”93 though it certainly wasn't sustainable.) The caveat, as GFN's chief science officer David Lin told us, is that our “ecological footprint” is of course only an accounting measure: there is no way of saying for sure just how detrimental our economic production and consumption processes really are. But it is clear the world's use of natural resources is unsustainable and is exacerbating many other harmful trends, such as global warming. What exactly is our record on this front?

Figure 2.6 “Earth Overshoot Day” Has Been Taking Place on an Earlier Date Almost Each Year since 1970

Source: Redrawn from Global Footprint Network and Biocapacity Accounts 2019, Earth Overshoot Day.

Consider first fossil fuels, which can regenerate only over millions of years. Even though they can only be used once, coal, oil, and natural gas still account for about 85 percent of the world's primary energy consumption94 and two thirds of world's electricity production.95 In fact, their use has nearly doubled about every 20 years in the past century. Despite calls to phase them out, their production even increased in 2018. It is a statistic that unnerved even BP's chief economist Spencer Dale:96 “At a time when society is increasing its demands for an accelerated transition to a low-carbon energy system,” he wrote in his group's 2019 Statistical Review, “the energy data for 2018 paint a worrying picture.”

It is not only fossil fuels. More broadly, over the past five decades, the use of natural resources tripled, according to the UN Environment's International Resource Panel.97 Their extraction and processing have “accelerated” over the last two decades, and “accounts for more than 90 percent of our biodiversity loss and water stress and approximately half of our climate change impacts,” the organization warned.

These trends coincided with one of increased pollution of at least three sorts: water, air, and soil.

Take first the issue of water. UN Water, the agency coordinating the United Nations work on water and sanitation, estimated that globally 2 billion people live in countries experiencing high water stress,98 often due to climate change. But even when water is available, it is often heavily polluted. Globally, the agency said,99 “it is likely that over 80% of wastewater is released to the environment without adequate treatment,” with pollution often happening because of   “intensive agriculture, industrial production, mining and untreated urban runoff and wastewater.” It threatens the access of clean water everywhere from cities to rural areas and poses a great health risk.

Moreover, there is the issue of plastics, whose impact will be felt most dramatically in the coming decades, as the plastic that is currently accumulating in the world's oceans may affect life on land in a myriad of ways. Microplastics have become ubiquitous in the world's water, in part because they take decades to decompose: by current measures, it is estimated we could end up with more plastic than fish in our oceans by 2050.100 The most famous example in popular imagination is the “Great Pacific Garbage Patch” consisting largely of the debris of microplastics in the Pacific Ocean. But the issue is a global one, affecting all of the world's bodies of water.

Second, almost two-thirds of the world's cities also exceed WHO guidelines on air pollution, according to Greenpeace.101 Many of the large metropoles of Asia are so polluted it is unhealthy even to walk outside,102 as many who live or have been there will be able to attest. And third, according to the Food and Agricultural Organization of the UN (FAO),103 soil pollution is a hidden reality all over the world and a direct threat to human health.

This rapid exploitation and pollution also started to wreak havoc on the world's natural ecosystems and threatened to make global warming spin out of control, with major consequences for people in regions hit hard by climatic change and for future generations. Other data also reveal the human impact on the environment.

The UN-sponsored Intergovernmental Platform on Biodiversity and Ecosystems Services (IPBES) concluded in a 2019 report that “nature is declining globally at rates unprecedented in human history,” with species already becoming extinct “at least tens to hundreds of times faster than the average over the past 10 million years.”104 Quoting the research, the Financial Times also wrote that “one million of Earth's estimated 8 million plant and animal species are at risk of extinction.”105

Another specialized UN agency, the Intergovernmental Panel on Climate Change (IPCC), issued a warning late 2018 that the current path of CO2 emissions would also lead to an unstoppable cycle of global warming—with major disruptions for life on earth—if major reductions weren't achieved by 2030. It said, “Pathways limiting global warming to 1.5°C with no or limited overshoot would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems.”106 But hopes for even that narrow path to a limited global warming of 1.5°C had all but evaporated two years later. The World Meteorological Organization, another UN-affiliated institution, in July 2020 said that a 1°C warming would already be a reality in the next five years (2020–2024) and believed there was a one in five chance that warming would already reach 1.5°C in that period.107

There is no one who hasn't experienced at least some of the realities of a changing climate. As I write this, the past two summers have once again been among the hottest on record.108 Even high in the Swiss Alpine town of Zermatt, where I go to walk in summer and where temperatures are usually quite moderate, global warming and extreme weather events are hitting home—literally. The Theodul Glacier is retreating further every year, and when I visited in the summer of 2019, the melting glacier caused flooding in the valley, even though not a drop of rain had fallen in days.109

Faced with these changes down the ages, people have responded with one simple act: they have started moving. Today, the UN Migration Agency IOM warns that “gradual and sudden environmental changes are already resulting in substantial population movements. The number of storms, droughts, and floods has increased threefold over the last 30 years with devastating effects on vulnerable communities, particularly in the developing world.”110 It expects that the total number of climate migrants alone will by 2050 be as great as the total number of international migrants in the world today, at 200 million people.111

Business leaders know environmental risks are rising, as they rank them ever-more prominently in the World Economic Forum's yearly Global Risks report. For the first time in 2020, it said, “Severe threats to our climate account for all of the Global Risks Report's top long-term risks.”112 It pointed to the risks associated with extreme weather events, failure of climate-change mitigation and adaptation, human-made environmental damage, major biodiversity losses, resulting in severely depleted resources, and major natural disasters.

We should not take these risks lightly like we did in the 1970s, especially as the next generation is already looking over our shoulder, wondering what legacy we plan to leave. That would be nothing short of a betrayal of future generations.

Indeed, the dangers posed by global warming have become a major worry for the next generation of youth these past few years, as they start to demand more urgent climate action. Inspired to a large degree by peers such as Swedish school student Greta Thunberg, hundreds of thousands of climate activists have been hitting the streets, giving speeches to whomever would listen and changing their own habits where possible. We understand their concerns and for this reason invited Greta Thunberg to speak at our Annual Meeting in 2019. Thunberg's foremost message was that “our house is on fire”113 and that we should act with an utmost sense of urgency.

We hope we will heed the next generation's call to create a more sustainable economic system with more urgency than in 1973. Since Aurelio Peccei's speech, decades have passed. Since then, we failed to act with sufficient results and have, in doing so, worsened the economic, health, and environmental outlook for future generations—and still left many people behind economically. It was Kuznets’ final curse. He had never suggested that our economic system was indefinitely sustainable.

▪ ▪ ▪

We did not listen to Simon Kuznets’ cautious warnings: he told us GDP was a poor measure for broad societal progress, as it was more geared toward measuring production capacity than any other signs of prosperity. He wasn't convinced that the declining income inequality during the 1950s would be a permanent feature but rather saw it as a temporary effect of the specific technological advances that favored inclusive growth at the time. And he never subscribed to the notion of any “Environmental Kuznets’ Curve,” which hypothesized that harm to the environment would decline as an economy developed. We are now paying the price for it.

But before we try to make up for those errors in our economic development though, we must first ask: Is another development path already available? And to what extent can it be found in the East, in the rise of Asia?

3

The Rise of Asia

The view from the Sham Chun River in Southern China offers a stark contrast. On its southern bank, rice paddies stretch almost as far as the eye can see. On its northern bank, skyscrapers dominate the skyline.

It wasn't always so. Forty years ago, there was almost nothing on either side of the river. The most developed part was on the southern banks, where the city of Hong Kong was a few miles out. Train tracks connected the British-ruled “Northern territories” with the empty Chinese mainland across the river. A lone Chinese guard would inspect the river's crossing point.

Four decades later, the contrast isn't one a visitor from the past might have expected. The rice paddies to the south still belong to Hong Kong, the long-time financial capital of Asia. But the skyscrapers to the north are now part of contemporary China's technology capital, Shenzhen, a city that appeared out of nowhere.

What happened north of the Sham Chun River in those 40 years, represents perhaps the greatest economic miracle ever. In 1979, those living there had an average income of less than a dollar a day. Today, Shenzhen has a per capita GDP of almost US$30,000, about a 100-fold increase over 1979. It is home to tech giants such as Huawei, Tencent, and ZTE,114 and a “maker movement” of tech start-ups. Hong Kong didn't stand still either, but it now has a formidable twin next door.

How did this turnaround happen? And what does it tell us about the broader shift of the world economy to the East?

China's Special Economic Zones

I first visited China in April 1979. The country's new leader Deng Xiaoping had only been in power for about a year, and the land I encountered was still deeply impoverished. China had suffered for a long period from foreign invasions, civil war, and policies that had failed to deliver any meaningful economic progress.

That detrimental situation had been 150 years in the making. For much of the past millennia, China had been an economic superpower, alongside India, but things changed during the 19th century. First, there was a so-called Chinese Century of Humiliation from about 1840 onward. During this period, the proud and powerful Chinese civilization was defeated in various Opium Wars with Britain. It also ceded key Chinese ports and cities and territory in Indochina to Britain, France, and Japan, and suffered from Japanese occupation during the Second World War. A key reason for these defeats was that the Industrial Revolution had not spread in China, giving its adversaries economic, military, and technical supremacy.

The turmoil also led to the fall of the established political regime. The Qing Imperial dynasty was overthrown in 1912. After that, various political groups vied for power for several decades, all through the Japanese occupation in the 1930s and 1940s, and until after the end of the Second World War. Initially, the Nationalist Party of Chiang Kai-shek prevailed. He led a national government in China in the first few years after the Japanese occupation had ended. But it was unable to fully gain control over the chaotic situation that resulted after the retreat of Japanese troops and faced strong internal opposition. Instead, the civil war continued, and ultimately, the Nationalists were defeated by Mao's Communist Party.

Under the leadership of Chairman Mao, from 1949 to 1975, the Communist Party of China (CPC) became the lone governing party of the country, ending the political turmoil more decidedly. The CPC founded the People's Republic of China as a single-party state, which brought stability to the regime for the price of democratic freedom.

On the social and economic front, the People's Republic in its early years did not manage to bring about the progress enjoyed in other regions, including the United States, Western Europe, and the Soviet Union. The country reverted to autarky in terms of food production, central planning for its industrial production, and severe restrictions in terms of political and cultural freedoms. By the late 1970s, when Deng Xiaoping came to power as successor of Mao, the Chinese economy was a shadow of its former self. The Middle Kingdom (as China is sometimes called) had become a developing country, and many of its people lived below the poverty line.