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The Global Economy’s Next Winners

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The Global Economy’s Next Winners

What It Takes to Thrive in the Automation Age

By Susan Lund, James Manyika, And Michael Spence

The countries that once led the world toward economic openness are retreating into protectionism. Over the past two and a half years, the United States has abandoned the Trans-Pacific Partnership and imposed tariffs on steel, aluminum, and a wide range of Chinese goods. The United Kingdom is in the process of leaving the world’s largest free-trade area. And rising nationalist sentiment is threatening to repeat these self-destructive acts elsewhere. The rich world is turning inward.

Its timing couldn’t be worse. Even as critics of free trade gain the upper hand, globalization, wholly of its own accord, is transforming in rich countries’ favor. Economic growth in the developing world is boosting demand for products made in the developed world. Trade in services is up. Companies are moving production closer to their customers so they can respond faster to changes in demand. Automation has slowed the relentless search for people willing to work for ever-lower wages. And the greater complexity of modern goods means that research, design, and maintenance are coming to matter more than production.

All these trends play to the strengths of developed countries, where skilled work forces, large quantities of capital, huge customer bases, and dense clusters of high-tech companies combine to power modern economies. Middle-income countries, such as China and Mexico, may also benefit from the next era of globalization (although changing trade and investment patterns may well leave sections of their work forces behind, just as they did in rich countries over the past two decades). The poorest countries, meanwhile, will see their chief advantage—cheap labor—grow less important.

Rich countries have chosen a spectacularly poor time to begin closing themselves off from trade, investment, and immigration. Rather than pulling up the drawbridge just as the benefits of globalization have begun to flow back toward the developed world, they should figure out how to take advantage of these changing patterns of globalization. Making sure that everyone, not just the already successful, benefits will be a daunting task. But the one way for rich countries to ensure that everyone loses is to turn away from the open world just as they are becoming the masters of it.

THAT WAS THEN . . .

In the 1990s and the early years of this century, growth in trade soared, especially in manufactured goods and natural resources. In 2001, China’s entry into the World Trade Organization helped create a vast new manufacturing center for labor-intensive goods. The digital revolution allowed multinational companies to stretch their supply chains around the world. This spurt of globalization was fueled in part by trade in intermediate goods, such as raw materials and computer chips, which tripled in nominal value, from $2.5 trillion in 1995 to $7.5 trillion in 2007. Over that period, the total value of goods traded each year grew more than twice as fast as global GDP.

Then came the Great Recession. Global trade flows plummeted. Most analysts assumed that once the recovery gained steam, trade would come roaring back. They were wrong. From 2007 to 2017, exports declined from 28 percent to 23 percent of global gross output. The decline has been most pronounced in heavily traded goods with complex global value chains, such as computers, electronics, vehicles, and chemicals. A decade after the Great Recession, it is clear that trade is not returning to its former growth rates and patterns.

In part, that’s because the global economy is rebalancing as China and other countries with emerging markets reach the next stage of development. After several decades of participating in global trade mainly as producers, emerging economies have become the world’s major engines of demand. In 2016, for example, carmakers sold 40 percent more cars in China than they did in Europe. It is expected that by 2025, emerging markets will consume two-thirds of the world’s manufactured goods and, by 2030, they will consume more than half of all goods.

China’s growing demand means that more of what is made in China is being sold there. In 2007, China exported 55 percent of the consumer electronic goods and 37 percent of the textiles it produced; in 2017, those figures were 29 percent and 17 percent, respectively. Other emerging economies are following suit.

Developing countries also now rely less on intermediate imports. China first stepped onto the global trading scene in the 1990s by importing raw materials and parts and then assembling them into finished goods for export. But things have changed. In several sectors, including computers, electronics, vehicles, and machinery, China now produces far more sophisticated components, and a wider range of them, than it did two decades ago.

Trade is becoming more concentrated in specific regions, particularly within Europe and Asia. That is partly the result of greater domestic demand from emerging-market countries, but it is also being driven by the increased importance of speed. Proximity to consumers allows companies to respond faster to changing demand and new trends. Many companies are creating regional supply chains near each of their major markets. Adidas, for example, has built fully automated “Speedfactories” to produce new shoes in Germany and the United States rather than making them in its traditional locations in Indonesia. Zara has pioneered the “fast fashion” industry, refreshing its store merchandise twice a week. More than half of the company’s thousands of suppliers are concentrated in Morocco, Portugal, Spain, and Turkey, where they can serve the European and U.S. markets. Zara can get new designs from the drawing board to a store in Manhattan in just 25 days.

The growth of new technologies, such as Internet connectivity and artificial intelligence (AI), are also changing trade patterns. From 2005 to 2017, the amount of data flowing across borders every second grew by a factor of 148. The availability of cheap, fast digital communication has boosted trade. E-commerce platforms allow buyers and sellers to find each other more easily. The Internet of Things—everyday products with Internet connections—lets companies track shipments around the world and monitor their supply chains.

Yet not all new technologies lead to more trade. Some, such as robotics, automation, AI, and 3-D printing, are changing the nature of trade flows but not boosting the overall amount of trade. Factories have used robots for decades, but only for rote tasks. Now, technological advances, such as AI-powered vision, language comprehension, and fine motor skills, allow manufacturing robots to perform tasks that were once out of their reach. They can assemble intricate components and are starting to work with delicate materials, such as textiles.

The rise of automation means companies don’t have to worry as much about the cost of labor when choosing where to invest. In recent decades, companies have sought out low-paid workers, even if that meant building long, complex supply chains. That is no longer the dominant model: today, only 18 percent of the overall trade in goods involves exports from a low-wage country to a high-wage one. Other factors, such as access to resources, the speed at which firms can get their products to consumers, and the skills available in the work force, are more important. Companies are building fully automated factories to make textiles, clothes, shoes, and toys—the labor-intensive goods that gave China and other developing countries their start in global manufacturing. Exports from low-wage countries to high-wage countries fell from 55 percent of all exports of those kinds of cheap, labor-intensive goods in 2007 to 43 percent in 2017.

. . . THIS IS NOW

Trade in goods may be slowing relative to global economic growth, but trade in services is not. Since 2007, global trade in services has grown more than 60 percent faster than global trade in goods. Trade in some sectors, including telecommunications, information technology, business services, and intellectual property, is now growing two to three times as fast as trade in goods. In 2017, global trade in services totaled $5.1 trillion, still far less than the $17.3 trillion of goods traded globally. But those numbers understate the size of the services trade. National accounts do not, for example, separate out R & D, design, sales and marketing, and back-office services from the physical production of goods. Account for those elements, and services make up almost one-third of the value of traded manufactured goods. And companies have been turning more and more to foreign providers for those services. Although directly measured services are only 23 percent of total trade, services now account for 45 percent of the value added of traded goods.

Trade in services will take up an ever-greater share of the global economy as manufacturers and retailers introduce new ways of providing services, and not just goods, to consumers. Car and truck manufacturers, for example, are launching partnerships with companies that develop autonomous driving technologies, rent out vehicles, or provide ride-hailing services, as they anticipate a shift away from the traditional model of one-time vehicle purchases. Cloud computing has popularized pay-as-you-go and subscription models for storage and software, freeing users from making heavy investments in their own hardware. Ultrafast 5G wireless networks will give companies new ways to deliver services, such as surgery carried out by remotely operated robots and remote-control infrastructure maintenance made possible by virtual re-creations of the site in question.

For decades, manufacturing firms made physical things. Today, that is no longer a given. Some multinational companies, including Apple and many pharmaceutical manufacturers, have turned themselves into “virtual manufacturers”—companies that design, market, and distribute but rely on contractors to churn out the actual product.

That change reflects a broader shift toward intangible goods. Across many industries, R & D, marketing, distribution, and after-sales services now create more value than the physical goods, and they’re growing faster. The economist Carol Corrado has shown that firms’ annual investment in intangible assets, such as software, brands, and intellectual property, exceeds their investment in buildings, equipment, and other physical assets. In part, that’s because products have become more complicated. Software now accounts for ten percent of the value of new cars, for example, and McKinsey expects that share to rise to 30 percent by 2030.

Goods still matter. Companies still have to move goods across borders, even when services have played a big role in their production. Tariffs on goods disrupt and distort these flows and lower productivity. That means they act as tariffs on the services involved, too. Tariffs on intermediate goods raise costs for manufacturers and result in a kind of double taxation for final exports. In short, the argument for free trade is just as strong today as it was three decades ago.

THE GOOD NEWS FOR THE WEST

Middle-class Americans and Europeans bore the brunt of the job losses caused by the last wave of globalization. With the notable exception of Germany, advanced economies have experienced steep falls in manufacturing employment over the past two decades. In the United States, the number of people working in manufacturing declined from an estimated 17.6 million in 1997 to a low of 11.5 million in 2010, before recovering modestly to about 12.8 million today.

Yet advanced economies stand to benefit from the next chapter of globalization. A future that hinges on innovation, digital technology, services, and proximity to consumers lines up neatly with their strengths: skilled work forces, strong protections for intellectual property, lucrative consumer markets, and leading high-tech firms and start-up ecosystems. Developed countries that take advantage of these favorable conditions will thrive. Those that don’t, won’t.

Manufacturing jobs are not yet flowing back to the rich world in vast numbers, but there are some encouraging signs. Several major companies, such as Adidas, Fast Radius, and Lincoln Electric, have opened U.S. facilities in recent years. Apple has announced a major expansion in Austin, Texas, and is planning new data centers and research facilities in other cities across the United States. Companies based in the developing world are also investing more in the United States and Europe.

The growth in trade in services is providing another boost for advanced economies. The United States, Europe, and other advanced economies together already run an annual surplus in trade in services of almost $480 billion, twice as high as a decade ago, demonstrating their competitive advantage in these industries. New technology will let companies remotely deliver more services, such as education and health care. Countries that already specialize in exporting services, such as France, Sweden, the United Kingdom, and the United States, are in a good position to capitalize on these trends.

Finally, as the developing world gets richer, it will buy more cars, computers, airplanes, and machinery from the developed world. Advanced economies send more than 40 percent of their exports to emerging markets, almost double the share they sent 20 years ago. Those exports added up to more than $4 trillion worth of goods in 2017 alone.

The picture for advanced economies is not uniformly rosy, however. Some industries will face fierce new competition from the developing world. Homegrown companies in Brazil, China, and other middle-income countries are branching out into higher-value-added industries, such as supercomputing, aerospace, and solar panel manufacturing, and relying less on imported parts from the developed world. Chinese companies are beginning to manufacture the computer chips they used to buy from abroad. (Although for smartphones, China still imports chips.) China’s total annual imports of intermediate goods from Germany for vehicles, machines, and other sophisticated products peaked in 2014 at $44 billion; by 2017, the figure was $37 billion. Japan and South Korea have also seen their exports of intermediate goods to China in those industries decline. The Made in China 2025 initiative aims to build the country’s strengths in cutting-edge areas such as AI, 5G wireless systems, and robotics.

STUCK IN THE MIDDLE

Middle-income countries, such as Brazil, China, Hungary, Mexico, Morocco, Poland, South Africa, Thailand, and Turkey, will reap some of the benefits of the new globalization, but they will also face new difficulties. Such countries now play important roles in the complex value chains that produce vehicles, machinery, electronics, chemicals, and transportation equipment. They both supply and compete with the companies based in countries with advanced economies that have traditionally dominated those industries.

A number of middle-income countries enjoy a fixed advantage: geographic proximity to major consumer markets in advanced economies. As automation makes labor costs less important, many multinational companies are choosing to build new factories not in countries with the lowest wages but in countries that are closer to their main consumer markets and that still offer lower wages than rich countries. Mexico fits the bill for the United States; Morocco, Turkey, and eastern European countries do the same for western European countries, as do Malaysia and Thailand for richer Asian countries, such as Japan and the wealthier parts of China.

Other middle-income countries are poised to benefit from the shift from goods to services. Costa Rica, for example, is now a major exporter of business services, such as data entry, analytics, and information technology support. Its exports in those sectors have grown at an average annual rate of 34 percent over the last ten years, and they are worth $4.5 billion today, or 7.6 percent of Costa Rica’s GDP. The global annual trade in outsourced business services—everything from accounting to customer support—totals $270 billion and growing. That represents a lucrative opportunity for middle-income countries such as Costa Rica. Yet since AI tools could handle much of the work involved in these services, workers will need to be able to assist customers with more complex troubleshooting or sales if they are to stay ahead of the machines.

Middle-income countries also have huge opportunities to benefit from new technologies—not only by adopting them but also by building them. China, for instance, is a world leader in mobile payments. Apps such as WeChat Pay and Alipay have allowed Chinese consumers to move straight from using cash for transactions to making smartphone payments, skipping credit cards altogether. China’s third-party payment platforms handled some $15.4 trillion worth of mobile payments in 2017—more than 40 times the amount processed in the United States, according to the consulting firm iResearch. In addition to making transactions cheaper and more efficient, payment apps also create huge pools of data that their creators can use to offer individually tailored loans, insurance, and investment products. In every country, the rise of big data raises difficult legal and ethical questions; in China, especially, official use of such data has come under scrutiny. No two countries are likely to come to exactly the same conclusions, but all will have to grapple with these issues.

In addition, e-commerce, mobile Internet, digital payments, and online financial services tend to contribute to more inclusive growth. A 2019 report by the Luohan Academy, a research group established by Alibaba, found that the benefits of the current digital revolution are likely to be more evenly distributed than those of previous technological revolutions. That’s because digital technologies are no longer restricted to rich people in rich countries. Today’s technologies have made it easier for people everywhere to start businesses, reach customers, and access financing. The report found that in China, digital technologies have accelerated growth in rural areas and inland provinces, places that have long lagged behind the coasts.

Even as middle-income countries shift to higher-value manufacturing and services, their manufacturing workers are likely to face struggles similar to those of American and European workers who have been displaced by digital technologies. Factory workers in China, Mexico, and Southeast Asia may bear the brunt of job displacement as wages rise and automation proceeds. A study by the economist Robert Atkinson found that China, the Czech Republic, Slovenia, and Thailand are adopting industrial robots faster than their wage levels would predict. Although automation will raise productivity growth and product quality, these countries will need to help displaced workers and avoid the mistakes made by the West.

THE DEVELOPING-COUNTRY CHALLENGE

In a world of increasing automation, the prospects for low-income countries are growing more uncertain. In the short term, export-led, labor-intensive manufacturing may still have room to grow in some low-wage countries. Bangladesh, India, and Vietnam are achieving solid growth in labor-intensive manufacturing exports, taking advantage of China’s rising wages and the country’s emphasis on more sophisticated and profitable products. To make the old model of export-led manufacturing growth work, countries will need to invest in roads, railways, airports, and other logistics infrastructure—and eventually in modern, high-tech factories that can compete with those in the rest of the world. Bangladesh, India, and Vietnam have taken some positive steps but will need to do more.

Whether services can drive the kind of rapid growth in early stage developing countries that manufacturing once did remains to be seen. Some low-income countries, such as Ghana, India, and the Philippines, have thriving service industries catering to businesses around the world. But even in those countries, the services-export sector employs few people and contributes little to GDP. Like middle-income countries, low-income ones will need to shift to higher-value activities to stay ahead of automation. Tradable services, such as transportation, finance, and business services, enjoy high productivity growth and can raise living standards, but less tradable ones, such as food preparation, health care, and education, which employ millions more people, thus far show little productivity growth, making them a poor engine for long-term prosperity.

Technology may enable some people in low-income economies to jump ahead in economic development without retracing the paths taken by those in advanced economies. Internet access allows workers everywhere to use online freelance platforms, such as UpWork, Fiverr, and Samasource, to earn supplemental income. A large share of the freelancers on these platforms are in developing countries. Khan Academy and Coursera teach languages and other skills. Google Translate is removing language barriers. Kiva and Kickstarter help aspiring entrepreneurs fund their start-ups. And telemedicine services make better health care available to people in remote places. But using those services requires widespread access to affordable high-speed Internet. Countries need to invest in digital infrastructure and education if they are to succeed in a global digital economy. Although many countries have achieved near-universal primary schooling, getting students to complete secondary school and making sure they receive a high-quality education when there are the next hurdles.

Trade has done more than almost anything else to cut global poverty. If developing countries shift strategies to take advantage of the next wave of globalization, trade can continue to lift people out of poverty and into the middle class. It is advanced economies, however, that need to change their outlook the most dramatically. They are shutting themselves off from the outside world at the very moment when they should be welcoming it in.

~ Foreign Affairs

July/August 2019
 

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Shareholder Value Is No Longer Everything, Top C.E.O.s Say

Chief executives from the Business Roundtable, including the leaders of Apple and JPMorgan, argued that companies must also invest in employees and deliver value to customers.

For major corporations, shareholders used to be everything. No more.

A coalition of executives representing some of America’s largest companies issued a statement on Monday that redefines “the purpose of a corporation.” No longer should the primary job of a corporation be to advance the interests of shareholders, the coalition, known as the Business Roundtable, said in a statement. Now, companies must also invest in employees, deliver value to customers and deal fairly and ethically with suppliers.

The statement was signed by nearly 200 chief executives, including the leaders of Apple, American Airlines, Accenture, AT&T, Bank of America, Boeing and BlackRock.

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the statement said. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

The statement was short on specifics on how to achieve this shift. But it pledged to compensate employees fairly and provide “important benefits,” as well as training and education. It also promised to “protect the environment by embracing sustainable practices across our businesses” and “foster diversity and inclusion, dignity and respect.”

Since the 1970s, the Business Roundtable, which primarily functions as a lobbying organization, has periodically issued principles of corporate governance that detailed how a company should operate. Each version of those principles over the last 20 years has stated that “corporations exist principally to serve their shareholders,” according to Monday’s announcement.

“It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow C.E.O.s endeavor every day to create value for all our stakeholders,” the statement said.


NYTimes
 

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China’s Long March to Technological Supremacy

The Roots of Xi Jinping’s Ambition to “Catch Up and Surpass”

By Julian Baird Gewirtz

Until recently, American perceptions of Chinese technology tended to be either hopeful or dismissive. On the hopeful side, the information revolution was taken as a sure drive of greater freedom. “Imagine if the Internet took hold in China,” George W. Bush said in a presidential debate in 1999. “Imagine how freedom would spread.” Some observers noted considerable theft and imitation of U.S. technology firms, but Chinese technology was generally thought to represent little or no competitive threat, with analysts explaining—as a 2014 Harvard Business Review headline put it—“why China can’t innovate.”

But China has quickly moved up the value chain, creating world-class industries in everything from 5G and artificial intelligence to biotechnology and quantum computing. Some experts now believe that China could unseat the United States as the world’s leading technological force. And many U.S. policymakers view that prospect as an existential threat to U.S. economic and military power. “Very dangerous,” President Donald Trump said recently when talking about the Chinese telecommunications company Huawei; National Security Adviser John Bolton has warned of a “Manchurian chip.”

Yet if China’s rapid technological advance came as a shock to most observers in the United States, for Chinese leaders it reflects a drive that dates to the origins of the People’s Republic. President Xi Jinping has described a formidable objective for Chinese tech: “catch up and surpass.” But that ambition, abbreviated as ganchao in Chinese, has long been one of the Chinese Communist Party’s defining goals; it remains the essential framework for understanding China’s ambition to become a technological superpower today, bringing together the legacies of Marxism, Maoism, and the tortuous pursuit of modernization by the Chinese Communist Party (CCP). In the minds of China’s leaders, from Mao Zedong to Xi Jinping, technological progress is not only a means to economic and military prowess but also an ideological end in itself—offering final proof of China’s restoration as a great power after decades of struggle.

“CATCH UP AND SURPASS”

Long before Donald Trump and Xi Jinping began their trade war, the CCP’s historical fixation on advanced technology emerged from a combination of nostalgia for China’s lost imperial glory and awe for Soviet modernization. Mao, like other Chinese revolutionaries and reformers, blamed the country’s having fallen behind partly on its inability to keep up with international technological advancements. And he watched as leaders in Moscow carved their own path to technological progress.

Initially, Mao’s China received extensive technological and technical assistancefrom the Soviet “elder brother.” In 1957, Soviet Premier Nikita Khrushchev declared that his goal was to “catch up and surpass the United States.” Mao took the idea and made it his own, putting the Chinese variant of Khrushchev’s goal—ganchao—at the heart of CCP ambitions. He envisioned the socialist world’s “overwhelming superiority” in science and technology and came to see technological strength as central to economic, ideological, and geopolitical power—the view of catch up and surpass that CCP leaders continue to hold today.

The Chinese adaptation of catch up and surpass quickly turned fevered and utopian. Mao, impatient to develop faster than the overbearing Soviet Union, announced in early 1958 that China would take a Great Leap Forward, in which “politics and technology must be unified.” The Great Leap Forward—a massive campaign to rapidly industrialize and collectivize the country—ended in a catastrophic famine that killed tens of millions of people. Yet even then, the CCP did not abandon ganchao. Continued concerns about China’s military backwardness, as Evan Feigenbaum has written, motivated repeated pushes for technological advancement. In 1975, Premier Zhou Enlai introduced the concept of the Four Modernizations: modernizing “agriculture, industry, national defense, and S & T . . . to the front ranks of the world” by the year 2000. And when Zhou and Mao died in 1976, their successors, Hua Guofeng and Deng Xiaoping, attempted “a new leap forward,” aiming to help China “catch up” by importing more than $15 billion worth of advanced technology from abroad.

When this new leap also foundered, due to soaring debts and sloppy decision-making, Deng took a new approach to ganchao, this time relying on market reform, industrial policy, and economic opening. The CCP rehabilitated those who had been purged during the Cultural Revolution, increased investment in S & T research and training, sent delegations abroad to bring new ideas and technologies back to China, and encouraged foreign firms to set up shop in China and share sophisticated equipment and know-how. The rise of information technologies became a particular fixation of the Chinese leadership in the 1980s. In 1983, Premier Zhao Ziyang gave a speech on the “global New Technological Revolution,” invoking the need to “catch up and surpass” and citing the writings of American futurist Alvin Toffler, whose The Third Wave predicted the rise of a new Information Age. Zhao and Deng sought “ ‘leap-frog’ development in key high-tech fields” such as information technology, automation, and bioengineering.

In the marketizing economy, newly emergent private companies also served the national goal to “catch up and surpass.” Liu Chuanzhi, an engineer at the state-run Chinese Academy of Sciences, started a side business that grew into Lenovo, one of the world’s largest makers of personal computers. Ren Zhengfei, formerly an official in the People Liberation Army’s engineering corps, began importing and reverse-engineering foreign network hardware and electronics, establishing Huawei in 1987.

In the 1990s and 2000s, the pursuit of advanced technology involved several strategies of varying degrees of legality and publicity. Fostering the private sector remained a crucial part of the CCP’s strategy; Huawei especially won high-profile endorsements from senior Chinese leaders and tens of billions in loans from state banks, becoming a national champion as it expanded overseas and partnered with foreign companies. Information technology firms boomed, but the CCP assiduously managed the perceived political and cultural risks that accompanied the rise of the Internet. While building up the Great Firewall, China’s rulers also took advantage of the more open networks in developed countries: aggressively recruiting overseas Chinese experts to return to the PRC, obtaining foreign intellectual property by mandating the transfer of technical know-how in joint ventures, and engaging in industrial espionage targeted at high-value technologies.

SILICON MARXISM

In 2013, shortly after being appointed CCP general secretary, Xi laid out his vision for China’s future in a series of remarks centered around the goal of national rejuvenation—regaining wealth, power, and glory for China. Alongside the problems of corruption, pollution, debt, and military competition, he worried openly about the lagging state of Chinese technology. Advanced technology had been key to the West’s “sway over the world in modern times”; Beijing would need an “asymmetrical strategy” to “catch up and surpass,” he said, explicitly invoking this decades-old CCP ambition.

That long-standing view, reflecting a single-minded focus on ganchao, explains the intensity and persistence of Chinese theft of trade secrets, involving both conventional spycraft and cybercrime—what former National Security Agency Director Keith Alexander called “the greatest transfer of wealth in history.” It has been reinforced by a belief that China’s thefts were part of rectifying imperialist misdeeds by the Western countries as well as the linkage of technological advances to the ideology and identity of the CCP. It also reflects a paradox in the CCP’s relationship to technology: pursuing an ultimate state of self-reliance has relied above all on foreign technology and expertise.

By the time Trump came into office, China’s rulers could see that their focus on ganchao was bearing fruit. Barring a major crisis, China will become the world’s largest economy by gross domestic product well before the hundredth anniversary of the People’s Republic’s founding, in 2049. Its rulers, accordingly, are already shifting from “catching up” to “surpassing.”

Xi argues that indigenous technological innovation is necessary to surpass the West, even if copying has been mostly sufficient to catch up. He calls innovation“the primary driving force of development,” giving a Silicon Valley–friendly gloss to the Marxist idea of historical “driving forces.” Working closely with private companies and universities, the CCP has positioned fields such as chipmaking, bioengineering, telecommunications, and artificial intelligence (AI) as test cases of whether China can “surpass” the United States. A state-supported flood of discounted capital, world-class researchers, “civil-military fusion,” and less constraining norms give Chinese labs an edge. In the race to develop next-generation wireless service, 5G, Huawei is leading the pack, with one of the biggest R&D budgets of any tech company and revenues roughly equal to telecom competitors Nokia and Ericsson combined. And when it comes to the data powering AI, according to a report from the think tank MacroPolo, China may benefits from having fewer constraints on experimenting with new systems. (The Uighurs have experienced what this is leading to in the chilling techno-authoritarian model implemented in Xinjiang.) Because the CCP already engages in large-scale surveillance and limits personal freedoms, innovations in big-data systems for smart cities and social credit point in a startlingly dystopian direction.

To Xi, innovation is good for both maintaining social control and growing national power. His Made in China 2025 demonstrates the breadth of Beijing’s ambitions. Made in China 2025 aims to bolster Chinese firms and ensure that they control the domestic market in advanced technologies such as robotics, new-energy vehicles, medical devices, quantum computing, and AI. One Chinese official told The Wall Street Journal that the plan has undergone cosmetic changes “because the Americans don’t like it.” But it endures in substance, and other senior officials insist that the CCP “will never give an inch” on this scheme’s broader goals.

Top-down, CCP-led technological innovation brings its share of challenges. Many observers correctly cite the risks of misguided government-steered investment, which has led to waste and massive oversupply, or the challenges of supporting small entrepreneurs and researchers without heavy-handed interference. But the record of the past several decades shows that CCP leaders will, in their pursuit of technological advancement, display persistence and ingenuity in responding to those obstacles. China’s leadership has certainly been prone to exaggerating its achievements throughout a long history marked by leaps, rushes, and “asymmetric steps”—but they also have a record of doing whatever it takes to make the hype real.

A RACE AGAINST TIME

The goal of surpassing other countries technologically does not mean that China’s rulers seek global military supremacy. But even in best-case scenarios, China’s transition from catching up to surpassing will be destabilizing, as other countries confront Chinese ambitions for greater prosperity and security and feel their relative power decrease. And for China, building 5G networks for other countries and making AI breakthroughs clearly advance CCP aims far beyond narrowly construed self-reliance. Even if firms such as Huawei and ZTE are not incontrovertibly compromised by the state, their work clearly serves CCP interests.

Technology will remain at the heart of U.S.-China tensions well beyond the end of the current trade war. Technology, to the CCP, is power in practice—it is historical change in material form. The roots of “catch up and surpass” demonstrates that the CCP’s approach to technology is far more deeply entrenched than many analysts realize. If China’s rulers feel their technological rise is under threat, they are likely to react more forcefully and uncompromisingly than policymakers may expect—as the Chinese response to Washington’s effort to block Huawei’s global 5G dominance has demonstrated.

An all-out rivalry between the world’s two technology leaders would be immensely costly, disruptive, and destructive. Instead, policymakers should focus on establishing and enforcing new rules for the race already underway, so that competition can occur fairly and be at least somewhat bounded. Within the United States, that will require scrutinizing Chinese investments and acquisitions of U.S. firms, well beyond the traditional purview of the Committee on Foreign Investment in the United States, as well as the footprint of both Chinese firms in the United States (such as Baidu’s AI lab in Silicon Valley) and U.S. firms in China (such as Google’s AI lab in Beijing). In addition, Washington should seek to begin negotiations with China as soon as possible to explore common rules for emerging technologies. Such agreements were possible with the Soviet Union during the Cold War. Today, they can be effective again if they are based on deep understanding of the technologies under discussion and the importance of tech to both countries’ conceptions of national power. For the U.S. government, that may require creating or improve policymaking institutions, such as upgrading the Office of Science and Technology Policy (which currently runs the National Science and Technology Council) into a new National Emerging Technology Council. The National Emerging Technology Council would serve as a consistent, high-level body, overlapping the National Security Council and the National Economic Council, to coordinate more effectively across the whole of government and bring empowered expertise to bear on both domestic policymaking and international negotiations.

The U.S. government’s response should not be premised on the notion, evidently in vogue in both Washington and Beijing, that all scientific and technological activity is a zero-sum competition between states. The history of ganchao suggests that so-called technological decoupling between China and the United States will continue in areas where it is most difficult to distinguish between commercial and military applications. But unwinding interdependence carries significant costs, and so U.S. policymakers should attempt to draw distinctions between sectors in China that feature strong private-sector leadership and those dominated by the state—not all “Chinese” technology is the same. Research institutions and private companies will also need much more help evaluating potential research cooperation with Chinese counterparts, to guard against problematic partnerships while preserving the great value of international exchange to the progress of scientific research.

Above all, Washington must not view countering China’s technological advancement as a substitute for investing in a major effort at home. The Trump Administration’s repeated attempts to cut budgets for the National Science Foundation and other government S & T funding are profoundly self-defeating at a time of intensified U.S.-China tech competition. China’s technological advancement will challenge not only U.S. power but also the United States’ sense of itself as a global leader and innovator. This demands significant U.S. domestic investment in S & T—in government research labs and private research institutions for certain, and perhaps in private companies directly. It will also require mobilizing the American people behind making significant improvements to the education, infrastructure, and immigration systems, which are sources of the country’s enduring strength. If there is one thing that U.S. policymakers can learn from the history of ganchao, it is that the world still wants what the United States has.

~ Foreign Affairs

August 27, 2019
 
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Nonan

Legendary Member
Orange Room Supporter
Shareholder Value Is No Longer Everything, Top C.E.O.s Say

Chief executives from the Business Roundtable, including the leaders of Apple and JPMorgan, argued that companies must also invest in employees and deliver value to customers.

For major corporations, shareholders used to be everything. No more.

A coalition of executives representing some of America’s largest companies issued a statement on Monday that redefines “the purpose of a corporation.” No longer should the primary job of a corporation be to advance the interests of shareholders, the coalition, known as the Business Roundtable, said in a statement. Now, companies must also invest in employees, deliver value to customers and deal fairly and ethically with suppliers.

The statement was signed by nearly 200 chief executives, including the leaders of Apple, American Airlines, Accenture, AT&T, Bank of America, Boeing and BlackRock.

“While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders,” the statement said. “We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

The statement was short on specifics on how to achieve this shift. But it pledged to compensate employees fairly and provide “important benefits,” as well as training and education. It also promised to “protect the environment by embracing sustainable practices across our businesses” and “foster diversity and inclusion, dignity and respect.”

Since the 1970s, the Business Roundtable, which primarily functions as a lobbying organization, has periodically issued principles of corporate governance that detailed how a company should operate. Each version of those principles over the last 20 years has stated that “corporations exist principally to serve their shareholders,” according to Monday’s announcement.

“It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow C.E.O.s endeavor every day to create value for all our stakeholders,” the statement said.


NYTimes
Sorry, I personally know at least two of these CEOs, and can tell you two things
1) it was never about shareholders, unless you consider the CEO share compensation. CEOs are only focused on their survival and their bonus. Some add “legacy” or clout... but shareholders, no one really cares
2) this will not chante one iota in how they manage their companies, with their short term Q by Q focus
 

Walidos

Legendary Member
Orange Room Supporter
Sorry, I personally know at least two of these CEOs, and can tell you two things
1) it was never about shareholders, unless you consider the CEO share compensation. CEOs are only focused on their survival and their bonus. Some add “legacy” or clout... but shareholders, no one really cares
2) this will not chante one iota in how they manage their companies, with their short term Q by Q focus

I absolutely disagree with you on the first point: It has been about the shareholders for a very long time. The survival of a CEO depends first and foremost on their ability to make money for shareholders. Otherwise they are booted.
The other face which I wished we had more of is CEOs/companies that care more about the stakeholders, not just the shareholders
 

Nonan

Legendary Member
Orange Room Supporter
I absolutely disagree with you on the first point: It has been about the shareholders for a very long time. The survival of a CEO depends first and foremost on their ability to make money for shareholders. Otherwise they are booted.
The other face which I wished we had more of is CEOs/companies that care more about the stakeholders, not just the shareholders
You assume that boards are true representation of shareholder interest. Take BLK, the board will never fire Larry Fink. Armed with that knowledge, do you think Larry Fink is trying to maximize shareholder value?
 

Walidos

Legendary Member
Orange Room Supporter
You assume that boards are true representation of shareholder interest. Take BLK, the board will never fire Larry Fink. Armed with that knowledge, do you think Larry Fink is trying to maximize shareholder value?
there are several things to consider:
1- he is the CEO and founder...
2- he has transformed the company from creation in the 80s to managing over 6 trillion $ in assets...! In less than 30 years!
3- BLK shares have grown considerably in the past 2 decades! Over 1300% since 1999 and over 26% in the last 5 years assuming shareholders didn’t sell in 2017 when it was over 70% up (from 5ya)...

Why would the board want to fire him? Not only is he the founder, but His results are not bad at all. Yes there is a bit of a slump (-11% in the last 52 weeks), so short term investors will beware...

And besides, this is 1 company: look at others: Unilever changed not long ago, P&G changed some 2-3 years ago, etc... my experience tells me whoever is not creating money is booted sooner or later...
 

Nonan

Legendary Member
Orange Room Supporter
there are several things to consider:
1- he is the CEO and founder...
2- he has transformed the company from creation in the 80s to managing over 6 trillion $ in assets...! In less than 30 years!
3- BLK shares have grown considerably in the past 2 decades! Over 1300% since 1999 and over 26% in the last 5 years assuming shareholders didn’t sell in 2017 when it was over 70% up (from 5ya)...

Why would the board want to fire him? Not only is he the founder, but His results are not bad at all. Yes there is a bit of a slump (-11% in the last 52 weeks), so short term investors will beware...

And besides, this is 1 company: look at others: Unilever changed not long ago, P&G changed some 2-3 years ago, etc... my experience tells me whoever is not creating money is booted sooner or later...
Sooner or later yes, but the point you make re Larry (iconic, past performance, etc,) can be said more or less about others too.. We can have a much longer discussion re BLK but not publicly. Larry hasn’t done anything strategic since the acquisition of BGI. For the others, that’s the point, the CEO is trying to survive and make as much money as they can. So the game is to hit whatever targets associated with their bonus, Q by Q while focusing on short term objectives. This aligns with short term stock movement but in reality, these are not correlated with building long term value.
 

Picasso

Legendary Member
Orange Room Supporter
The New Masters of the Universe
Big Tech and the Business of Surveillance

By Paul Starr

In his 1944 classic, The Great Transformation, the economic historian Karl Polanyi told the story of modern capitalism as a “double movement” that led to both the expansion of the market and its restriction. During the eighteenth and early nineteenth centuries, old feudal restraints on commerce were abolished, and land, labor, and money came to be treated as commodities. But unrestrained capitalism ravaged the environment, damaged public health, and led to economic panics and depressions, and by the time Polanyi was writing, societies had reintroduced limits on the market.
Shoshana Zuboff, a professor emerita at the Harvard Business School, sees a new version of the first half of Polanyi’s double movement at work today with the rise of “surveillance capitalism,” a new market form pioneered by Facebook and Google. In The Age of Surveillance Capitalism, she argues that capitalism is once again extending the sphere of the market, this time by claiming “human experience as free raw material for hidden commercial practices of extraction, prediction, and sales.” With the rise of “ubiquitous computing” (the spread of computers into all realms of life) and the Internet of Things (the connection of everyday objects to the Internet), the extraction of data has become pervasive. We live in a world increasingly populated with networked devices that capture our communications, movements, behavior, and relationships, even our emotions and states of mind. And, Zuboff warns, surveillance capitalism has thus far escaped the sort of countermovement described by Polanyi.

Zuboff’s book is a brilliant, arresting analysis of the digital economy and a plea for a social awakening about the enormity of the changes that technology is imposing on political and social life. Most Americans see the threats posed by technology companies as matters of privacy. But Zuboff shows that surveillance capitalism involves more than the accumulation of personal data on an unprecedented scale. The technology firms and their experts—whom Zuboff labels “the new priesthood”—are creating new forms of power and means of behavioral modification that operate outside individual awareness and public accountability. Checking this priesthood’s power will require a new countermovement—one that restrains surveillance capitalism in the name of personal freedom and democracy.

THE RISE OF THE MACHINES

A reaction against the power of the technology industry is already underway. The U.S. Justice Department and the Federal Trade Commission are conducting antitrust investigations of Amazon, Apple, Facebook, and Google. In July, the FTC levied a $5 billion fine on Facebook for violating promises to consumers that the company made in its own privacy policies (the United States, unlike the European Union, has no general law protecting online privacy). Congress is considering legislation to limit technology companies’ use of data and roll back the broad immunity from liability for user-generated content that it granted them in the Communications Decency Act of 1996. This national debate, still uncertain in its ultimate impact, makes Zuboff’s book all the more timely and relevant.

The rise of surveillance capitalism also has an international dimension. U.S. companies have long dominated the technology industry and the Internet, arousing suspicion and opposition in other countries. Now, chastened by the experience of Russian interference in the 2016 U.S. presidential election, Americans are getting nervous about stores of personal data falling into the hands of hostile foreign powers. In July of this year, there was a viral panic about FaceApp, a mobile application for editing pictures of faces that millions of Americans had downloaded to see projected images of themselves at older ages. Created by a Russian firm, the app was rumored to be used by Russian intelligence to gather facial recognition data, perhaps to create deepfake videos—rumors that the firm has denied. Early last year, a Chinese company’s acquisition of the gay dating app Grindr stirred concern about the potential use of the app’s data to compromise individuals and U.S. national security; the federal Committee on Foreign Investment in the United States has since ordered the Chinese firm to avoid accessing Grindr’s data and divest itself entirely of Grindr by June 2020. It is not hard to imagine how the rivalry between the United States and China could lead not only to a technology divorce but also to two different worlds of everyday surveillance.

According to Zuboff, surveillance capitalism originated with the brilliant discoveries and brazen claims of one American firm. “Google,” she writes, “is to surveillance capitalism what the Ford Motor Company and General Motors were to mass-production-based managerial capitalism.” Incorporated in 1998, Google soon came to dominate Internet search. But initially, it did not focus on advertising and had no clear path to profitability. What it did have was a groundbreaking insight: the collateral data it derived from searches—the numbers and patterns of queries, their phrasing, people’s click patterns, and so on—could be used to improve Google’s search results and add new services for users. This would attract more users, which would in turn further improve its search engine in a recursive cycle of learning and expansion.

Google’s commercial breakthrough came in 2002, when it saw that it could also use the collateral data it collected to profile the users themselves according to their characteristics and interests. Then, instead of matching ads with search queries, the company could match ads with individual users. Targeting ads precisely and efficiently to individuals is the Holy Grail of advertising. Rather than being Google’s customers, Zuboff argues, the users became its raw-material suppliers, from whom the firm derived what she calls “behavioral surplus.” That surplus consists of the data above and beyond what Google needs to improve user services. Together with the company’s formidable capabilities in artificial intelligence, Google’s enormous flows of data enabled it to create what Zuboff sees as the true basis of the surveillance industry—“prediction products,” which anticipate what users will do “now, soon, and later.” Predicting what people will buy is the key to advertising, but behavioral predictions have obvious value for other purposes, as well, such as insurance, hiring decisions, and political campaigns.

Zuboff’s analysis helps make sense of the seemingly unrelated services offered by Google, its diverse ventures and many acquisitions. Gmail, Google Maps, the Android operating system, YouTube, Google Home, even self-driving cars—these and dozens of other services are all ways, Zuboff argues, of expanding the company’s “supply routes” for user data both on- and offline. Asking for permission to obtain those data has not been part of the company’s operating style. For instance, when the company was developing Street View, a feature of its mapping service that displays photographs of different locations, it went ahead and recorded images of streets and homes in different countries without first asking for local permission, fighting off opposition as it arose. In the surveillance business, any undefended area of social life is fair game.

This pattern of expansion reflects an underlying logic of the industry: in the competition for artificial intelligence and surveillance revenues, the advantage goes to the firms that can acquire both vast and varied streams of data. The other companies engaged in surveillance capitalism at the highest level—Amazon, Facebook, Microsoft, and the big telecommunications companies—also face the same expansionary imperatives. Step by step, the industry has expanded both the scope of surveillance (by migrating from the virtual into the real world) and the depth of surveillance (by plumbing the interiors of individuals’ lives and accumulating data on their personalities, moods, and emotions).

The surveillance industry has not faced much resistance because users like its personalized information and free products. Indeed, they like them so much that they readily agree to onerous, one-sided terms of service. When the FaceApp controversy blew up, many people who had used the app were surprised to learn that they had agreed to give the company “a perpetual, irrevocable, nonexclusive, royalty-free, worldwide, fully-paid, transferable sub-licensable license to use, reproduce, modify, adapt, publish, translate, create derivative works from, distribute, publicly perform and display your User Content and any name, username or likeness provided in connection with your User Content in all media formats and channels now known or later developed, without compensation to you.” But this wasn’t some devious Russian formulation. As Wired pointed out, Facebook has just as onerous terms of service.

Even if Congress enacts legislation barring companies from imposing such extreme terms, it is unlikely to resolve the problems Zuboff raises. Most people are probably willing to accept the use of data to personalize their services and display advertising predicted to be of interest to them, and Congress is unlikely to stop that. The same processes of personalization, however, can be used to modify behavior and beliefs. This is the core concern of Zuboff’s book: the creation of a largely covert system of power and domination.

MAKE THEM DANCE

From extracting data and making predictions, the technology firms have gone on to intervening in the real world. After all, what better way to improve predictions than to guide how people act? The industry term for shaping behavior is “actuation.” In pursuit of actuation, Zuboff writes, the technology firms “nudge, tune, herd, manipulate, and modify behavior in specific directions by executing actions as subtle as inserting a specific phrase into your Facebook news feed, timing the appearance of a BUY button on your phone, or shutting down your car engine when an insurance payment is late.”

Evidence of the industry’s capacity to modify behavior on a mass scale comes from two studies conducted by Facebook. During the 2010 U.S. congressional elections, the company’s researchers ran a randomized, controlled experiment on 61 million users. Users were split up into three groups. Two groups were shown information about voting (such as the location of polling places) at the top of their Facebook news feeds; users in one of these groups also received a social message containing up to six pictures of Facebook friends who had already voted. The third group received no special voting information. The intervention had a significant effect on those who received the social message: the researchers estimated that the experiment led to 340,000 additional votes being cast. In a second experiment, Facebook researchers tailored the emotional content of users’ news feeds, in some cases reducing the number of friends’ posts expressing positive emotions and in other cases reducing their negative posts. They found that those who viewed more negative posts in their news feeds went on to make more negative posts themselves, demonstrating, as the title of the published article about the study put it, “massive-scale emotional contagion through social networks.”
The 2016 Brexit and U.S. elections provided real-world examples of covert disinformation delivered via Facebook. Not only had the company previously allowed the political consulting firm Cambridge Analytica to harvest personal data on tens of millions of Facebook users; during the 2016 U.S. election, it also permitted microtargeting of “unpublished page post ads,” generally known as “dark posts,” which were invisible to the public at large. These were delivered to users as part of their news feeds along with regular content, and when users liked, commented on, or shared them, their friends saw the same ads, now personally endorsed. But the dark posts then disappeared and were never publicly archived. Micro-targeting of ads is not inherently illegitimate, but journalists are unable to police deception and political opponents cannot rebut attacks when social media deliver such messages outside the public sphere. The delivery of covert disinformation on a mass basis is fundamentally inimical to democratic debate.

Facebook has since eliminated dark posts and made other changes in response to public criticism, but Zuboff is still right about this central point: “Facebook owns an unprecedented means of behavior modification that operates covertly, at scale, and in the absence of social or legal mechanisms of agreement, contest, and control.” No law, for example, bars Facebook from adjusting its users’ news feeds to favor one political party or another (and in the United States, such a law might well be held unconstitutional). As a 2018 study by The Wall Street Journal showed, YouTube’s recommendation algorithm was feeding viewers videos from ever more extreme fringe groups. That algorithm and others represent an enormous source of power over beliefs and behavior.

Surveillance capitalism, according to Zuboff, is moving society in a fundamentally antidemocratic direction. With the advent of ubiquitous computing, the industry dreams of creating transportation systems and whole cities with built-in mechanisms for controlling behavior. Using sensors, cameras, and location data, Sidewalk Labs, a subsidiary of Google’s parent company, Alphabet, envisions a “for-profit city” with the means of enforcing city regulations and with dynamic online markets for city services. The system would require people to use Sidewalk’s mobile payment system and allow the firm, as its CEO, Dan Doctoroff, explained in a 2016 talk, to “target ads to people in proximity, and then obviously over time track them through things like beacons and location services as well as their browsing activity.” One software developer for an Internet of Things company told Zuboff, “We are learning how to write the music, and then we let the music make them dance.”

Such aspirations imply a radical inequality of power between the people who control the play list and the people who dance to it. In the last third of her book, Zuboff takes her analysis up a level, identifying the theoretical ideas and general model of society that she sees as implicit in surveillance capitalism. The animating idea behind surveillance capitalism, Zuboff says, is that of the psychologist B. F. Skinner, who regarded the belief in human freedom as an illusion standing in the way of a more harmonious, controlled world. Now, in Zuboff’s view, the technology industry is developing the means of behavior modification to carry out Skinner’s program.

The emerging system of domination, Zuboff cautions, is not totalitarian; it has no need for violence and no interest in ideological conformity. Instead, it is what she calls “instrumentarian”—it uses everyday surveillance and actuation to channel people in directions preferred by those in control. As an example, she describes China’s efforts to introduce a social credit system that scores individuals by their behavior, their friends, and other aspects of their lives and then uses this score to determine each individual’s access to services and privileges. The Chinese system fuses instrumentarian power and the state (and it is interested in political conformity), but its emerging American counterpart may fuse instrumentarian power and the market.

NO FUTURE?

The Age of Surveillance Capitalism is a powerful and passionate book, the product of a deep immersion in both technology and business that is also informed by an understanding of history and a commitment to human freedom. Zuboff seems, however, unable to resist the most dire, over-the-top formulations of her argument. She writes, for example, that the industry has gone “from automating information flows about you to automating you.” An instrumentarian system of behavior modification, she says, is not just a possibility but an inevitability, driven by surveillance capitalism’s own internal logic: “Just as industrial capitalism was driven to the continuous intensification of the means of production, so surveillance capitalists are . . . now locked in a cycle of continuous intensification of the means of behavioral modification.”

As a warning, Zuboff’s argument deserves to be heard, but Americans are far from mere puppets in the hands of Silicon Valley. The puzzle here is that Zuboff rejects a rhetoric of “inevitabilism”—“the dictatorship of no alternatives”—but her book gives little basis for thinking we can avoid the new technologies of control, and she has little to say about specific alternatives herself. Prophecy you will find here; policy, not so much. She rightly argues that breaking up the big technology companies would not resolve the problems she raises, although antitrust action may well be justified for other reasons. Some reformers have suggested creating an entirely new regulatory structure to deal with the power of digital platforms and improve “algorithmic accountability”—that is, identifying and remedying the harms from algorithms. But all of that lies outside this book.

The more power major technology platforms exercise over politics and society, the more opposition they will provoke—not only in the United States but also around the world. The global reach of American surveillance capitalism may be only a temporary phase. Nationalism is on the march today, and the technology industry is in its path: countries that want to chart their own destiny will not continue to allow U.S. companies to control their platforms for communication and politics.

The competition of rival firms and political systems may also complicate any efforts to reform the technology industry in the United States. Would it be a good thing, for example, to heavily regulate major U.S. technology firms if their Chinese rivals gained as a result? The U.S. companies at least profess liberal democratic values. The trick is passing laws to hold them to these values. If Zuboff’s book helps awaken a countermovement to achieve that result, we may yet be able to avoid the dark future she sees being born today

~ Foreign Affairs

November/December 2019
 

Nevermore

New Member
The New Masters of the Universe
Big Tech and the Business of Surveillance

The big tech companies might only be rivaled by the giant banks and oil and gas firms in terms of malicious contributions to the 21st century social and economic order.

At the risk of overusing the cliched dystopia trend, the key aspect of surveillance technology is its ability to make sure that the individual being observed would never actually know when s/he is being observed, according to Foucault. Amending his concept of surveillance, the technology of the 21st century creates the space for companies to make the individual not even care that they are being observed at any and every moment precisely because the technology has become an inextricable part of human function. Implanted microchips is a glaring example among many. This is no longer the old panopticon style of surveillance, this is "we're contributing to your convenience as long as you consciously accept our presence in your every thought and action".
 

The_FPMer

Well-Known Member
The big tech companies might only be rivaled by the giant banks and oil and gas firms in terms of malicious contributions to the 21st century social and economic order.

At the risk of overusing the cliched dystopia trend, the key aspect of surveillance technology is its ability to make sure that the individual being observed would never actually know when s/he is being observed, according to Foucault. Amending his concept of surveillance, the technology of the 21st century creates the space for companies to make the individual not even care that they are being observed at any and every moment precisely because the technology has become an inextricable part of human function. Implanted microchips is a glaring example among many. This is no longer the old panopticon style of surveillance, this is "we're contributing to your convenience as long as you consciously accept our presence in your every thought and action".
But it's also the individual's fault for always accepting comfort in exchange for his privacy.
 

Nevermore

New Member
But it's also the individual's fault for always accepting comfort in exchange for his privacy.

In cases where it's fully elective, sure. Using such technologies is becoming more and more essential in industrialized societies, so whether it's actually elective is up for debate. It seems to me that doesn't actually matter as long as the individual has no means of refusal. EDIT: Or, I should say, as long as it creates the conditions for docility among individuals (read: workers, prisoners, dissenters/deviants).
 

Picasso

Legendary Member
Orange Room Supporter
The Clash of Capitalisms

The Real Fight for the Global Economy’s Future

By Branko Milanovic



Capitalism rules the world. With only the most minor exceptions, the entire globe now organizes economic production the same way: labor is voluntary, capital is mostly in private hands, and production is coordinated in a decentralized way and motivated by profit.

There is no historical precedent for this triumph. In the past, capitalism—whether in Mesopotamia in the sixth century BC, the Roman Empire, Italian city-states in the Middle Ages, or the Low Countries in the early modern era—had to coexist with other ways of organizing production. These alternatives included hunting and gathering, small-scale farming by free peasants, serfdom, and slavery. Even as recently as 100 years ago, when the first form of globalized capitalism appeared with the advent of large-scale industrial production and global trade, many of these other modes of production still existed. Then, following the Russian Revolution in 1917, capitalism shared the world with communism, which reigned in countries that together contained about one-third of the human population. Now, however, capitalism is the sole remaining mode of production.

It’s increasingly common to hear commentators in the West describe the current order as “late capitalism,” as if the economic system were on the verge of disappearing. Others suggest that capitalism is facing a revived threat from socialism. But the ineluctable truth is that capitalism is here to stay and has no competitor. Societies around the world have embraced the competitive and acquisitive spirit hardwired into capitalism, without which incomes decline, poverty increases, and technological progress slows. Instead, the real battle is within capitalism, between two models that jostle against each other.

Often in human history, the triumph of one system or religion is soon followed by a schism between different variants of the same credo. After Christianity spread across the Mediterranean and the Middle East, it was riven by ferocious ideological disputes, which eventually produced the first big fissure in the religion, between the Eastern and Western churches. So, too, with Islam, which after its dizzying expansion swiftly divided into Shiite and Sunni branches. And communism, capitalism’s twentieth-century rival, did not long remain a monolith, splitting into Soviet and Maoist versions. In this respect, capitalism is no different: two models now hold sway, differing in their political, economic, and social aspects.

In the states of western Europe and North America and a number of other countries, such as India, Indonesia, and Japan, a liberal meritocratic form of capitalism dominates: a system that concentrates the vast majority of production in the private sector, ostensibly allows talent to rise, and tries to guarantee opportunity for all through measures such as free schooling and inheritance taxes. Alongside that system stands the state-led, political model of capitalism, which is exemplified by China but also surfaces in other parts of Asia (Myanmar, Singapore, Vietnam), in Europe (Azerbaijan, Russia), and in Africa (Algeria, Ethiopia, Rwanda). This system privileges high economic growth and limits individual political and civic rights.

These two types of capitalism—with the United States and China, respectively, as their leading examples—invariably compete with each other because they are so intertwined. Asia, western Europe, and North America, which together are home to 70 percent of the world’s population and 80 percent of its economic output, are in constant contact through trade, investment, the movement of people, the transfer of technology, and the exchange of ideas. Those connections and collisions have bred a competition between the West and parts of Asia that is made more intense by the differences in their respective models of capitalism. And it is this competition—not a contest between capitalism and some alternative economic system—that will shape the future of the global economy.

In 1978, almost 100 percent of China’s economic output came from the public sector; that figure has now dropped to less than 20 percent. In modern China, as in the more traditionally capitalist countries of the West, the means of production are mostly in private hands, the state doesn’t impose decisions about production and pricing on companies, and most workers are wage laborers. China scores as positively capitalistic on all three counts.

Capitalism now has no rival, but these two models offer significantly different ways of structuring political and economic power in a society. Political capitalism gives greater autonomy to political elites while promising high growth rates to ordinary people. China’s economic success undermines the West’s claim that there is a necessary link between capitalism and liberal democracy.

Liberal capitalism has many well-known advantages, the most important being democracy and the rule of law. These two features are virtues in themselves, and both can be credited with encouraging faster economic development by promoting innovation and social mobility. Yet this system faces an enormous challenge: the emergence of a self-perpetuating upper class coupled with growing inequality. This now represents the gravest threat to liberal capitalism’s long-term viability.

At the same time, China’s government and those of other political capitalist states need to constantly generate economic growth to legitimize their rule, a compulsion that might become harder and harder to fulfill. Political capitalist states must also try to limit corruption, which is inherent to the system, and its complement, galloping inequality. The test of their model will be its ability to restrain a growing capitalist class that often chafes against the overweening power of the state bureaucracy.

As other parts of the world (notably African countries) attempt to transform their economies and jump-start growth, the tensions between the two models will come into sharper focus. The rivalry between China and the United States is often presented in simply geopolitical terms, but at its core, it is like the grinding of two tectonic plates whose friction will define how capitalism evolves in this century.

LIBERAL CAPITALISM

The global dominance of capitalism is one of two epochal changes that the world is living through. The other is the rebalancing of economic power between the West and Asia. For the first time since the Industrial Revolution, incomes in Asia are edging closer to those in western Europe and North America. In 1970, the West produced 56 percent of world economic output and Asia (including Japan) produced only 19 percent. Today, only three generations later, those proportions have shifted to 37 percent and 43 percent—thanks in large part to the staggering economic growth of countries such as China and India.

Capitalism in the West generated the information and communications technologies that enabled a new wave of globalization in the late twentieth century, the period when Asia began to narrow the gap with the “global North.” Anchored initially in the wealth of Western economies, globalization led to an overhaul of moribund structures and huge growth in many Asian countries. Global income inequality has dropped significantly from what it was in the 1990s, when the global Gini coefficient (a measure of income distribution, with zero representing perfect equality and one representing perfect inequality) was 0.70; today, it is roughly 0.60. It will drop further as incomes continue to rise in Asia.

Although inequality between countries has lessened, inequality within countries—especially those in the West—has grown. The United States’ Gini coefficient has risen from 0.35 in 1979 to about 0.45 today. This increase in inequality within countries is in large part a product of globalization and its effects on the more developed economies in the West: the weakening of trade unions, the flight of manufacturing jobs, and wage stagnation.

Liberal meritocratic capitalism came into being in the last 40 years. It can be best understood in comparison to two other variants: classical capitalism, which was predominant in the nineteenth and early twentieth centuries, and social democratic capitalism, which defined the welfare states in western Europe and North America from World War II to the early 1980s.

Unlike in the classical capitalism of the nineteenth century, when fortunes were to be made from owning, not working, rich individuals in the present system tend to be both capital rich and labor rich—that is, they generate their income both from investments and from work. They also tend to marry and make families with partners of similar educational and financial backgrounds, a phenomenon sociologists call “assortative mating.” Whereas the people at the top of the income distribution under classical capitalism were often financiers, today many of those at the top are highly paid managers, Web designers, physicians, investment bankers, and other elite professionals. These people work in order to earn their large salaries, but whether through an inheritance or their own savings, they also draw a great deal of income from their financial assets.

In liberal meritocratic capitalism, societies are more equal than they were during the phase of classical capitalism, women and ethnic minorities are more empowered to enter the workforce, and welfare provisions and social transfers (paid out of taxes) are employed in an attempt to mitigate the worst ravages of acute concentrations of wealth and privilege. Liberal meritocratic capitalism inherited those last measures from its direct predecessor, social democratic capitalism.

That model was structured around industrial labor and featured the strong presence of unions, which played a huge role in shrinking inequality. Social democratic capitalism presided over an era that saw measures such as the GI Bill and the 1950 Treaty of Detroit (a sweeping, union-negotiated contract for autoworkers) in the United States and economic booms in France and Germany, where incomes rose. Growth was distributed fairly evenly; populations benefited from better access to health care, housing, and inexpensive education; and more families could climb up the economic ladder.

But the nature of work has changed significantly under globalization and liberal meritocratic capitalism, especially with the winnowing away of the industrial working class and the weakening of labor unions. Since the late twentieth century, the share of capital income in total income has been rising—that is, an increasing portion of GDP belongs to the profits made by big corporations and the already wealthy. This tendency has been quite strong in the United States, but it has also been documented in most other countries, whether developing or developed. A rising share of capital income in total income implies that capital and capitalists are becoming more important than labor and workers, and so they acquire more economic and political power. It also means an increase in inequality, because those who draw a large share of their income from capital tend to be rich.

MALAISE IN THE WEST

While the current system has produced a more diverse elite (in terms of both gender and race), the setup of liberal capitalism has the consequence of at once deepening inequality and screening that inequality behind the veil of merit. More plausibly than their predecessors in the Gilded Age, the wealthiest today can claim that their standing derives from the virtue of their work, obscuring the advantages they have gained from a system and from social trends that make economic mobility harder and harder. The last 40 years have seen the growth of a semipermanent upper class that is increasingly isolated from the rest of society. In the United States, the top ten percent of wealth holders own more than 90 percent of the financial assets. The ruling class is highly educated, many of its members work, and their income from that labor tends to be high. They tend to believe that they deserve their high standing.

These elites invest heavily both in their progeny and in establishing political control. By investing in their children’s education, those at the top enable future generations of their kind to maintain high labor income and the elite status that is traditionally associated with knowledge and education. By investing in political influence—in elections, think tanks, universities, and so on—they ensure that they are the ones who determine the rules of inheritance, so that financial capital is easily transferred to the next generation. The two together (acquired education and transmitted capital) lead to the reproduction of the ruling class.

The formation of a durable upper class is impossible unless that class exerts political control. In the past, this happened naturally; the political class came mostly from the rich, and so there was a certain commonality of views and shared interests between politicians and the rest of the rich. That is no longer the case: politicians come from various social classes and backgrounds, and many of them share sociologically very little, if anything, with the rich. Presidents Bill Clinton and Barack Obama in the United States and Prime Ministers Margaret Thatcher and John Major in the United Kingdom all came from modest backgrounds but quite effectively supported the interests of the one percent.

In a modern democracy, the rich use their political contributions and the funding or direct ownership of think tanks and media outlets to purchase economic policies that benefit them: lower taxes on high incomes, bigger tax deductions, higher capital gains through tax cuts to the corporate sector, fewer regulations, and so on. These policies, in turn, increase the likelihood that the rich will stay on top, and they form the ultimate link in the chain that runs from the higher share of capital in a country’s net income to the creation of a self-serving upper class. If the upper class did not try to co-opt politics, it would still enjoy a very strong position; when it spends on electoral processes and builds its own civil society institutions, the position of the upper class becomes all but unassailable.

As the elites in liberal meritocratic capitalist systems become more cordoned off, the rest of society grows resentful. Malaise in the West about globalization is largely caused by the gap between the small number of elites and the masses, who have seen little benefit from globalization and, accurately or not, regard global trade and immigration as the cause of their ills. This situation eerily resembles what used to be called the “disarticulation” of Third World societies in the 1970s, such as was seen in Brazil, Nigeria, and Turkey. As their bourgeoisies were plugged into the global economic system, most of the hinterland was left behind. The disease that was supposed to affect only developing countries seems to have hit the global North.

CHINA’S POLITICAL CAPITALISM

In Asia, globalization doesn’t have that same reputation: according to polls, 91 percent of people in Vietnam, for instance, think globalization is a force for good. Ironically, it was communism in countries such as China and Vietnam that laid the groundwork for their eventual capitalist transformation. The Chinese Communist Party came to power in 1949 by prosecuting both a national revolution (against foreign domination) and a social revolution (against feudalism), which allowed it to sweep away all ideologies and customs that were seen as slowing economic development and creating artificial class divisions. (The much less radical Indian independence struggle, in contrast, never succeeded in erasing the caste system.) These two simultaneous revolutions were a precondition, over the long term, for the creation of an indigenous capitalist class that would pull the economy forward. The communist revolutions in China and Vietnam played functionally the same role as the rise of the bourgeoisie in nineteenth-century Europe.

In China, the transformation from quasi feudalism to capitalism took place swiftly, under the control of an extremely powerful state. In Europe, where feudal structures were eradicated slowly over centuries, the state played a far less important role in the shift to capitalism. Given this history, then, it is no surprise that capitalism in China, Vietnam, and elsewhere in the region has so often had an authoritarian edge.

The system of political capitalism has three defining features. First, the state is run by a technocratic bureaucracy, which owes its legitimacy to economic growth. Second, although the state has laws, these are applied arbitrarily, much to the benefit of elites, who can decline to apply the law when it is inconvenient or apply it with full force to punish opponents. The arbitrariness of the rule of law in these societies feeds into political capitalism’s third defining feature: the necessary autonomy of the state. In order for the state to act decisively, it needs to be free from legal constraints. The tension between the first and second principles—between technocratic bureaucracy and the loose application of the law—produces corruption, which is an integral part of the way the political capitalist system is set up, not an anomaly.

Since the end of the Cold War, these characteristics have helped supercharge the growth of ostensibly communist countries in Asia. Over a 27-year period ending in 2017, China’s growth rate averaged about eight percent and Vietnam’s averaged around six percent, compared with just two percent in the United States.

The flip side of China’s astronomic growth has been its massive increase in inequality. From 1985 to 2010, the country’s Gini coefficient leapt from 0.30 to around 0.50—higher than that of the United States and closer to the levels found in Latin America. Inequality in China has risen starkly within both rural and urban areas, and it has risen even more so in the country as a whole because of the increasing gap between those areas. That growing inequality is evident in every divide—between rich and poor provinces, high-skilled workers and low-skilled workers, men and women, and the private sector and the state sector.

Notably, there has also been an increase in China in the share of income from privately owned capital, which seems to be as concentrated there as in the advanced market economies of the West. A new capitalist elite has formed in China. In 1988, skilled and unskilled industrial workers, clerical staff, and government officials accounted for 80 percent of those in the top five percent of income earners. By 2013, their share had fallen by almost half, and business owners (20 percent) and professionals (33 percent) had become dominant.

A remarkable feature of the new capitalist class in China is that it has emerged from the soil, so to speak, as almost four-fifths of its members report having had fathers who were either farmers or manual laborers. This intergenerational mobility is not surprising in view of the nearly complete obliteration of the capitalist class after the Communists’ victory in 1949 and then again during the Cultural Revolution in the 1960s. But that mobility may not continue in the future, when—given the concentration of ownership of capital, the rising costs of education, and the importance of family connections—the intergenerational transmission of wealth and power should begin to mirror what is observed in the West.

Compared with its Western counterparts, however, this new capitalist class in China may be more of a class by itself than a class for itself. China’s many byzantine forms of ownership—which at the local and national levels blur the lines between public and private—allow the political elite to restrain the power of the new capitalist, economic elite.

For millennia, China has been home to strong, fairly centralized states that have always prevented the merchant class from becoming an independent center of power. According to the French scholar Jacques Gernet, wealthy merchants under the Song dynasty in the thirteenth century never succeeded in creating a self-conscious class with shared interests because the state was always there ready to check their power. Although merchants continued to prosper as individuals (as the new capitalists largely do nowadays in China), they never formed a coherent class with its own political and economic agenda or with interests that were forcefully defended and propagated. This scenario, according to Gernet, differed markedly from the situation around the same time in Italian merchant republics and the Low Countries. This pattern of capitalists enriching themselves without exercising political power will likely continue in China and in other political capitalist countries, as well.

A CLASH OF SYSTEMS

As China expands its role on the international stage, its form of capitalism is invariably coming into conflict with the liberal meritocratic capitalism of the West. Political capitalism might supplant the Western model in many countries around the world.

The advantage of liberal capitalism resides in its political system of democracy. Democracy is desirable in itself, of course, but it also has an instrumental advantage. By requiring constant consultation of the population, democracy provides a powerful corrective to economic and social trends that may be detrimental to the common good. Even if people’s decisions sometimes result in policies that reduce the rate of economic growth, increase pollution, or lower life expectancy, democratic decision-making should, within a relatively limited time period, correct such developments.

Political capitalism, for its part, promises much more efficient management of the economy and higher growth rates. The fact that China has been by far the most economically successful country in the past half century places it in a position to legitimately try to export its economic and political institutions. It is doing that most prominently through the Belt and Road Initiative, an ambitious project to link several continents through improved, Chinese-financed infrastructure. The initiative represents an ideological challenge to the way the West has been handling economic development around the world. Whereas the West focuses on building institutions, China is pouring money into building physical things. The BRI will link partnered countries into a Chinese sphere of influence. Beijing even has plans to handle future investment disputes under the jurisdiction of a Chinese-created court—quite a reversal for a country whose “century of humiliation” in the nineteenth century was capped by Americans and Europeans in China refusing to be subject to Chinese laws.

Many countries may welcome being part of the BRI. Chinese investment will bring roads, harbors, railways, and other badly needed infrastructure, and without the type of conditions that often accompany Western investment. China has no interest in the domestic policies of recipient nations; instead, it emphasizes equality in the treatment of all countries. This is an approach that many officials in smaller countries find particularly attractive. China is also seeking to build international institutions, such as the Asian Infrastructure Investment Bank, following the playbook of the United States after World War II, when Washington spearheaded the creation of the World Bank and the International Monetary Fund.

Beijing has another reason to be more active on the international stage. If China refused to advertise its own institutions while the West continued to advance the values of liberal capitalism in China, large swaths of the Chinese population could become more attracted to Western institutions. The current disturbances in Hong Kong have failed to spread anywhere else in China, but they do illustrate real discontent with the arbitrary application of the law, discontent that may not be confined to the former British colony. The blatant censorship of the Internet is also deeply unpopular among the young and educated.

By projecting the advantages of its political capitalism abroad, China will reduce the appeal of the Western liberal model to its own citizens. Its international activities are essentially matters of domestic survival. Whatever formal or informal arrangement Beijing reaches with states that embrace political capitalism, China is bound to exercise increasing influence on international institutions, which in the past two centuries have been built exclusively by Western states, to serve Western interests.

THE FUTURE OF CAPITALISM

John Rawls, the consummate philosopher of modern liberalism, argued that a good society ought to give absolute priority to basic liberties over wealth and income. Experience shows, however, that many people are willing to trade democratic rights for greater income. One need simply observe that within companies, production is generally organized in the most hierarchical fashion, not the most democratic. Workers do not vote on the products they would like to produce or on how they would like to produce them. Hierarchy produces greater efficiency and higher wages. “Technique is the boundary of democracy,” the French philosopher Jacques Ellul wrote more than half a century ago. “What technique wins, democracy loses. If we had engineers who were popular with the workers, they would be ignorant of machinery.” The same analogy can be extended to society as a whole: democratic rights can be, and have been, given up willingly for higher incomes.

In today’s commercialized and hectic world, citizens rarely have the time, the knowledge, or the desire to get involved in civic matters unless the issues directly concern them. It is telling that in the United States, one of the oldest democracies in the world, the election of a president, who, in many respects in the American system, has the prerogatives of an elected king, is not judged of sufficient importance to bestir more than half the electorate to go to the polls. In this respect, political capitalism asserts its superiority.

The problem, however, is that in order to prove its superiority and ward off a liberal challenge, political capitalism needs to constantly deliver high rates of growth. So while liberal capitalism’s advantages are natural, in that they are built into the setup of the system, the advantages of political capitalism are instrumental: they must be constantly demonstrated. Political capitalism starts with the handicap of needing to prove its superiority empirically. It faces two further problems, as well. Relative to liberal capitalism, political capitalism has a greater tendency to generate bad policies and bad social outcomes that are difficult to reverse because those in power do not have an incentive to change course. It can also easily engender popular dissatisfaction because of its systemic corruption in the absence of a clear rule of law.

Political capitalism needs to sell itself on the grounds of providing better societal management, higher rates of growth, and more efficient administration (including the administration of justice). Unlike liberal capitalism, which can take a more relaxed attitude toward temporary problems, political capitalism must be permanently on its toes. This may, however, be seen as an advantage from a social Darwinist point of view: because of the constant pressure to deliver more to its constituents, political capitalism might hone its ability to manage the economic sphere and to keep on delivering, year in, year out, more goods and services than its liberal counterpart. What appears at first as a defect may prove to be an advantage.

But will China’s new capitalists forever acquiesce to a status quo in which their formal rights can be limited or revoked at any moment and in which they are under the constant tutelage of the state? Or, as they become stronger and more numerous, will they organize, influence the state, and, finally, take it over, as happened in the United States and Europe? The Western path as sketched by Karl Marx seems to have an ironclad logic: economic power tends to emancipate itself and to look after, or impose, its own interests. But the track record of nearly 2,000 years of an unequal partnership between the Chinese state and Chinese business presents a major obstacle to China’s following the same path as the West.

The key question is whether China’s capitalists will come to control the state and if, in order to do so, they will use representative democracy. In the United States and Europe, capitalists used that cure very carefully, administering it in homeopathic doses as the franchise slowly expanded and withholding it whenever there was a potential threat to the property-owning classes (as in Great Britain after the French Revolution, when the right to vote became even more tightly restricted). Chinese democracy, if it comes, will likely resemble democracy in the rest of the world today, in the legal sense of mandating one vote per person. Yet given the weight of history and the precarious nature and still limited size of China’s propertied classes, it is not certain that rule by the middle class could be maintained in China. It failed in the first part of the twentieth century under the Republic of China (which held sway over much of the mainland from 1912 to 1949); only with great difficulty will it be reestablished with greater success 100 years later.

PLUTOCRATIC CONVERGENCE?

What does the future hold for Western capitalist societies? The answer hinges on whether liberal meritocratic capitalism will be able to move toward a more advanced stage, what might be called “people’s capitalism,” in which income from both factors of production, capital and labor, would be more equally distributed. This would require broadening meaningful capital ownership way beyond the current top ten percent of the population and making access to the top schools and the best-paying jobs independent of one’s family background.

To achieve greater equality, countries should develop tax incentives to encourage the middle class to hold more financial assets, implement higher inheritance taxes for the very rich, improve free public education, and establish publicly funded electoral campaigns. The cumulative effect of these measures would be to make more diffuse the ownership of capital and skills in society. People’s capitalism would be similar to social democratic capitalism in its concern with inequality, but it would aspire to a different kind of equality; instead of focusing on redistributing income, this model would seek greater equality in assets, both financial and in terms of skills. Unlike social democratic capitalism, it would require only modest redistributive policies (such as food stamps and housing benefits) because it would have already achieved a greater baseline of equality.

If they fail to address the problem of growing inequality, liberal meritocratic capitalist systems risk journeying down another path—not toward socialism but toward a convergence with political capitalism. The economic elite in the West will become more insulated, wielding more untrammeled power over ostensibly democratic societies, much in the same way that the political elite in China lords over that country. The more that economic and political power in liberal capitalist systems become fused together, the more liberal capitalism will become plutocratic, taking on some features of political capitalism. In the latter model, politics is the way to win economic benefits; in plutocratic—formerly liberal meritocratic—capitalism, economic power will conquer politics. The endpoint of the two systems will be the same: the closing ranks of a privileged few and the reproduction of that elite indefinitely into the future.

~ Foreign Affairs

January/February 2020
 

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How Poverty Ends

The Many Paths to Progress—and Why They Might Not Continue



For all the worries today about the explosion of inequality in rich countries, the last few decades have been remarkably good for the world’s poor. Between 1980 and 2016, the average income of the bottom 50 percent of earners nearly doubled, as this group captured 12 percent of the growth in global GDP. The number of those living on less than $1.90 a day—the World Bank’s threshold for “extreme poverty”—has dropped by more than half since 1990, from nearly two billion to around 700 million. Never before in human history have so many people been lifted out of poverty so quickly.

There have also been massive improvements in quality of life, even for those who remain poor. Since 1990, the global maternal mortality rate has been cut in half. So has the infant mortality rate, saving the lives of more than 100 million children. Today, except in those places experiencing major social disruption, nearly all children, boys and girls alike, have access to primary education. Even deaths from HIV/AIDS, an epidemic that once seemed hopeless, peaked soon after the turn of the millennium and have been declining ever since.

A great deal of the credit for these gains can go to economic growth. In addition to increasing people’s income, steadily expanding GDPs have allowed governments (and others) to spend more on schools, hospitals, medicines, and income transfers to the poor. Much of the decline in poverty happened in two large economies that have grown particularly fast, China and India. But now, as growth has begun to slow down in both countries, there are reasons to be anxious. Can China and India do anything to avoid stalling? And do these countries offer a sure recipe that other countries can imitate, so that they can lift millions of their people out of poverty?

Economists, ourselves included, have spent entire careers studying development and poverty, and the uncomfortable truth is that the field still doesn’t have a good sense of why some economies expand and others don’t. There is no clear formula for growth. If there is a common thread, it is that the fastest growth appears to come from reallocating poorly allocated resources—that is, putting capital and labor toward their most productive use. But eventually, the returns from that process diminish, at which point countries need to find a new strategy for combating poverty.

THE SEARCH FOR GROWTH

Although growth has been key to reducing poverty, “grow faster” or even “continue to grow fast” are more expressions of hope than actionable policy recommendations. During the 1980s and 1990s, economists spent a lot of time running cross-country growth regressions, a type of analysis aimed at predicting growth rates based on a number of variables. Researchers would plug in data—on education, investment, corruption, inequality, culture, distance to the sea, and so on—in an effort to discover which factors helped or hurt growth. The hope was to find a few levers that could be pulled to raise growth.

There were two problems with this search. First, as the economist William Easterly has shown, growth rates for the same country can change drastically from decade to decade without much apparent change in anything else. In the 1960s and 1970s, Brazil was a global front-runner in growth; starting around 1980, it essentially stopped growing for two decades (before growing again and then stopping again). In 1988, Robert Lucas, one of the founders of modern macroeconomics, published an article in which he wondered why India was such a laggard and wished it would become a fast grower, like Egypt or Indonesia. As fate would have it, India’s economy was just beginning a 30-year period of fast growth, while Egypt’s and Indonesia’s were starting to fall behind. Bangladesh, widely derided as a basket case shortly after its founding in 1971, saw its economy grow at five percent or more for most years between 1990 and 2015, and in 2016, 2017, and 2018, Bangladesh’s growth exceeded seven percent—making it among the 20 fastest-growing economies in the world. In all these cases, growth came or went without some obvious reason.

Second, at a more fundamental level, these efforts to discover what causes growth make little sense. Almost every variable for a given country is partly a product of something else. Take education, one factor positively correlated with growth. Education is partly a function of a government’s effectiveness at running and funding schools. But a government that is good at doing that is probably good at other things, as well—say, building roads. If growth is higher in countries with better educational systems, should the schools that educate the workforce get credit, or the roads that make trade easier? Or is something else responsible? Further muddying the picture, it is likely that people feel more committed to educating their children when the economy is doing well—so perhaps growth causes education, and not just the other way around. Trying to tease out single factors that lead to growth is a fool’s errand. So, by extension, is coming up with corresponding policy recommendations.

What, then, are policymakers left with? There are some things clearly worth avoiding: hyperinflation; extremely overvalued fixed exchange rates; communism in its Soviet, Maoist, or North Korean varieties; the kind of total government chokehold on private enterprise that India had in the 1970s, with state ownership of everything from shipyards to shoe factories. But this is not particularly helpful advice today, given that hardly anyone is reaching for such extreme options anymore.

What most developing countries want to know is not whether they should nationalize all private industry overnight but whether they should emulate China’s economic model. Although China is very much a market economy, the country’s approach to capitalism differs greatly from the classic Anglo-Saxon model, characterized by low taxes and few regulations, and even from its European variant, with a greater role for the state. In China, the state, at both the national and local levels, plays an outsize role in the allocation of land, capital, and even labor. Other economies in East Asia have also deviated from the traditional capitalist model and experienced decades of high growth; consider Japan, South Korea, and Taiwan, all places where the government initially pursued an active industrial policy.

All these economies achieved spectacular success after pursuing unconventional policies. The question is whether they did so because of their choices or in spite of them. Did East Asia just luck out, or is there a lesson to be learned from its success? The economies there were also devastated by World War II, so the fast growth might in part have been a function of mere recovery. Moreover, what elements of the Chinese experience are countries supposed to emulate? Should they start with Deng Xiaoping’s China, a dirt-poor economy with comparatively excellent education and health care and a very flat income distribution? Or with the Cultural Revolution, an attempt to wipe out the advantages of the elites and place everyone on an even playing field? Or with the preceding 4,000 years of Chinese history? Those who herald the experience of the East Asian economies to prove the virtue of one approach or the other are dreaming: there is no way to prove any such thing.

There simply is no accepted recipe for how to make poor countries achieve permanently high growth. Even the experts seem to have accepted this. In 2006, the World Bank asked the economist Michael Spence to lead a commission on economic growth. In its final report, the group recognized that there are no general principles for growth and that no two instances of economic expansion are quite alike. Easterly described their efforts in less charitable terms: “After two years of work by the commission of 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out.”

THE LOW-HANGING FRUIT

Economists did learn something, however, from the back-and-forth about the sources of growth. In particular, they came to understand that transitions are an important yet underemphasized part of the growth story. One of the central tenets of traditional growth theory was that transitions were unimportant, because market forces ensured that resources were smoothly and speedily delivered to their most productive use. The most fertile plots of land should be farmed most intensively. The best workers should end up at the most profitable companies. Investors should entrust their capital to the most promising entrepreneurs.

But this assumption is often false. In a given economy, productive and nonproductive firms coexist, and resources do not always flow to their best use. This is particularly true in developing countries, where many markets, such as those for credit, land, or labor, function poorly. The problem is often not so much that talent, technology, and capital are not available but that the economy does not appear to put them to their best use. Some companies have more employees than they need, while others are unable to hire. Some firms use the latest technology, while others never do. Some entrepreneurs with great ideas may not be able to finance them, while others who are not particularly talented continue operating. This is what economists call “misallocation.”

Misallocation saps growth, which means that reallocation can improve it. In recent years, economists have tried to quantify just how much growth could come from moving resources to their best uses. Chang-Tai Hsieh and Peter Klenow, for example, found that merely reallocating factors within certain industries, while holding capital and labor constant, could increase productivity in China by 30–50 percent and in India by 40–60 percent. If reallocation took place across a broader swath of the economy, the payoff would be even larger.

In other words, it is possible to spur growth just by reallocating existing resources to more appropriate uses. If a country starts off with its resources very poorly used, as did China before Deng or India in its days of extreme dirigisme, then the first benefits of reform may come from simply harnessing so many poorly used resources. There are many ways to improve allocation, from the moves away from collectivized agriculture that China made under Deng to the efforts India made in the 1990s to speed the resolution of debt disputes and thus make credit markets more efficient.

But the flip side to this is that at a certain point, the gains start to diminish. Many developing economies are now reaching this point. They and the rest of the world will have to come to terms with an uncomfortable truth: the era of breathtaking growth is likely coming to an end.

Consider China’s trajectory. By now, the country has gotten rid of its most blatant forms of misallocation. Wisely, it plowed back the gains from the resulting growth in new investment, and as output grew, it sold that output abroad, benefiting from the world’s seemingly endless hunger for exports. But that strategy has largely run its course, too: now that China is the largest exporter in the world, it cannot possibly continue to grow its exports much faster than the world economy is growing.

China might still eventually catch up with U.S. output in per capita terms, but its slowing growth means that it will take a long time. If Chinese growth falls to five percent per year, which is not implausible, and stays there, which is perhaps optimistic, and if U.S. growth continues to hover around 1.5 percent, then it will take at least 35 years for China to catch up with the United States in terms of per capita income. In the meantime, it makes sense for Chinese authorities to accept that fast growth is temporary, as they appear to be doing. In 2014, Chinese President Xi Jinping spoke about adjusting to “the new normal” of slower growth. Many interpreted this to mean that although the days of double-digit annual growth were behind it, the Chinese economy would still expand at seven percent per year for the foreseeable future. But even that may be too optimistic. The International Monetary Fund projects that China’s growth will fall to 5.5 percent by 2024.

A similar story is playing out in India. Beginning around 2002, the country’s manufacturing sector saw sharp improvements in resource allocation. Plants swiftly upgraded their technology, and capital increasingly flowed to the best firms within each industry. Because the improvements appeared to be unrelated to any change in policy, some economists spoke of “India’s mysterious manufacturing miracle.” But it was no miracle—just a modest improvement from a dismal starting point. One can imagine various explanations for the upswing. Perhaps there was a generational shift, as control of companies passed from parents to their children, many of whom had been educated abroad and were often more ambitious and savvier about technology and world markets. Or perhaps it was the effect of the accumulation of modest profits, which eventually made it possible to pay for the shift to bigger and better plants. Regardless of the precise cause, India’s economic rise is best understood as the result of correcting misallocation: the type of growth that can come from picking low-hanging fruit.

That kind of growth cannot go on forever. As the economy sheds its worst plants and firms, the space for further improvement naturally shrinks. Today, India seems to be facing the prospect of a steep deceleration. The International Monetary Fund, the Asian Development Bank, and the Organization for Economic Cooperation and Development have all downgraded their growth estimates for India for 2019–20 to around six percent. Others have suggested that India’s economy may have already slowed: Arvind Subramanian, New Delhi’s chief economic adviser from 2014 to 2018, has argued that official estimates have overstated the country’s growth by as much as 2.5 percentage points in recent years. Growth in India could recover, but at some point, it will slow for good. Indeed, it is possible that India could get stuck in the dreaded “middle-income trap,” whereby fast-growing economies start to stall. It would not be alone: according to the World Bank, of 101 middle-income economies in 1960, only 13 had become high income by 2008.

Unfortunately, just as economists don’t know much about how to make growth happen, they know very little about why some countries, such as Mexico, get stuck in the middle-income trap and why some, such as South Korea, don’t. One very real danger is that in trying to hold on to fast growth, countries facing sharply slowing growth will veer toward policies that hurt the poor now in the name of future growth. In a bid to preserve growth, many countries have interpreted the prescription to be business friendly as a license to enact all kinds of anti-poor, pro-rich policies, such as tax cuts for the rich and bailouts for corporations.

Such was the thinking in the United States under President Ronald Reagan and in the United Kingdom under Prime Minister Margaret Thatcher. If the experience of those two countries is any guide, however, asking the poor to tighten their belts in the hope that giveaways to the rich will eventually trickle down does nothing for growth and even less for the poor: in both, growth hardly picked up at all, but inequality skyrocketed. Globally, the one group that did even better than the poorest 50 percent between 1980 and 2016 was the top one percent—the rich in the already rich countries, plus an increasing number of superrich in the developing world—who captured an astounding 27 percent of total growth during that time. The 49 percent of people below them, which includes almost everybody in the United States and Europe, lost out, and their incomes stagnated throughout that period.

The explosion of inequality in economies that are no longer growing is bad news for future growth. The political backlash leads to the election of populist leaders touting miracle solutions that rarely work—and often lead to Venezuela-style disasters. In rich countries, the consequences are already visible, from the rising trade barriers in the United States to the mayhem of Brexit in the United Kingdom. Even the International Monetary Fund, once a bastion of growth-first orthodoxy, has come to recognize that sacrificing the poor to promote growth is bad policy. It now requires its country teams to take inequality into consideration when giving advice.

EYES ON THE PRIZE

Growth is likely to slow, at least in China and India, and there may be very little that anyone can do about it. It may well pick up in other countries, but no one can forecast where or why. The good news is that even in the absence of growth, there are ways to improve other indicators of progress. What policymakers need to remember is that GDP is a means to an end, not an end in itself. It is a useful means, no doubt, especially when it creates jobs or raises wages or increases budgets so that the government can redistribute more. But the ultimate goal remains improving quality of life, especially for those who are the worst off.

Quality of life means more than just consumption. Although better lives are indeed partly about being able to consume more, most human beings, even the very poor, care about more than that. They want to feel worthy and respected, keep their parents healthy, educate their children, have their voices heard, and follow their dreams. A higher GDP may help the poor achieve many of those things, but it is only one way of doing so, and it is not always the best one. In fact, quality of life varies enormously between countries with similar income levels: for example, Sri Lanka has more or less the same GDP per capita as Guatemala but far lower maternal, infant, and child mortality rates.

Such disparities should not be so surprising. Looking back, it is clear that many of the important successes of the last few decades were the result not of economic growth but of a direct focus on improving particular outcomes, even in countries that were and have remained very poor. The under-five mortality rate, for example, has fallen drastically across the world, even in some very poor countries whose economies have not grown particularly fast. Credit goes mostly to policymakers’ focus on newborn care, vaccination, and malaria prevention. The same approach can and should be applied to any of the other factors that improve quality of life, be it education, skills, entrepreneurship, or health. The focus should be identifying the key problems and figuring out how to solve them.

This is patient work: spending money by itself does not necessarily deliver real education or good health. But unlike with growth, experts actually know how to make progress. One big advantage of focusing on clearly defined interventions is that these policies have measurable objectives and therefore can be directly evaluated. Researchers can experiment with them, abandon the ones that don’t work, and improve the ones that do. This is what we have spent a good part of our careers doing and what hundreds of researchers and policymakers now routinely do with the help of such organizations as the Abdul Latif Jameel Poverty Action Lab, or J-PAL (the network we started at MIT), and Innovations for Poverty Action, a group founded by the economist Dean Karlan.

So although no one knows how to transform Kenya into South Korea, thanks to the work of Jessica Cohen and Pascaline Dupas, we do know, for example, that the massive distribution of free insecticide-treated bed nets is the most effective way to fight malaria. In a series of randomized trials, these researchers found that charging people for bed nets, which was once thought to make the nets more likely to be used, in fact decreased their use—evidence that eventually convinced major development organizations to abandon fees. Between 2014 and 2016, a total of 582 million insecticide-treated mosquito nets were delivered globally. Of these, 75 percent were given out through mass distribution campaigns of free bed nets, saving tens of millions of lives.

BEYOND GROWTH

The bottom line is that the true ingredients of persistent economic growth remain mysterious. But there is much that can be done to get rid of the most egregious sources of waste in poor countries’ economies and of suffering among their people. Children who die of preventable diseases, schools where teachers do not show up, court systems that take forever to adjudicate cases—all no doubt undercut productivity and make life miserable. Fixes to such problems may not propel countries to permanently faster growth, but they could dramatically improve the welfare of their citizens.

Moreover, although no one knows when the growth locomotive will start in a given country, if and when it does, the poor will be more likely to hop on the train if they are in decent health, can read and write, and can think beyond their immediate circumstances. It may not be an accident that many of the winners of globalization have been communist countries that invested heavily in the human capital of their populations for ideological reasons (such as China and Vietnam) or places that pursued similar policies because they were threatened by communism (such as South Korea and Taiwan).

The best bet, therefore, for a developing country such as India is to attempt to raise living standards with the resources it already has: investing in education and health care, improving the functioning of the courts and banks, and building better roads and more livable cities. The same logic holds for policymakers in rich countries, who should invest directly in raising living standards in poorer countries. In the absence of a magic potion for development, the best way to profoundly transform millions of lives is not to try in vain to boost growth. It is to focus squarely on the thing that growth is supposed to improve: the well-being of the poor.

~ Foreign Affairs

January/February 2020
 

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Dirty Money

How Corruption Shapes the World

By Oliver Bullough

There is an old joke about a drunkard searching for his keys under a streetlight. A passerby stops to help. After a few minutes of failing to find them, he asks the drunkard if he is sure that this is where he lost them. “No,” the drunkard replies, “but it’s dark everywhere else.”

That is how humans approach many daunting tasks, not least of them writing about corruption. We know that it’s a problem, we know that it’s serious, but we are reduced to hunting for evidence in the light cast by the few countries willing and able to prosecute the crime. Darkness stretches all around: we are missing out on a whole world of evidence that remains completely obscure.

In a speech he delivered in 1996, James Wolfensohn, then president of the World Bank, likened corruption to cancer. “Corruption diverts resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures, and deters foreign investors,” Wolfensohn explained. It was a new, post–Cold War world, and he wanted to spearhead a push for cleanliness and corporate accountability now that it was no longer acceptable to ignore kleptocracy for reasons of geopolitical expediency. Two years later, Wolfensohn’s counterpart at the International Monetary Fund, the economist Michel Camdessus, put a figure on the phenomenon: he estimated that between two and five percent of global money flows had criminal origins.

Anything involving that much money and doing that much damage to so many people should clearly become a public policy priority as well as a focus of detailed research. Activists, authorities, and journalists need data on the scope, dynamics, and causes of the problem to figure out how best to fight it. And yet, despite efforts by Wolfensohn, Camdessus, and others to sound the alarm, such clarity has remained elusive. Some additional light has been cast on the issue over the past two decades, mostly by legal proceedings brought under U.S. and British antibribery laws and by reports produced by nongovernmental organizations such as Global Witness and Transparency International. But on the whole, we know little more than we did 20 years ago.

Camdessus’s figure was based on very rough estimates, but it has been fossilized by long usage. Those who have tried to improve on it have come up against an obstacle that has long prevented a clearer picture of global corruption: the opaque financial structures that corporations and wealthy individuals use to hide their assets. Academics such as the economist Gabriel Zucman have done excellent work to ascertain the volume of such secret wealth. Zucman has concluded that around eight percent of global financial assets are concealed in various offshore accounts. No one knows, however, what proportion of that money is criminal in origin, let alone how much comes from bribes.

This means that no reliable data exist to measure how widespread corruption is, which prevents systematic action against bad actors, including major corporations that routinely pay bribes in exchange for contracts, concessions, and other favorable treatment. Given the urgency of the problem, it is notable that governments, universities, and think tanks have not dedicated more resources to doing the basic research. The generous explanation for their failure is that journalists and academics have not succeeded in adequately conveying the urgency of the issue, which has thus not caught the public imagination. A less charitable explanation is that, around the world, powerful people worry that restricting dark and dirty cash will cost them, and so they have taken steps to keep the public ignorant of what is happening.

To make matters worse, much of the research that does get published is misleading. Transparency International’s annual Corruption Perceptions Index (CPI) ranks how crooked each country is according to experts and business executives, and it underpins much of the journalistic and policy discussion of corruption. But the index considers only the public sector and focuses on “officials using public office for private gain.” It explicitly does not consider, among other things, illicit financial flows, money laundering, and what Transparency International calls “enablers of corruption.” In this limited view, when it comes to the act of bribery, the only party that contributes to corruption is the one who takes the bribe. That leaves out not only whoever pays the bribe but also the entire support mechanism for modern corruption, provided by, among others, the bankers in London and Zurich who accept the dirty money, the lawyers in New York who channel that money into real estate, and the officials in offshore tax havens who disguise its ownership behind shell companies. Thinking about corruption without reference to those players is akin to discussing the drug trade only in the context of an addict buying his fix and excluding the farms and factories that produce and process illicit substances, the cartels and dealers who distribute them, the governments that protect the distributors, and the banks that launder their money.

The consequences of this narrow scope are perverse. In the latest CPI, issued in January 2019, Denmark was ranked as the cleanest country in the world despite the fact that just months earlier its largest bank had confessed to laundering 200 billion euros—one of the largest money-laundering operations the world has ever seen. This is representative of a larger, systemic problem with the CPI: it covers only the aspects of corruption that take place in poorer countries and not those that help boost the economies of the wealthy Western countries. A true measure of corruption would give at least as much weight to the willingness of a jurisdiction to launder dirty money.

Fortunately, a growing body of work is challenging the traditional approach. David Montero’s Kickback is a fine new addition to the genre. Like everyone else trying to get their arms around corruption, Montero must confine himself to the available data. But he adds caveats reflecting the limited nature of the material, avoids the inflated estimates that afflict more sensationalistic accounts, and points the way toward some new thinking about how to combat this global scourge.

“A SLOW-MOTION DISASTER”

Montero selects his evidence with care, and he correctly focuses not just on the recipients of bribes but also on the companies that pay them. These include some of the biggest names in business: Chevron, Halliburton, IBM, Pfizer, and many more. “Bribery, unlike other crimes, often plays out slowly, with secret payments flowing between a company and a government over the course of years,” he writes. “The result is a slow-motion disaster, leaving economic, political and social damage that cannot be detected unless someone begins to look for it.”

Montero analyzes a succession of scandals in order to draw out different lessons. He begins with the oil-for-food program that the UN ran in Iraq between 1995 and 2003, when the United States invaded the country. That deeply flawed initiative allowed more than 2,000 corporations to connive with the regime of the Iraqi dictator Saddam Hussein to avoid UN-imposed sanctions, and it serves as an example of the failure of global anticorruption conventions. The program was intended to ensure that the most vulnerable people in Iraq did not suffer for the actions of their government. Instead, it allowed insiders in Baghdad to profit by extracting kickbacks from companies hungry for oil, all the while denying ordinary Iraqis food, clean water, and basic medicines.

The scandal demonstrated how, when confronted by officials who demand bribes, corporations often put the interests of their shareholders ahead of those of their own governments. The reasons why are spelled out in perhaps the most interesting section of Montero’s book, in which he contrasts the risks and rewards that come from engaging in corrupt behavior. He cites the work of the economist Jonathan Karpoff, whose research suggests that, on average, companies have little more than a five percent chance of getting caught if they pay a bribe overseas; meanwhile, each $1 they spend on bribes results in an average of an additional $5 in earnings. The reward far outweighs the risk. From this perspective, paying bribes is rational.

Karpoff’s conclusions emerge from legal proceedings brought under the Foreign Corrupt Practices Act of 1977, a piece of U.S. legislation passed in the aftermath of Watergate that prohibits American companies from engaging in bribery overseas. FCPA prosecutions and the congressional investigations that sometimes accompany them are central to understanding how corruption works and remain the best resource available to anyone working on the problem. Montero uses them to great effect in his analysis of corruption in the Greek defense industry in the late 1990s and early years of this century, when American, Russian, and European arms companies paid off government insiders in order to win contracts, inflating their prices to cover the cost of the bribes. The higher prices naturally added to Greece’s intractable public debt, which exploded into a crisis when the country went bust in 2009.

Montero also explains how, before Chinese authorities took action a few years ago, Western pharmaceutical companies exploited the fact that Chinese doctors’ earnings were tied to the amount of drugs they prescribed. The payment system was intended to reward performance but ended up incentivizing overmedication. The results were predictable: middlemen bribed doctors on behalf of major pharmaceutical firms desperate to take advantage of growth that was no longer available in their home markets. This not only undermined trust in doctors but also had serious public health consequences. “China’s pronounced overuse of antibiotics is responsible for the appearance of antibiotic-resistant strains of various diseases, such as tuberculosis and syphilis, as well as various superbugs,” Montero writes. “Health officials have called the latter ‘nightmare bacteria’ because they remain resistant to all known antibiotics and can therefore be lethal.”

Montero summarizes research showing that the higher the level of public dishonesty in a country, the lower its economic growth and the greater its income inequality. And that is just what can be measured: How do you quantify the loss of trust in public officials and institutions that results from pervasive bribery? If U.S. President Donald Trump’s assault on the norms of governance has been traumatic for many Americans, how must the residents of a country such as Nigeria feel after decades of entrenched kleptocracy? How will Ukrainians, for example, be able to build true democracy when they have become so accustomed to public servants stealing rather than serving?

CRACKING THE SHELLS

Everyone who writes about corruption finds it easier to diagnose the disease than to prescribe a treatment. This results partly from the lack of knowledge about the precise dimensions of corruption and also reflects just how stubborn the problem is. The modern epidemic of offshore-enabled venality, for example, is an outgrowth of globalization, and anything that restricted those financial flows would also limit the activities of powerful, well-networked, and tax-averse corporations and individuals. Such efforts would naturally struggle to gain political traction.

Many of Montero’s prescriptions focus on the countries where bribes are solicited, and he advocates better funding for anticorruption agencies and the strengthening of independent judiciaries through higher salaries and better legal protections. He does not, however, address the problem of how to achieve those changes in countries that have become so corrupt that the entire political class is on the take. Why would anyone in the Kremlin, for example, agree to reforms that would undermine its entire business model? Even if ordinary Russians were to rise up in revolt, the elite would still get to keep its stolen wealth, which is stashed irretrievably offshore. The only solution is long-term, incremental efforts to force honesty on public servants and private citizens alike. But that is incredibly hard to achieve when the rewards of corruption are so high and the downsides are so few.

Looking beyond the countries where bribes are solicited and toward the places where bribes are paid and laundered, Montero is correct in calling for governments to work together more closely to combat what he calls “the global kickback system,” particularly in countries such as Cyprus, the United Kingdom, and the United States, which are important nodes in the international banking system. He does not specify new ways in which they should act together, however, or how they can overcome the distrust that has infected politics all over the world—and made international cooperation less likely now than it has been for decades.

A critical solution that Montero does not tackle at great length is for governments to commit to corporate transparency. Every episode of corruption described in Kickback involves the use of anonymous corporate structures that allow crooked officials to put a layer of deniability between themselves and the bribes they have solicited and make it possible for corporations to claim that they were unaware that they were engaging in bribery. It remains easy and absurdly cheap to create a network of shell companies that will baffle even the best-resourced law enforcement agencies by making it virtually impossible to determine the true owners of any particular financial entity. History has shown that when given the option of committing a crime with impunity, humans tend to commit the crime.

Although there has been some movement in the European Union and among some lawmakers in the U.S. Congress toward forcing companies to declare their true owners, the effort remains patchy and underresourced and has barely started to apply to the trusts and foundations that hold a great deal of the world’s wealth. If major wealth havens such as Switzerland, the United Kingdom, and the United States were to publicly declare the ownership of all real estate holdings and corporate entities, the space available for corrupt actors would shrink dramatically, and law enforcement agencies would find their jobs much easier.

Montero has done a good job of explaining why everyone should care about corruption. It is now up to politicians, academics, and government officials to make it a priority. Otherwise, the kind of authoritarian kleptocracy now ascendant in places such as the Philippines and Russia will become ever more the global norm. Consider how even relatively small amounts of murky cash have destabilized the U.S. political system. Fighting corruption is not just worth doing for its own sake. It is crucial to the defense of liberal democracy.

~ Foreign Affairs

January/February 2020
 

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The Starving State

Why Capitalism’s Salvation Depends on Taxation

By Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman



For millennia, markets have not flourished without the help of the state. Without regulations and government support, the nineteenth-century English cloth-makers and Portuguese winemakers whom the economist David Ricardo made famous in his theory of comparative advantage would have never attained the scale necessary to drive international trade. Most economists rightly emphasize the role of the state in providing public goods and correcting market failures, but they often neglect the history of how markets came into being in the first place. The invisible hand of the market depended on the heavier hand of the state.

The state requires something simple to perform its multiple roles: revenue. It takes money to build roads and ports, to provide education for the young and health care for the sick, to finance the basic research that is the wellspring of all progress, and to staff the bureaucracies that keep societies and economies in motion. No successful market can survive without the underpinnings of a strong, functioning state.

That simple truth is being forgotten today. In the United States, total tax revenues paid to all levels of government shrank by close to four percent of national income over the last two decades, from about 32 percent in 1999 to approximately 28 percent today, a decline unique in modern history among wealthy nations. The direct consequences of this shift are clear: crumbling infrastructure, a slowing pace of innovation, a diminishing rate of growth, booming inequality, shorter life expectancy, and a sense of despair among large parts of the population. These consequences add up to something much larger: a threat to the sustainability of democracy and the global market economy.

This drop in the government’s share of national income is in part the result of conscious choices. In recent decades, lawmakers in Washington—and, to a somewhat lesser extent, in many other Western countries—have embraced a form of fundamentalism, according to which taxes are a hindrance to economic growth. Meanwhile, the rise of international tax competition and the growth of a global tax-avoidance industry have put additional downward pressure on revenues. Today, multinationals shift close to 40 percent of their profits to low-tax countries around the world. Over the last 20 years, according to the economist Brad Setser, U.S. firms have reported growth in profits only in a small number of low-tax jurisdictions; their reported profits in most of the world’s major markets have not gone up significantly—a measure of how cleverly these firms shift capital to avoid taxes. Apple, for example, has demonstrated as much inventiveness in tax avoidance as it has in its technical engineering; in Ireland, the technology giant has paid a minuscule annual tax rate as low as 0.005 percent in some years.

It is not just corporations that engage in tax avoidance; among the superrich, dodging taxes is a competitive sport. An estimated eight percent of the world’s household financial wealth is hidden in tax havens. Jurisdictions such as the Cayman Islands, Panama, and Switzerland have structured their economies around the goal of helping the world’s rich hide their assets from their home governments. Even in places that don’t show up on international watch lists—including U.S. states such as Delaware, Florida, and Nevada—banking and corporate secrecy enable people and firms to evade taxes, regulation, and public accountability.

Unchecked, these developments will concentrate wealth among a smaller and smaller number of people, while hollowing out the state institutions that provide public services to all. The result will be not just increased inequality within societies but also a crisis and breakdown in the very structure of capitalism, in the ability of markets to function and distribute their benefits broadly.

A WORLD FOR PLUTOCRATS

The parlous state of affairs today stems from policy choices that allowed elites to limit the reach of governments, including their ability to implement taxes. In the United States, the Supreme Court has at various times played the role of guardian of plutocratic privilege, making legally dubious rulings against a direct income tax in 1895 and early New Deal policies in the 1930s. At the state level, an emphasis on sales taxes over property taxes shifted the burden disproportionately onto the poor and people of color, while sheltering wealthier white households. Despite these obstacles, the United States succeeded in implementing one of the world’s most progressive tax systems from the 1930s to the late 1970s, with top marginal income tax rates exceeding 90 percent, top estate tax rates nearing 80 percent, and effective tax rates on the very wealthy of about 60 percent at the middle of the century. But the administration of President Ronald Reagan dismantled this system, slashing the top marginal income tax rate to 28 percent in 1986, at the time the lowest among industrialized countries. There was a brief moment in 2010 when the estate tax was phased out completely under the terms of President George W. Bush’s 2001 and 2003 tax cuts (those cuts were repealed in 2011, and the estate tax was reinstated).

The Bush administration broke with historical norms by starting a war in 2003 at the same time as it lowered taxes on the rich. It slashed top marginal rates, especially on those earning income from capital, while launching a calamitous war in Iraq that is estimated to have cost the United States upward of $3 trillion. In 2017, the Trump administration pushed this trend still further, not only lowering top marginal tax rates and corporate taxes but also creating so-called opportunity zone schemes that allow the wealthy to avoid capital gains taxes by investing in poor neighborhoods. In practice, however, real estate developers have used the new tax incentives to build luxury condos and yoga studios in affluent communities that are adjacent to—and even included in—the opportunity zones.

Over the last four decades, new loopholes, the rise of a cottage industry of advisers eager to help firms avoid taxes, and the spread of a corporate culture of tax avoidance have led to a situation in which a number of major U.S. companies pay no corporate taxes at all. This phenomenon is hardly unique to the United States. Many governments around the world have made their tax systems less progressive, all in the context of rising inequality. This process has been driven by reductions in the taxation of capital, including the fall of corporate taxes. The global average corporate income tax rate fell from 49 percent in 1985 to 24 percent in 2018. Today, according to the latest available estimates, corporations around the world shift more than $650 billion in profits each year (close to 40 percent of the profits they make outside the countries where they are headquartered) to tax havens, primarily Bermuda, Ireland, Luxembourg, Singapore, and a number of Caribbean islands.

Much of the blame lies with the existing transfer price system, which governs the taxation of goods and services sold between individual parts of multinational companies. This system was invented in the 1920s and has barely changed since then. It leaves important determinations (such as where to record profits) to companies themselves (regardless of where the profit-making activity took place), since the system was designed to manage the flows of manufactured goods that defined the global economy in the 1920s, when most trade occurred between separate firms; it was not designed for the modern world of trade in services, a world in which most trade takes place between subsidiaries of corporations. When one of us (Stiglitz) chaired the Council of Economic Advisers, in the 1990s, under President Bill Clinton, he waged a quiet but unsuccessful campaign to change the global system to the kind used within the United States to allocate profits between states (this arrangement is known as “formulary apportionment,” whereby, for the purpose of assessing a company’s tax, profits are assigned to a given state based on the share of the firm’s sales, employment, and capital within that state). Entrenched corporate interests defended the status quo and got their way. Since then, intensifying globalization has only further encouraged the use of the transfer price system for tax dodging, compounding the problems posed by the flight of capital to tax havens.

Nowhere is tax avoidance more striking than in the technology sector. The richest companies in the world, owned by the richest people in the world, pay hardly any taxes. Technology companies are allowed to shift billions of dollars of profits to places such as Jersey, one of the Channel Islands, where the corporate tax rate is zero, with complete impunity. Some countries, including France and the United Kingdom, have attempted to impose a tax on some of the revenues the technology giants generate in their jurisdictions. But France’s small, three percent tax, for example, has only reinforced the need for a new global agreement, for the tax does not go far enough; it targets only the digital sector, even though profit shifting is rampant across the board, including in the pharmaceutical, financial services, and manufacturing industries.

HOW THE RICHEST GET RICHER

Many policymakers, economists, corporate tycoons, and titans of finance insist that taxes are antithetical to growth. Opponents of tax increases claim that firms will reinvest more of their profits when less gets siphoned off by the government. In this view, corporate investment is the engine of growth: business expansion creates jobs and raises wages, to the ultimate benefit of workers. In the real world, however, there is no observable correlation between capital taxation and capital accumulation. From 1913 to the 1980s, the saving and investment rates in the United States have fluctuated but have usually hovered around ten percent of national income. After the tax cuts in the 1980s, under the Reagan administration, capital taxation collapsed, but rates of saving and investment also declined.

The 2017 tax cut illustrates this dynamic. Instead of boosting annual wages by $4,000 per family, encouraging corporate investment, and driving a surge of sustained economic growth, as its proponents promised it would, the cut led to minuscule increases in wages, a couple of quarters of increased growth, and, instead of investment, a $1 trillion boom in stock buybacks, which produced only a windfall for the rich shareholders already at the top of the income pyramid. The public, of course, is paying for the bonanza: the United States is experiencing its first $1 trillion deficit.

Lower taxes on capital have one main consequence: the rich, who derive most of their income from existing capital, get to accumulate more wealth. In the United States, the share of wealth owned by the richest one percent of the adult population has exploded, from 22 percent in the late 1970s to 37 percent in 2018. Conversely, over the same period, the wealth share of the bottom 90 percent of adults declined from 40 percent to 27 percent. Since 1980, what the bottom 90 percent has lost, the top one percent has gained.

This spiraling inequality is bad for the economy. For starters, inequality weakens demand: the bulk of the population has less money to spend, and the rich don’t tend to direct their new income gains to the purchase of goods and services from the rest of the economy; instead, they hoard their wealth in offshore tax havens or in pricey art that sits in storage bins. Economic growth slows because less money overall is spent in the economy. In the meantime, inequality is passed down from generation to generation, giving the children of the wealthy a better shot at getting into the top schools and living in the best neighborhoods, perpetuating a cycle of ever-deeper division between the haves and the have-nots.

Inequality also distorts democracy. In the United States especially, millionaires and billionaires have disproportionate access to political campaigns, elected officials, and the policymaking process. Economic elites are almost always the winners of any legislative or regulatory battle in which their interests might conflict with those of the middle class or the poor. The oil magnates the Koch brothers and other right-wing financiers have successfully built political machines to take over state houses and push anti-spending and anti-union laws that exacerbate inequality. Even rich individuals who are seen as more politically moderate—technology executives, for instance—tend to focus their political efforts on narrow technocratic issues rather than the distributional conflicts that define today’s politics.

MAKE THEM PAY

Nothing less than a bold new regime of domestic and international taxes will save wealthy democracies and economies from the distortions and dangers of rampant inequality. The first order of business should be establishing a fiscal system that generates the tax revenue required for a twenty-first-century economy—an amount that will need to be even higher than those prevalent in the middle of the twentieth century, the period of the fastest economic growth in the United States and in which prosperity was more evenly shared. In today’s innovative economy, governments will need to spend more on basic research and education (12 years of schooling might have sufficed in 1950, but not today). In today’s urbanized society, governments need to spend more on expensive urban infrastructure. In today’s service economy, governments need to spend more on health care and caring for the aged, areas in which the state has naturally played a central role. In today’s dynamic and ever-changing economy, governments will have to spend more to help individuals cope better with the inevitable dislocations of economic transformation. Addressing the existential problem of climate change will also require large amounts of investment in green infrastructure.

With more and more income going to the very wealthy and to corporations, only a far more progressive tax code will provide the necessary level of revenue. There is no reason that the salaries of workers should be taxed at a higher rate than capital. Plumbers, carpenters, and autoworkers should not pay a higher rate than private-equity managers; mom-and-pop retailers should not pay a higher rate than the world’s richest corporations.

The next step would be to eliminate special provisions that exempt dividends, capital gains, carried interest, real estate, and other forms of wealth from taxation. Today, when assets are passed on from one generation to another, the underlying capital gains escape taxation altogether; as a consequence, many wealthy individuals manage to avoid paying capital gains taxes on their assets. It is as if the tax code were designed to create an inherited plutocracy, not to create a world with equality of opportunity. Without increasing tax rates, eliminating these special provisions for the owners of capital—making them pay the same rate as workers—would generate trillions of dollars over the next ten years.

Another improvement would be a wealth tax, such as the one recently proposed by Elizabeth Warren, the Democratic U.S. senator from Massachusetts who is currently running for president. She has proposed a tax of two percent on wealth above $50 million and six percent on wealth above $1 billion. Such a tax could raise nearly $3.6 trillion over the next decade. It would be paid by the 75,000 richest American families—less than 0.1 percent of the population.

To curb the evasion of income and wealth taxes, countries will have to cooperate much more with one another. Instead of allowing rich people and corporations to hide their assets through elaborate offshore trusts and other legal vehicles, countries must create a global wealth registry that records the ultimate owners of all assets. The United States could start by drawing on the comprehensive information that already exists within private financial institutions such as the Depository Trust Company. The European Union could easily do the same, and these registries could eventually be merged.

Governments would also have to tax corporations chartered in their jurisdictions on their global income and not allow them to shift money to low-tax jurisdictions through the use of subsidiaries or other means. Instead of effectively letting firms self-declare the national provenance of their profits, governments should attribute taxable corporate income to places through formulary apportionment. Under this system, Apple could not get away with its profit-shifting gimmicks. Finally, a global minimum tax should be instituted to set a floor on how low would-be tax havens could drop their rates.

Once these new rules are in place, they will need adequate enforcement—as will the tax laws already on the books. The Internal Revenue Service has been devastated in recent years, losing thousands of employees between 2010 and 2016, a trend that has only gotten worse in the Trump era. The agency needs to add thousands of employees, offer them competitive salaries, and upgrade its outdated information technology systems.

At the international level, policymakers have to find the right mode of cooperation that will produce the best and most rigorous enforcement of tax collection. One option would require the biggest developed economies (the United States and western European countries) to move first, demanding that firms that trade in their markets follow the new rules and using diplomatic pressure to get other countries to adopt a similar system (which would benefit them through the collection of tax revenue they cannot tap now). There is a substantial debate raging over whether the world needs new trade agreements after decades of trade liberalization have boosted inequality within countries; regardless, it would make sense to condition the signing of any new trade deals on adherence to stricter rules on tax cooperation. There may be room for a multilateral approach—for instance, by turning the currently beleaguered World Trade Organization into a body that could help with tax enforcement and other matters of international cooperation, such as climate change. Substantial changes would be needed to the culture and personnel of the WTO to make that happen. Whichever path governments choose, it is important to recognize that there is an alternative to neoliberal trade policy. Instead of a model that limits the ability of sovereign states to guard against the flight of capital and tax avoidance, governments can build a model of trade that supports tax justice.

In the United States, most of these reforms could be achieved within the existing constraints of the U.S. Constitution. There is a debate about the wealth tax, which conservatives have claimed would run up against constitutional strictures on direct taxation; many historians and legal scholars dispute this conservative objection. Some critics might also allege that these proposals are too extreme, claiming that they will discourage investment, hurt the economy, and slow down growth. Nothing could be further from the truth. In fact, what is truly extreme is the experiment in taxation that began during the Reagan era, when tax rates on the rich and corporations began their dramatic descent. The results have been clear: slow growth, high deficits, and unprecedented inequality.

REVIVING THE STATE

These enormous problems have created demands for even more extensive reforms. As younger voters tilt further to the left, delaying an overhaul of the current tax regime and continuing to strip revenue from the state may give rise to policy changes that are far more radical than those outlined here. A more chilling threat might come from the right: time and again, authoritarians and nationalists have proved adept at channeling public anger over inequality and exploiting it for their own ends.

By eating up the state, capitalism eats itself. For centuries, markets have relied on strong states to guarantee security, standardize measures and currencies, build and maintain infrastructure, and prosecute bad actors who attain their wealth by exploiting others in one way or another. States lay the basis for the healthy, educated populations that can participate in and contribute to the successful flourishing of markets. Allowing states to collect their fair share of revenue in the form of taxes will not usher in a dystopian era of oppressive government. Instead, strengthening the state will return capitalism to a better path, toward a future in which markets function in the interests of the societies that produce them, and in which the benefits of economic activity will not be restricted to a vanishingly small elite.

~ Foreign Affairs

January/February 2020
 

NewLeb

Member
^^

Sigh, why is it that the only solution that economic leftists seem to come up with is punishing rich people by taxing their wealth? How will that make poor people better off?
 

Picasso

Legendary Member
Orange Room Supporter
^^

Sigh, why is it that the only solution that economic leftists seem to come up with is punishing rich people by taxing their wealth? How will that make poor people better off?

Why do you see it a punishment. When someone makes a wealth, it should be taxed in order for the money to not become stalled in real estate, stocks, banks (idle cash that is not invested) or pricey arts, when part of it should be redistributed in a way that makes the economy function properly so he himself can keep accumulating his wealth when the people preserve their purchase capabilities.

State intervention is becoming more necessary than ever with the kind of challenges that face not only the economy, but also humanity and the planet. Corporate priorities lie in making profits, the state can reallocate the money to education, infrastructure, housing, health care system, the environment etc. so the wheel could go on. If we remain like this, we will end up, as it's already happening, with wealthy protected neighborhoods, while the rest of the people live in poverty.

The state should definitely encourage the rich to invest their money, and protect it for them, but saving money through tax cuts only to buy treasury stocks, that's not the way we understand investment.

Did you read the article before you went surfing? 🏄‍♂️
 
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Iron Maiden

Paragon of Bacon
Orange Room Supporter
Why do you see it a punishment. When someone makes a wealth, it should be taxed in order for the money to not become stalled in real estate, stocks, banks (idle cash that is not invested) or pricey arts, when part of it should be redistributed in a way that makes the economy function properly so he himself can keep accumulating his wealth when the people preserve their purchase capabilities.

State intervention is becoming more necessary than ever with the kind of challenges that face not only the economy, but also humanity and the planet. Corporate priorities lie in making profits, the state can reallocate the money to education, infrastructure, housing, health care system, the environment etc. so the wheel could go on. If we remain like this, we will end up, as it's already happening, with wealthy protected neighborhoods, while the rest of the people live in poverty.

The state should definitely encourage the rich to invest their money, and protect it for them, but saving money through tax cuts only to buy treasury stocks, that's not the way we understand investment.

Did you read the article before you went surfing? 🏄‍♂️
i’d like to argue that state interventionism will only lead to cutting diwn on personal freedoms.
capitalism and corporations are not at fault, they are an engine that drives forward, but like everything else they have become too harsh and firgot about ethics.
we need to reinject ethics into capitalism and preserve as much independence from the state as posible.
 

NewLeb

Member
Why do you see it a punishment. When someone makes a wealth, it should be taxed in order for the money to not become stalled in real estate, stocks, banks (idle cash that is not invested) or pricey arts, when part of it should be redistributed in a way that makes the economy function properly so he himself can keep accumulating his wealth when the people preserve their purchase capabilities.

State intervention is becoming more necessary than ever with the kind of challenges that face not only the economy, but also humanity and the planet. Corporate priorities lie in making profits, the state can reallocate the money to education, infrastructure, housing, health care system, the environment etc. so the wheel could go on. If we remain like this, we will end up, as it's already happening, with wealthy protected neighborhoods, while the rest of the people live in poverty.

The state should definitely encourage the rich to invest their money, and protect it for them, but saving money through tax cuts only to buy treasury stocks, that's not the way we understand investment.

Did you read the article before you went surfing? 🏄‍♂️

The problem with economic socialists is that their theories are rooted in a material perspective, and thus only offer material solutions (that usually don’t work). You can raise as much taxes as you want, but people who lack the knowledge, skill, and drive to acquire and maintain wealth will always go back to square one, regardless of what the state does.

As Iron Maiden argued, the problem is a lack of ethics in capitalism, and not the economic theory itself.
 
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