The three authors chose three very different entry points and perspectives to argue their case: (liberal) democracy for Mounk, inequality in the age of (liberal) capitalism for Milanovic, and (liberal) ethics for Collier. This notwithstanding, the authors identify the same higher-level challenges that beset our (Western) society although each places a different accent: growing inequality with a more entrenched intergenerational lack of mobility; retreat of meritocracy and liberal democracy and its replacement with nativism and authoritarianism; broadening and deepening of capitalist relations and materialism encroaching on our private lives at the expense of social solidarity and reciprocal obligations; growing market distortions (concentration, market power, financialization) that impede normal functioning of the capitalist system. (Milanovic’s analysis of how people become centers of capitalist production is particularly interesting and enlightening. He discusses progressive commodification of what had previously been noncommercial, such as our assets and real personal property, including our free time. He sees a historic logic in what becomes commodified: from agriculture to manufacturing activities to services and ultimately free time.) Globalization, structural transition from industrial production to services, and new technologies are all lurking behind.
But the authors identify the underlying root causes of these challenges differently according to their theoretical orientation. For Collier, this is erosion of (capitalist?) ethics based on shared mutual responsibility values and reciprocal obligations coupled with general moral turpitude and corruption. Similarly for Mounk, the underlying reason is a wilting sense of citizenship and common identity. Milanovic is different in that he considers these phenomena part of a normal trend of capitalist development (‘a historical logic in commodification’). His view is different from the other two authors who believe that the present failure of capitalism/liberal democracy to deliver on its promise of prosperity (‘Despite its promise of prosperity, what modern capitalism is currently delivering is aggression, humiliation and fear’, according to Collier) is just a temporary aberration in an otherwise eternal era of happy capitalism (‘the end of history’). Collier is convinced that ‘What has happened recently is not intrinsic to capitalism; it is a damaging malfunction that must be put right’. Furthermore, Milanovic is quick to point out that the current discontent (and perception of failure) has become so prominent because it is affecting the developed world negatively and ignores the fact that capitalism has succeeded in lifting the developing world out of poverty (China and India but also Eastern Europe).
We now come to a very interesting but also problematic parts of the books that offer recommendations (to borrow from Lenin, ‘What to Do’ always follows ‘Who is Responsible’). Suggesting recommendations, particularly for fundamental socio-economic problems is not easy at all for at least three reasons. One is the effectiveness of individual recommendations: To what extent they address specific challenges (e.g., more equal income distribution between people and territories or restraining high frequency trading). Two, the scope: Taken together, do the recommendations adequately address the big challenge, e.g. building a common identity or minimizing negative impacts of labor migration. Lastly (and most problematically, in my opinion), realism: How realistic is it to expect that the suggested recommendations will be implemented, i.e. is there required political will and popular support for enacting such changes? The authors recognize this last challenge but the answers ultimately depends on the theoretical orientation. If this is a temporary aberration, generating the required political will is possible (even in view of the growing role of money in politics because ‘elites will ultimately realize that by accepting these changes they are saving themselves). If however this is a systemic, structural trend, the changes need to be simple and palatable to the ruling class.
Milanovic takes this last course offering just four broad recommendations from the perspective of reducing inequality: tax advantages for the middle class and a corresponding increase in the taxation for the rich; increased funding for education, particularly public schools; special migration arrangements without offering the full benefits of citizenship and, lastly, limiting the money influence in politics. But what makes Milanovic’s discussion very interesting is that he doesn’t stop there but deliberates on the future of capitalism. His best hope appears to be not on the good will of the ruling elites but on the natural development of the capitalist system. Milanovic discusses two possible evolutionary developments. One is evolution towards ‘people’s capitalism’, where (1) the concentration of capital incomes (and the concentration of ownership of wealth) would be less, (2) income inequality would be lower, and (3) intergenerational income mobility would be greater. The other option is some convergence of liberal and political capitalism (as the one that exists in China). Milanovic has no illusion about which development is more likely. This latter, as Milanovic stresses ‘would be to a large extent compatible with the interests of the new elite that is being formed under liberal capitalism and would enable the elite to be much more autonomous from the rest of the society’. The more economic and political power in liberal capitalism become united, the more liberal capitalism becomes plutocratic and comes to resemble political capitalism.
For Collier and Mounk, the future of capitalism is its return to the form it had between 1945 and 1970 when it ‘last worked well’. Although Collier lambasts Marxists and religious fundamentalists as ‘people with paranoid psychology of the cult’, I can’t see much difference between his capitalist fundamentalism and Marxist orthodoxy and religious fundamentalism. As Stalin replied when asked which deviation in the party was worse, rightist or leftist; ‘They are both worse.’ Collier’s and Mounk’s idealized world of capitalism never existed and what they take as the ‘normative state’ of capitalism was in fact a historically very brief spell in the 300 years of capitalist history. Milanovic’s evolutionary approach makes much more common sense. I can’t help quoting Joseph Heller’s Catch 22 when an Italian old man baffled a young pilot with a question of how long the US hegemony may last: The pilot gave up at 500 years saying he is not sure. Both Collier and Mounk are anti-Trumpists and anti-Brexiteers fuming at both developments as an abomination of pure capitalism (democracy). But given their backward-looking agenda (return to pure uncorrupted state of things), it is difficult to differentiate between their approach and essentially the same backward-looking agenda of Trump (Make America Great Again) and Brexit (Take Back Control).
But back to the recommendations. Collier offers a grandiose program to restore ethical behavior in four areas: ethical state, ethical firm, ethical family and ethical world. Mounk uses a more specific approach focusing on three objectives: domesticating nationalism, fixing the economy, and renewing civic faith. But their recommendations are quite similar. According to Collier, the state will become ethical when it abandons nationalism and embraces patriotism (‘inclusive patriotism’, specifies Mounk). Such inclusive patriotism ‘should build on the tradition of multi-ethnic democracy to show that the ties that bind us go well beyond ethnicity and religion’ (Mounk). The two authors do not make it clear how this shift from nationalism to patriotism can be achieved (let alone achieved in a short term, given the urgency of ‘saving capitalism from itself) beyond promoting inclusive political narrative coupled with civic education about shared values.
Mounk’s plan for fixing economy is rather confusing. It jumps from taxation to housing to productivity. All this makes sense in principle but weather it suffices to ‘fix’ the economy is not obvious (see my earlier point about the challenge related to the scope of recommendations). There is no clear focus or prioritization whereas some admonitions are misplaced. An increase in productivity is important for economic development and I’m sympathetic to a stronger role of government in R&D (which Mounk advocates) but it is a statistical fact that in the past 20 years wage in the US has been lagging behind productivity gains. Obviously, productivity in itself will not help tackle the challenge of inequality (as Mounk claims) without changes in the distribution pattern between labor and capital. Collier’s approach is more granular as he focuses on the ethical firm specifically. In essence, Collier champions more public control over businesses by applying differentiated taxation to eliminate economic rents, strengthening representation of the public interest on company boards, and enhancing regulation to protect the public interest. How will this be achieved? By raising a critical mass of ethical citizens. ‘Raising citizens and instilling political virtue in the youth is the way to go,’ echoes Mounk. Again, I can’t help thinking about Bolsheviks who set to create a new and higher form of Soviet human being to inhabit their Communist Utopia. I still remember from my young days publicly displayed boards with the ‘Code of the Communism Builder’ which was supposed to guide the behavior of real Soviet people. The result is well known. You need to be as confident in Capitalist Utopia as Bolsheviks were in theirs to pin all your hopes on raising ethical citizens that would change the existing world (…’They have a world to win’). As Joseph Stiglitz rightly remarked in his review of Collier’s book, ‘..that won’t happen on its own. And it won’t happen by lecturing corporations on social responsibility. Corporations are experts in greenwashing, or falsely claiming to be environmentally responsible because it’s good business.’ I believe Milanovic is much more realistic in this respect, stressing that the inner logic of capitalism based on utility maximization is taking it in a certain direction that cannot be wished away with moral incantations.
Nevertheless, all three authors defend capitalism, some of them more enthusiastically (Collier and Mounk) and others rather reluctantly (Milanovic, not because he considers capitalism ideal but because there is no clear alternative, at least in the near term).
Are there any lessons?
So, faced with the fact that capitalism is with us for the foreseeable future, what are the implications for us in the development community and in UNCDF in particular? What useful lessons can we extract for ourselves from these three books? I believe that as much as possible we should support development of people’s capitalism. This is clearly not an option preferred by the ruling elites and corporations, but it will enjoy significant support among common people regardless of their ethnic and religious background and other socio-economic circumstances. More specifically, we can strengthen our emphasis on SDG10 and make it the centerpiece of our corporate agenda, focusing on
- Policies and business models that promote collective ownership and therefore reduce the concentration of capital incomes (and the concentration of ownership of wealth). We are already doing it by promoting various forms of cooperation at different levels: saving and credit cooperatives (SACCOs) in rural and urban areas to improve access to finance; agricultural cooperatives and cooperative businesses with collective shareholding arrangements; subnational pooled financing mechanisms for local governments, etc.
We should look out for more opportunities in this respect and pro-actively support the development of cooperative structures through technical advisory and our financial instruments. We can also support the existing businesses to transition to a more inclusive ownership model if they wish. The entire sector of social solidarity economy is underexplored by us. There is a perception that social enterprises are good only for small-scale interventions on the margins of ‘serious’ business. This is untrue. Social enterprises can operate on par with other forms of business organizations. As a recent publication on social economy summed it up, ‘At the heart of the challenges to a deep and sustainable social economy lies our current system of economic governance and the public policies and institutions that support it.’ (Gismondi, M. et al., eds. 2016. Scaling Up the Convergence of Social Economy and Sustainability. Edmonton, AB: AU Press). Like inequality in general, the extent of social economy is primarily a policy choice.
- Policies, business models and mechanisms that reduce income inequality. We are already applying a Women Economic Empowerment Index to analyze the impact of the projects we support on reducing income inequality between men and women. There are many other areas where a similar approach can be extended: e.g., analysis of income equality between different social groups or different geographic areas.
Importantly, intergenerational inequality should not be overlooked. Borrowing for municipal infrastructure makes inherent sense as the benefits of such investments are enjoyed not only by the current generation but by the future generations as well. But as we launch the International Municipal Investment Fund, lending must be done prudently spreading the debt burden equally to preclude an excessive debt burden on the future generations.
Our work on intergovernmental fiscal transfers to ensure adequate vertical and (especially) horizontal equalization is very important in this respect. The geographic divide, divide between metropolitan areas and secondary cities, urban and rural areas, which is of so much concern to Collier, is an area where UNCDF can enhance its territorial approach to local development. There are growing fears (that I heard most recently in Uganda and Lesotho) that the progressive urbanization is widening the gap between the town and the village resulting in relatively prosperous urban areas surrounded by poor rural local governments. Not only do rural populations have access to a more limited range of public services, the cost of those services is often higher than in urban areas (e.g., the offgrid electricity tariffs for rural areas may be 10 times more expensive than those in urban areas). Access to quality education, healthcare and social support is another critical dimension of reducing income inequalities. UNCDF has been promoting better local service delivery through PFM support and local development funds.
Is there anything else we can do? We have started experimenting recently with business models for some social services. Whereas this may bring new services to the areas which are currently deprived of such services and save public funding for other purely public goods, we should be mindful of the affordability aspect and the inequality gap that commercialization of certain services may create.
- Policies and business models that promote inclusive innovation. As we enthusiastically embrace innovation (financial, digital, social) and rightly praise its importance for poverty reduction and development, we should not forget about the potential pitfalls that innovation may entail. The biggest risk is widening the gap between the haves and have nots, those who have access to information about innovations, relevant technologies, skills to apply a particular innovation, etc. and those who don’t. This is not only about the potential inclusiveness of the innovation per se (and some innovations may be exclusive by design) but also about an inclusive application of that innovation.
But more to the point, we should be more concerned about the impact of innovation on income and wealth distribution rather than about its financial viability. Whereas on a personal level I dislike the deepening of capitalist relations and their encroachment on our personal lives, I believe we should focus more systematically on innovations that allow maximization (by commodification) of the available resources of low-income populations. If we can identify and support innovations that put their most abundant resource, time, to more productive uses, the overall social gains can be immense.
The other important aspect where UNCDF expertise can be applied more productively is financing for innovations. Clearly, the role of the government will continue to be critical. Hence, it is important to work with the government to create an effective ecosystem for innovation including financial and nonfinancial support measures to foster the conception and growth of innovations. But the challenge is to make domestic financial systems more attuned and responsive to innovations. The venture capitalist sector in the countries where we work is practically nonexistent. Even the domestic DFIs are not particularly keen to invest in innovations (despite having access to low-cost capital). UNCDF can engage with the financial sector to guide and de-risk investments in early innovations as well as in scaling up the proven protypes.
- Support to entrepreneurial state. Equality is a social good which is and will be underdelivered by the market. The current trend towards commercialized capitalism can bring about only more inequality. To fend off this trend, we need a capable, agile and smart government. The myth of a lumbering, bureaucratic state versus a dynamic, innovative private sector is just that, a myth. I have immense respect to men and women working for the government, particularly out there in the field, often under resourced, underpaid and disempowered. I’m also aware that working with the government can be very time consuming and disappointing. But this is the only way to promote and effect political choices that can foster a more just and inclusive society. Our PFM support to governments needs to take a step further, in the direction of analyzing the underlying processes and tools from the perspective of their contribution to reducing inequalities.
The allocative efficiency of government investment decisions needs to be improved. The outcomes of the Second National Development Plan in Uganda are a clear indication: Focusing on big national infrastructure projects, the government neglected investment in social services, resulting an increase in poverty rates from 19 to 22% (the initial finding was 26% but it was brought down after some political arm-twisting). Financing of development and the use of nontraditional finance at the local level is gaining more importance. We have too many development plans at all levels that are nothing but wish lists, poorly (it at all) costed and with no realistic sources of finance (the latest example comes from the DRC where a massive development planning at the provincial level has recently been completed). These are the vestiges of an inert and dependent government of the yesteryear. Changing this dynamic requires a significant effort but UNCDF is well poised to make a change in this respect.
I realize that what I said above about the three challenges of recommendations (effectiveness, scope and realism) are also applicable to these thoughts. I don’t pretend to be comprehensive or rely on a theoretically robust framework. Rather, these are the thoughts provoked by the three great authors whose books I have reviewed here. No matter, if we agree or disagree…