This review is featured in Australian Foreign Affairs 10: Friends, Allies and Enemies.
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In Capitalism, Alone, Branko Milanovic outlines the weaknesses of capitalism as an economic system. His analysis encompasses two competing forms – liberal capitalism as epitomised by the United States and political capitalism as epitomised by China – both of which he sees as flawed. They result in income inequality, reduced intergenerational mobility and the concentration of political power with the elite, particularly in the liberal version. These weaknesses arise from a system that fosters social divisions due to the private provision of services such as education and health, which leads to resistance to higher taxes. Milanovic also offers suggestions on how capitalism, especially its liberal form, might be improved.
Capitalism, Alone was published in September 2019, in the era before COVID-19. The pandemic, which has hit the global economy in unprecedented ways, highlights the weaknesses in capitalism that Milanovic outlines, placing his book in a more urgent light.
There is no doubt that the global contraction in economic growth caused by COVID-19 will be unprecedented. It will dwarf the global financial crisis and the Great Recession that followed partly because, despite their names, these crises were not global. This public health crisis is. Countries have mandated varying forms of lockdown, populations have complied to varying degrees and the transmission of COVID-19 differs across nations. But despite divergences in policies, compliance and outcomes, all countries are experiencing slowed growth. According to the World Bank, in 2020 global gross domestic product is forecast to contract by between 5 and 8 per cent, most countries will enter into recession, and per capita income will decrease in the highest proportion of countries globally since 1870.
Domestic lockdown policies are not the main contributor to the downturn. The cause is the spread of a virus that compels people to change their social interactions to avoid illness and hence their demand for goods and services, independent of government directives. The labour force contracts; in addition, sick people cannot work. These effects combine to cause substantial interruption to the global economy through supply and demand channels, the disruption of transportation networks and the sudden halt in the flow of people across borders for tourism, business and education. It turns out that a healthy population predicates a healthy economy.
The pandemic reinforces Milanovic’s analysis of capitalism’s flaws. The waves of the virus affect those least able to afford it – youth, minority groups and women who work in service industries, who have either lost their jobs or are on the front line caring for others, putting themselves and their families at risk – thereby exacerbating inequality in income and wealth across generations. It also accentuates inequality in education and health. The challenges posed by remote learning, a lack of access to technology (particularly among the poor) and an increased reliance on parents to teach – as well as the lack of opportunity to develop professional and social networks in university classrooms and campuses – will inevitably lead to at least short-term educational disadvantage for the young, compared with previous generations. In many countries, unequal access to healthcare and an inadequate income safety net means that sick people need to go to work. In developing countries, these problems are even more severe, with World Bank estimates that between 40 and 60 million more people will enter extreme poverty in 2020.
The macroeconomic policy responses to support the population through the pandemic inevitably and rightly require massive increases in government debt and the central banks’ intervention in asset markets, as interest rates in many countries sit close to zero. Unfortunately, asset holders – that is, the wealthy – are the beneficiaries of interventions in asset markets, while the repayment of the debt will fall mostly to the young. Both of these factors exacerbate intergenerational inequality.
Perversely, the stimulus required to avert economic disaster means that we can afford the scale of investment needed to address the issues Milanovic highlights. The pandemic has shown that healthcare needs to be a universal public good, not the choice or burden of an individual. A critical lesson is the need for adequate healthcare in both developed and developing countries, and in particular the ability for the rapid detection, treatment and suppression of new diseases wherever they emerge. Viruses do not respect borders or income level. The cost to the global economy would have been much lower if global healthcare had been a priority before 2019.
The scale of stimulus necessary also provides an opportunity to equalise some of the imbalances developing between generations. Although Milanovic does not address this in his book, the critical issue for the young is climate change, and those working on reducing emissions have myriad projects and plans ready to be executed. Examples include developing the infrastructure for renewable energy, and developing smart and flexible transport infrastructure such as electric car networks – which could prove particularly valuable given that public transport will be a less favoured option for travel until the pandemic is contained.
The recession of 2020 is different from those in the past. Many of the losses are being accrued by women who work in roles with high levels of social contact. Economic stimulus can also protect the advances made in gender equality while benefitting low-income groups. The obvious area for investment is education, a key contributor to productivity growth. Governments should fund the rethinking of traditional models of education that has been kickstarted by the pandemic, including through investment in universal fast internet, and providing low-income households with access to technology, such as computers.
The international economy is undergoing massive structural change. However, smart stimulus expenditure in climate infrastructure, health and education, and the lessons learnt from flexible working arrangements and the use of technologies such as Zoom, might just lead to a surge in global productivity that has been sadly lacking since the mid-2000s. Many measures are consistent with the reforms Milanovic proposes in Capitalism, Alone. Due to the tragic impacts of COVID-19, these reforms are more probable now than when Milanovic published his book.