CAPITALISM has gone through crises of legitimacy before but this one is unprecedented. The underlying causes are complex, yet the net effect is plain - inequality is great and rising. Sixty-one million individuals have the same wealth as 3.5 billion people.
By Juan Somavia, For The Straits Times
And the macroeconomic outlook is worsening. According to the International Labour Organisation's (ILO) annual Global Employment Trends report out this week, one out of every three workers - some 1.1 billion people - is unemployed or living in poverty. At the present rate, it will take us 88 years to eradicate extreme poverty. Over the next decade, we need to create 600 million jobs - 200 million for today's unemployed and 400 million for those entering the labour market.
Given this, it is not surprising that this year's Global Risks reports of the World Economic Forum (WEF) rate severe income inequality and high unemployment, especially among young people, as the most likely global risks over the coming 10 years.
Last year's Gallup polling data showed that globally, people are perceiving their living standards to be falling and expressing diminishing confidence in their government's ability to reverse this. In the United States, a recent survey by the Pew Research Centre showed conflict between rich and poor as the biggest source of societal tension. In far too many places, there is a sense of receding hope for the future.
Clearly, this cannot go on. We need to be bold and not just tinker at the margins (the recovery after the 2008-2009 crisis was short-lived because the 'quick fix' option prevailed). Nothing short of a new paradigm will do - the bonding of people, the economy and society.
This is why this year's WEF theme, 'The great transformation: shaping new models', is spot on. I will be arguing that we must urgently put in place a much more effective model for strong, sustainable and balanced growth that is people-oriented.
First, we must rethink how we measure growth beyond percentage changes in gross domestic product or average income per capita. The measure of success must be tangible improvements in people's lives.
Second, full employment, with low inflation and financial stability, must be a top macroeconomic goal as well as a central bank policy goal, as in the US and Argentina. We know this works. Countries that invested in job creation (and social protection) as a way out of the 2008 crisis fared better than those that prioritised bailing out their banks. China invested in labour-intensive infrastructure projects. Germany's work-sharing programme kept 1.5 million workers employed at the height of the crisis.
Third, we must put the financial system back at the service of the productive economy, not the other way around. The distortion of this fundamental notion is at the heart of the current crisis, yet the markets are once again calling the shots. Risky and unproductive operations must become less profitable for financial institutions and taxpayers should not pick up the losses.
Fourth, we need to strengthen the framework for productive investment, including through an income-led growth strategy. This ignites demand through consumption and leads to savings to fuel future growth, rather than debt.
Fifth, we need social protection for the most vulnerable. In Brazil, income inequality, as measured by the Gini coefficient, is largely declining due to a national conditional cash transfer scheme that supports poor families. Boosting jobs reduces poverty.
Sixth, we need to build strong institutions to assist in the creation of new businesses, including through long-term partnerships between banks and enterprises, as in Germany and South Korea. Promoting decent work and labour rights is part of the process.
Finally, we need more coherence between economic and social policies to connect people's aspirations for social justice with the management of a sustainable global economy.
This is an achievable agenda. But governments cannot deliver it alone. We need what WEF founder and executive chairman Klaus Schwab calls 'collaborative power' - and what the ILO calls social dialogue.
Businesses have a vital role to play to make this global shift possible, from leading in debates like those in Davos, Switzerland, to their job-creating capacity. An ILO/University of Maryland study projects that US companies could create 2.4 million new jobs in 2014 by investing the US$500 billion (S$630 billion) extra corporate reserves accumulated over 2010 to last year. The highest priority should go to small and medium-sized enterprises as they are engines of growth.
Above all, we need creativity and innovative thinking to seriously address the social dimension of globalisation. It is a political responsibility and a sound business decision as an investment in a peaceful and prosperous future.
In Davos this week, leaders must focus on restoring not only hope and confidence but also public trust. Never again must people feel that, while some banks are too big to fail, they are too small to matter.
The writer is the director-general of the International Labour Organisation.