Building on the theoretical discussion in the first part, the second part of the book demonstrates how those theoretical shifts practically manifest themselves in modern economies.
One is financialization of the real economy including the buy-back blowback and diminishing investments in the real economy; focus on shareholder value maximization (I recommend a very recent discussion of it in one of the latest issues of The Economist of 24 August under the heading “What are companies for”); the retreat of patient capital; short-termism and unprodcutive investments. Lastly, Mariana explores the relationship between financialization and inequality arguing that financialization contributes to growing inequality both through value extraction from the real sector by boosting the industry’s profits and earnings and by transformation of public goods into private goods.
As a development agency with a financial mandate, we should be aware and cautious of this financialization trend, which may present us with ethical dilemmas in the context of what we are trying to promote and support. Think about entrepreneurship. Mariana argues we cannot assume that entrepreneurship will always be ‘productive’, in the sense of leading to the discovery of new products, services or processes that increase society’s wealth. In many circumstances, entrepreneurship can be unproductive. Hence, we should be mindful of what we support and how we identify the innovations we support and what criteria we apply. Or take our efforts to promote the marriage between digital technologies and finance. This is a very promising area, but its practical realization is not free from risks and ethical questions.
As Mariana argues, ‘the privatization of data to serve corporate profits rather than the common good produces a new form of inequality – the skewed access to the profits generated from big data… instead of us paying Amazon a fee to use its AI capabilities – built with our data – Amazon should be required to pay that fee to us.’ Of course, the problem of digital divide also looms large: Are we not contributing to more inequality by taking the population with access and knowledge of digital technologies further and further ahead of those who don’t? In addition to the old class divisions, are we not creating a new one, between digitally empowered and digitally disadvantaged? The digital divide may also affect us corporately, with some parts of the organization and some programs operating on the cutting edge of digital technologies and others falling behind becoming obsolete and irrelevant.
The other very important theme that the book investigates is the role of the government. Mariana’s previous book published in 2014 was called The Entrepreneurial State, and this probably gives you an idea about the direction of the discussion in this book. What is the value created by the government, how is it measured and what should be that value?
As we look at the production frontier, is the government inside or outside the production frontier? Mariana argues that it is inside but that its value is poorly captured by the existing measurement matrices and sometimes is intentionally ignored or understated. Far from being a natural self-regulating and self-sustaining phenomenon, modern markets (‘responsible capitalism’, if you will) have come to be shaped and actually forced into existence by the state. Government does not ‘distort’ the market. Rather, it creates the market. Put bluntly: no state, no market.
However, the stories told about government have undermined its confidence, limited the part it can play in shaping the economy, undervalued its contribution to national output, wrongly led to excessive privatization and outsourcing, ignored the case for the taxpayer sharing in the rewards of a collective – public – process of value creation, and enabled more value extraction. The national accounts fail to capture the full amount of this government value added and have several major flawed assumptions. There is an assumption that government activities create no value added even when the major technological breakthroughs of our times that enabled super-profitable private businesses, such as the Internet, space exploration, antibiotics, etc. The government of Korea had been subsidizing loss-making Samsung for 10 years before it broke even and started making profit but once this happened, the profits were attributed to the private business and the previous investments written off as government losses.
Mariana is convinced that the government role is not just about “intervening”. It is about shaping a different future: co-creating market and value, not just “fixing” markets or re-distributing value. It’s about taking risks, not only “de-risking”. And it must not be about leveling the playing field but about tilting it towards the kind of economy we want, particularly to enable innovation-led green (e.g., digital or green innovations). We can create a better economy by understanding that markets are outcomes of decisions made – in business, in public organizations and civil society.
Mariana strongly criticizes the governments that see themselves only as the ‘facilitators’ of a market system, as opposed to co-creators of wealth and markets. She points out that this produces exactly the type of government the critics like to bash: weak and apparently ‘business friendly’, but open to capture and corruption, privatizing parts of the economy that should be creating public and collective goods.
She insists that public institutions should reclaim their ‘rightful role as servants of the common good’. They must think big and play a full part in the great transformations to come, squaring up to the issues of climate change, aging populations in the need for 21st century infrastructure and innovation. They must get over the self-fulfilling fear of failure, and realize the experimentation and trial and error a part of the learning process. Importantly, instead of de-risking projects, there will be risk-sharing – and reward-sharing.
I find this insistence on a substantive role of government institutions as co-shapers of modern markets and co-creators and co-producers of social goods, public and private, very relevant for what UNCDF is doing. UNCDF has a very special feature of being equally knowledgeable of, and comfortable with, the public and private sector. This allows us to rethink our role as an integrator and go-between for the two sectors. This may be yet another area in which we may offer added value to our partners, national, international and sister agencies. But it also poses another important question: How exactly do we engage with the public sector and the private sector to encourage the best in the two and make sure that both sectors work as real partners in coproduction of socially important outcomes sharing risks and rewards?
I believe this is particularly relevant for the blended finance dimension of our work. We should not simply add our blended finance to the areas where the private sector is prepared to invest anyway. We should be pro-actively opening new investment areas, directing the private sector into the areas which are deemed socially important. This may require us to take disproportionate risks at times, not fully compatible with the due diligence procedures we currently apply. It may require us to rely more on social cost-benefit analysis rather than on financial and economic appraisals as we currently do. It also opens up a very fertile area of engagement with governments at all levels to facilitate and encourage innovation, experimentation, pro-active shaping of the rules of the game and equip them with technical know-how for this.