GLOBAL INEQUALITY. The Piketty story & INEQUALITY IN FINANCIAL CAPITALISM. My own story

Transcription

1 GLOBAL INEQUALITY The Piketty story & INEQUALITY IN FINANCIAL CAPITALISM My own story Master HDFS Pasquale Tridico Roma Tre University

2 Piketty book Piketty s work is fascinating for the historical data, empirical results and policy solutions. He charts the evolution of a rentier society with rising levels of wealth inequality up to 1914 (particularly in Europe and to a lesser degree the US) and its subsequent destruction due to 2 world wars and the rise between the 1930s and the 1970s of progressive taxation and the welfare state. He then discusses how income inequality has risen again since the early 1980s due to a combination of a gradual retreat from progressive taxation, declining trade union bargaining power, and the rise of a highly paid supermanager elite against a backdrop of increasingly globalised and liberalised markets, facilitated by new communications technologies.

3 Inequality ignored in mainstream economics Largely because mainstream economists didn t pay enough attention to capital accumulation the process of saving, investing, and building wealth which classical economists, such as David Ricardo, Karl Marx, and John Stuart Mill, had emphasized Inequality is irrelevant for macroeconomics balances It can be even useful/functional, as it drives economics growth The dominant view was: initially countries growth with increasing inequality rates, and then inequality decreases. Hence it is part of the takeoff process of development (The famous Kuznets curve) Inequality it may increase because of skills and education (neoclassical justification labour/wage inequality)

4 In details Per capita GDP (euros 2012) Equivalent per capita monthly income (euros 2012 World Europe incl. European Union incl. Russia/Ukraine America incl. United States/Canada incl. Latin America Africa incl. North Africa incl. Subsaharan Africa Asia incl. China incl. India incl. Japan incl. Other World GDP, estimated in purchasing power parity, was about billion euros in World population was about billion inhabitants, hence a per capita GDP of (equivalent to a monthly income of about 760 per month). Sources: see piketty.pse.ens.fr/capital21c.

5 Figure The distribution of world output, % 90% 80% 70% Asia 60% 50% America 40% 30% Africa 20% 10% Europe 0% Europe's GDP made 47% of world GDP in 1913, down to 25% in Sources and series: see piketty.pse.ens.fr/capital21c

6 Per capita GDP (% of world average) Figure - Global inequality : divergence then convergence? 250% 225% 200% 175% 150% 125% Europe-America World Asia-Africa 100% 75% 50% 25% 0% Per capita GDP in Asia-Africa went from 37% of world average in 1950 to 61% in Sources and series: see piketty.pse.ens.fr/capital21c.

7 Figure - The distribution of world population % 90% 80% 70% Asia 60% 50% 40% Africa 30% America 20% 10% Europe 0% Europe's population made 26% of world population in 1913, down to 10% in Sources and series: see piketty.pse.ens.fr/capital21c.

8 World population growth rate 2,0% 1,8% The growth rate of world population from Antiquity to 2100 Observed growth rates 1,6% 1,4% 1,2% UN projections (central scenario) 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% The growth rate of world population was above 1% per year from 1950 to 2012 and should return toward 0% by the end of the 21st century. Sources and series: see piketty.pse.ens.fr/capital21c.

9 Growth rate of world GDP 5,0% 4,5% The growth rate of world output from Antiquity until 2100 Projections (central scenario) 4,0% Observed growth rates 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% The growth rate of world output surpassed 4% from 1950 to If the convergence process goes on it will drop below 2% by Sources and series: see piketty.pse.ens.fr/capital21c.

10 Growth rate of per capita GDP 3,5% The growth rate of world per capita output since Antiquity until 2100 Projections (central scenario) 3,0% 2,5% Observed growth rates 2,0% 1,5% 1,0% 0,5% 0,0% The growth rate of per capita output surpassed 2% from 1950 to If the convergence process goes on, it will surpass 2,5% from 2012 to 2050, and then will drop below 1,5%. Sources and series : see piketty.pse.ens.fr/capital21c.

11 Growth rate of per capita GDP 5,0% The growth rate of per capita output since the industrial revolution 4,5% 4,0% 3,5% 3,0% Western Europe North America 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% The growth rate of per capita output surpassed 4% per year in Europe between 1950 and 1970, before returning to American levels. Sources and series: see piketty.pse.ens.fr/capital21c

12 Capital definition and motivation in Piketty book Any asset that generates a monetary return. It encompasses physical capital, such as real estate and factories; intangible capital, such as brands and patents; and financial assets, such as stocks and bonds. The popular model of economic growth developed by Robert Solow aims to show how the economy progresses along a balanced growth path, with the shares of national income received by the owners of capital and labor remaining constant over time. This doesn t matches with modern reality. In the United States, for example, the share of income going to wages and other forms of labor compensation dropped from sixty-eight per cent in 1970 to sixtytwo per cent in 2010 a decline of close to a trillion dollars

13 New debates Inequality can t be understood independently of politics There are circumstances in which incomes can converge and the living standards of the masses can increase steadily as happened in the so-called Golden Age, from 1945 to However, the forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century And, if current trends continue, the consequences for the long-term dynamics of the wealth distribution are potentially terrifying.

14 Rich and poor In 1950, the average American chief executive was paid about 20 times as much as the typical employee of his firm. Today the pay ratio between the corner office and the shop floor is more than 500 to 1, and many C.E.O.s do even better. In 2011, Apple s Tim Cook received 378 million dollars in salary, stock, and other benefits, which was 6258 (sixty-two hundred and fifty-eight) times the wage of an average Apple employee (60.000$). A typical worker at Walmart earns less than $ a year; Michael Duke, the retailer s former chief executive, was paid more than 23 million dollars in According to a recent report by Oxfam, the richest 85 people in the world the likes of Bill Gates, Warren Buffett, and Carlos Slim own more wealth than the roughly 3.5 billion people who make up the poorest half of the world s population.

15 Ratio between manager s compensation and average wages of blue-collar workers, US Source: ILO 2010

16 A patrimonial society (1) The return of a patrimonial society (of the time of Balzac and Austin): a small group of wealthy rentiers lives lavishly on the fruits of its inherited wealth, and the rest struggle to keep up. For the United States, in particular, this would be a cruel and ironic fate. The egalitarian pioneer ideal has faded into oblivion and the New World may be on the verge of becoming the Old Europe of the twenty-first century s globalized economy.

17 A patrimonial society (2) the richest 0.1 per cent in the United States is taking an ever-larger slice of the economic pie the share of the top income percentile is bigger than it was in South Africa in the nineteen-sixties and about the same as it is in Colombia, another deeply divided society, today In terms of income generated by work, the level of inequality in the United States is higher than in any other society at any time in the past, anywhere in the world the richest 0.1 is not superstar, rather supermanagers, who account for20-25% of total income. Rising income inequality is largely a corporate phenomenon.

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19 Share of top percentile in total income Share of top percentile in total income The share of top percentile in total income rose since the 1970s in all Anglo-saxon less in Europe and Japan. Sources and series: see piketty.pse.ens.fr/capital21c. 24% 22% 20% 18% 16% Income inequality in Anglo-saxon countries, U.S. U.K. Canada Australia 14% 12% 10% 8% 6% 4% 2% 0% % 22% 20% 18% Income inequality: Continental Europe and Japan, France Germany Sweden Japan 16% 14% 12% 10% 8% 6% 4% 2% 0%

20 Expressed in 2013 purchasing power, the hourly minimum wage rose from 2.1 to 9.4 in France between 1950 and and from $3.8 to $7.3 in the U.S. Sources and series: see piketty.pse.ens.fr/capital21c. 10,00 9,00 8,00 Minimum wage in 2013 euros $12,00 $10,80 $9,60 Minimum wage in 2013 dollars Minimum wage in current dollars 7,00 Minimum wage in current euros $8,40 6,00 $7,20 5,00 4,00, $6,00 $4,80 $3,60, 3,00 $2,40 2,00 $1,20 1,00 0, $0,

21 Share of top percentile in total income Income inequality: Northern and Southern Europe, % 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% France Denmark Italy Spain 0% As compared to Anglo-saxon countries, the top percentile income share barely increased in Northern and Southern Europe since the 1970s. Sources and series: see piketty.pse.ens.fr/capital21c

22 Share of top decile in total (incomes or wages) Share of top decile in total (incomes or wages) Inequality of total income (labor and capital) has dropped in France during the 20th century, while wage inequality has remained the same. In Usa is dramatically increased Sources and series: see piketty.pse.ens.fr/capital21c 50% 45% 40% High incomes and high wages in the U.S Share of top income decile in total income Excl. capital gains Share of top wage decile in total total wage bill 50% 45% 40% Income inequality in France, Share of top income decile in total income Share of top wage decile in total wage bill 35% 35% 30% 30% 25% 25% 20% 20%

23 Supermanagers today as before landowners/rentiers (1) Defenders of big pay packages like to claim that senior managers earn their vast salaries by boosting their firm s profits and stock prices. They are unique! Talent! But it is hard to measure the contribution (the marginal productivity ) of any one individual in a large corporation. The compensation of top managers is typically set by committees comprising other senior executives who earn comparable amounts. It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously

24 Supermanagers today as before landowners/rentiers (2) Many C.E.O.s receive a lot of stock and stock options. Over time, they and other rich people earn a lot of money from the capital they have accumulated: it comes in the form of dividends, capital gains, interest payments, profits from private businesses, and rents. Income from capital has always played a key role in capitalism. When the rate of return on capital (r) the annual income it generates divided by its market value is higher than the economy s growth rate (g), capital income will tend to rise faster than wages and salaries, which rarely grow faster than G.D.P. Strong forces of divergences in US

25 Main arguments from Piketty The observation that income inequality is rising across the world economy is not a new one. This phenomenon has been analysed in major reports by the OECD, the IMF and International Labour Organisation. Piketty s explanation, however, is that this is an inexorable trend if left unchecked by policy or major shocks like the two world wars. His argument rests on a number of empirical hypotheses, which challenge conventional economic thinking. The evidence he presents is very challenging, powerful and robust, although not conclusive, and it will certainly be a stimulus to more research in these areas.

26 1 - Strong forces of divergences r>g Modern capitalism has an internal law that leads, not inexorably but generally, toward less equal outcomes. The law is simple r>g When r the rate of return on capital (the annual income it generates divided by its market value) is higher than the economy s growth rate g, capital income will tend to rise faster than wages and salaries If the rate of growth exceeds the rate of return, wages and salaries will grow more rapidly than income from capital, and inequality will fall. That s what happened in much of the twentieth century at world level.

27 Annual rate of return or rate of growth Rate of return vs. growth rate at the world level, from Antiquity until 2100T the rate of return to capital (pre-tax) has always been higher than the world growth rate, but the gap was reduced during the 20th century, and might widen again in the 21st century. 6% 5% 4% 3% Pure rate of return to capital r (pre-tax) Growth rate of world output g 2% 1% 0% Sources and series: see piketty.pse.ens.fr/capital21c

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29 In other words pro-rich growth With r>g no problem if ownership of capital were distributed equally. We d all share the rise in profits and dividends and rents. But in the United States (and to some extent also in UE) in 2010, for example, the richest 10% of households owned 70% of all the country s wealth (a good proxy for capital ), and the 1% of households owned 35% per cent of the wealth. By contrast, the bottom 50% of households owned just 5%. When income generated by capital grows rapidly, the richest families benefit disproportionately. Since 2009, corporate profits, dividend payouts, and the stock market have all risen sharply, but wages have barely budged. As a result, almost all of the income growth in the economy between 2010 and 2012 (95% of it) accrued to the top 1%.

30 2 - elasticity of substitution between capital and labour > 1 He argues that the elasticity of substitution between capital and labour is significantly greater than 1 (maybe around 1.5). This it implies that a rising capital-income ratio will only be partly offset over time by a declining real rate of return on capital (r). This overturns the familiar result of stable labour and capital shares of national income, modelling of long-term growth and many other similar studies. Usually r declines for the well know mainstream principle of declining marginal productivity when K increases

31 3 - after 2050 Piketty also projects that global growth (g) will decelerate significantly in the long run, particularly after 2050 when the catch-up process will be much closer to being complete for the large emerging economies like China and India. He therefore argues that r > g will continue even more during the next century (particularly after 2050), which will tend to push up the capital-income ratio and the share of capital in national income.

32 4 - The larger the richer He also argues that the rate of return on capital (r) will generally be higher on average for larger portfolios, thus accentuating the trend towards ever greater wealth inequality. Evidence on returns on US university endowment proves this. As we said: in US (and to some extent also in UE) in 2010, for example, the richest 10% of households owned 70% of all the country s wealth and the 1% of households owned 35% per cent of the wealth.

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34 Between I and II WW and immediately after In Europe, two World Wars and the progressive tax policies that were needed to finance them did enormous damage to the old estates and great fortunes: many rich people, after paying their income and inheritance taxes, didn t have enough money left to replenish their capital. During the postwar era, inflation ate away at their savings. Meanwhile, labor-friendly laws enabled workers to bargain for higher wages, which raised the proportion of income that labor received. And the task of rebuilding after the wartime destruction made for the rapid expansion of G.D.P. This helped to keep the growth rate above the rate of return on capital, fending off the forces of divergence.

35 Market value of private capital (% national income) The capital/income ratio in Europe, % 700% 600% 500% 400% Germany France United Kingdom Aggregate private wealth was worth about 6-7 years of national income in Europe in 1910, between 2 and 3 years in 1950, and between 4 and 6 years in % 200% Sources and series: see piketty.pse.ens.fr/capital21c. 100%

36 Value of national capital (% national income) Value of national capital (% national income) National capital is worth about 7 years of national income (including 3-4 in agricultural land and 1 invested abroad). Sources and series: see piketty.pse.ens.fr/capital21c 800% Capital in Britain, % Capital in France, % 600% 500% Net foreign capital Other domestic capital Housing Agricultural land 700% 600% 500% Net foreign capital Other domestic capital Housing Agricultural land 400% 400% 300% 300% 200% 200% 100% 100% 0% %

37 Public assets and debt (% national income) National, private and public capital (% national income) Public debt surpassed 2 years of national income in 1950 (in Britain). In 1950, public capital in France is worth almost 1 year of national income, vs. 2 years for private capital. Sources and series: see piketty.pse.ens.fr/capital21c 250% 200% Public wealth in Britain, Public assets Public debt 900% 800% 700% 600% Private and public capital in France, % 100% 50% 500% 400% 300% 200% 100% 0% -100% National capital (private + public) Private capital Public capital 0% -200%

38 Value of capital (% national income) Value of national capital (% national income) The market value of slaves was about 1.5 years of U.S. national income around 1770 (as much as land). National capital is worth 6.5 years of national income in Germany in 1910 (incl. about 0.5 year invested abroad). Sources and series: see piketty.pse.ens.fr/capital21c. 800% 700% 600% 500% 400% 300% 200% 100% 0% Capital and slavery in the United States Net foreign capital Other domestic capital Housing Slaves Agricultural land 800% 700% 600% 500% Capital in Germany, Net foreign capital Other domestic capital Housing Agricultural land 400% 300% 200% 100% 0%

39 Value of capital (% national income) In Italy, private capital rose from 240% to 680% of national income between 1970 and 2010, while public capital dropped from 20% to -70%. Sources and series: see piketty.pse.ens.fr/capital21c. 800% 700% Figure 5.5. Private and public capital in rich countries, U.S. Japan Germany France U.K. Italy 600% Canada Australia 500% 400% 300% 200% 100% Public capital Private capital 0% -100%

40 Value of private capital (% national income) According to simulations (central scenario), the world capital/income ratio could be near to 700% by the end of the 21st century. Sources and series: see piketty.pse.ens.fr/capital21c. 800% The world capital/income ratio, % Projections (central scenario) 600% Observed series 500% 400% 300% 200% 100%

41 In US the story was less dramatic in terms of collapse of capital ratio but similar. The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy revolution. During the s, Roosevelt raised the top rate of income tax to 90% and the tax on large estates to more than 70%. The federal government set minimum wages, and it encouraged the growth of trade unions. In the decades after the war, it spent heavily on infrastructure, such as interstate highways, which boosted G.D.P. growth. Fearful of spurring public outrage, firms kept the pay of their senior executives in check. During the period from the New Deal era of the mid-1930s to the late 1970s, average real GDP per capita growth in the US was similar to, or even slightly higher than, in the following 30 years

42 Marginal tax rate applying to the highest incomes Top marginal tax rate applying to the highest inheritances Sources and series: see piketty.pse.ens.fr/capital21c. 100% Top income tax rates, % Top inheritance tax rates, % 90% U.S. 80% 80% U.K. 70% 70% Germany 60% 60% France 50% 50% 40% U.S. 40% 30% U.K. 30% 20% Germany 20% 10% France 10% 0% %

43 Since the end of 1970s Inequality started to rise again only when Margaret Thatcher and Ronald Reagan led a conservative counter-revolution that: 1. slashed tax rates on the rich, 2. decimated the unions, 3. and sought to restrain the growth of government expenditures. Politics and income distribution are two sides of the same coin.

44 Share of top decile in total income 50% Figure 9.7. The top decile income share: Europe and the U.S., U.S. U.K. Germany 45% 40% France Sweden 35% 30% 25% 20% In the 1950s-1970s, the top decile income share was about 25-35% of total income in Europe in the U.S. 45% Sources and series: see piketty.pse.ens.fr/capital21c.

45 Two ways out (possible without policy intervention) alternative to tax intervention 1. G.D.P. growth will approach, or even exceed, the rate of return on capital. If it does, the coming decades could look more like the middle of the twentieth century than like the nineteenth century. With the rise of the Internet, biotechnology, robots, and other scientific advances, it is at least conceivable that productivity growth will shift to a permanently higher rate, and that G.D.P. will rise with it. 2. A second possible escape route is for the return on capital to fall, closing the gap with the growth rate. That s what traditional economic theory would predict. As the stock of physical and financial capital gets bigger, the principle of diminishing returns suggests that the rate of profit and interest should decline.

46 Policy issues a global approach to progressive taxation Turning from analysis to policy, Piketty sees the need for a regulated form of capitalism to put some limits on the rising inequality seen over the past 30 years. He recognises the value of the free market economy and is not advocating widespread renationalisation or protectionism, but he does argue for stronger social protection for lower income groups. He sees progressive taxes on wealth and unearned income in particular as the fairest way to fund this provision.

47 Tax intervention Given that inequality is a worldwide phenomenon, a worldwide solution is needed: 1. a global tax on wealth combined with 2. higher rates of tax on the largest incomes. How much higher? the optimal top tax rate in the developed countries is probably above 80% Such a rate applied to incomes greater than five or 1 million dollars a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.

48 Annual (global) property/wealth tax A wealth tax would force individuals who often manage to avoid other taxes to pay their fair share; and it would generate information about the distribution of wealth, which is currently opaque. A new wealth tax would be like an annual property tax, but it would apply to all forms of wealth. Households would be obliged to declare their net worth to the tax authorities, and they would be taxed upon it. 1% for households with a net worth of between 1 million and 5 million dollars; 2% for those worth more than 5 millions. Or a more steeply progressive tax on large fortunes (for example a rate of 5 to 10 percent on assets above 1 billion euros)

49 Global coordination for tax Governments could only do this on a co-ordinated international basis with much greater financial transparency to prevent the flight of wealth (and wealthy people) to lower tax regimes. Taxing the rich more unilaterally, as the French government has tried to do in recent years, is risky (to fail). All in all: rich people do not work, so why then to tax so much labour and nothing the wealth?

50 Mainstream criticisms - 1 His book largely focusses on Europe and the United States. At the global level, substantial progress has been made in dragging people out of destitution, and extending their lives. In 1981, according to figures from the World Bank, about 2 in 5 members of humanity were forced to subsist on roughly 1 dollar a day. Today, the figure is down to about 1 in 7. In the early 1950s, the average life expectancy in developing countries was 42 years. By 2010, it had risen to 68 years. Life is better now than at almost any time in history, Angus Deaton, a Princeton economist, wrote in his 2013 book, The Great Escape: Health, Wealth, and the Origins of Inequality. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.

51 But:

52 Mainstream criticisms -2 Economists such as John Hawksworth, Andrew Sentence argue that the Piketty story may make sense as an analysis of the 18th and 19th centuries, when land and physical capital were the main sources of wealth. But it does not make sense for the 21st century. High earners in modern western society are generally exploiting skills and technology intangible capital rather than the accumulation of physical capital. They have to invest their high income somewhere so rich people do have large holdings of land and other physical assets. But the ultimate driver of inequality has little to do with the accumulation of physical wealth. His book is just a throwback to old Marxist ideas from the 19th century. One could dismiss all of Piketty's specific tax suggestions and advocate to combat inequality boosting early years education for lower income families to increased building of affordable housing and paying a decent living wage.

53 Mainstream criticisms - Punitive taxation Mainstream economists call Piketty s suggestions as Punitive taxation which will not help According to them, the leading western economies regenerated themselves in the 1980s and 1990s by moving away from punitive taxation. They prefer (in the most progressive case) a set of policies targeted on helping raise skill levels, improving access to basic needs including housing, and helping disadvantaged groups in the population.

54 Conclusion - 1 Piketty suggests instead that we are going (in US and in some EU countries) in the direction where it is not worth to study in order to achieve wealth, since this is accumulated mostly by inheritance, financial sector speculation, lobby, and ultimately top education institutions where only the already rich can study. This is a similar phenomenon of what happened in France and in UK in the 19 th century described in the Balzac/Austin books of the time).

55 Conclusion 2 His main thesis is in fact that there is an inherent tendency to the accumulation of wealth in fewer and fewer hands because the returns to capital exceed economic growth. He is also assuming that wealth accumulates as it is passed on through the generations. Thomas Piketty has done us a great service by writing a book on rising inequality of income and wealth. His translator, Arthur Goldhammer, also deserves a lot of credit. His translation has contributed greatly to the readability of the book in English in particular among Anglo-Saxon countries where inequality is rising the most.

56 INEQUALITY IN FINANCIAL CAPITALISM Welfare and Financial Capitalism during Globalisation (the Roots of Inequality and Poorer Economic Performance)

57 The context:a Trilemma 1. Financialisation, 2. Globalisation, 3. Welfare Only two of them can cohesist and work (produce better economic performance)

58 Pick two of them but only the right two Globalisation Financialisation Welfare

59 The objective of the paper Is the efficiency thesis functional for economic growth? (reduce welfare and increase competitiveness in the global market) or, The compensation thesis produces better results in terms of economic growth? (because of globalisation inequality increases SO: To reduce inequality increase welfare state, and this will create also advantages and competitiveness)

60 Hypothesis and method The efficiency thesis does not cause economic growth. The tests are conducted in a sample of 42 countries made up of OECD and EU members. Our econometric exercises indicate that the compensation thesis (i.e., regulated globalisation and an expanded welfare state) is better able to produce higher economic growth. Performance Index (PI) combines GDP growth and labour market performances

61 The results A new classification: 1) Welfare Capitalism and 2) Financial Capitalism. 1. Welfare capitalism reduces inequality and foster economic growth. 2. Financial Capitalism higher inequality and during crisis worse economic performance ( ). Welfare state is not a drain on economic performance and competitiveness or as a barrier to economic efficiency. The most generous of Europe s welfare states are also the most efficient and successful economies as far as they have globalisation without financialisation

62 Globalisation or Regionalisation (i.e. Europeanisation)? Globalisation process intensification of trade, capital mobility, finance, labour, technology. or Globalisation process not only of the intensification of those flows but also of extensive increase at a planetary level of trade, capital etc. (Hay and Wincott, 2012; Held et al., 1999).

63 FDI in Developed countries and in the World world FDI inward stock (millions US$) DevC FDI inward stock (millions US$) world FDI outward stock (millions US$) DevC FDI outward stock (millions US$)

64 Global trade intensification World Imports of goods and services (% of GDP) 0 World Exports of goods and services (% of GDP)

65 The six changes on the top of it 1. The political (and ideological) change in the 1980s Reagan and Thatcher Washington Consensus by WB and IMF. 2. The financial deregulation in the USA and in UK and later in other countries 3. The fall of Berlin Wall in 1989 (and the following dissolution of the Soviet Union in 1991) 4. The deepening of the process of integration of the European Union and the Maastricht Treaty 5. The tremendous challenges posed by the technological progress that brought about the ICT revolution 6. The take-off (during the 1980s and 1990s) of emerging economies

66 Globalisation and growth For Lucas (1993), international trade contributes to stimulate economic growth Baghwati (2004) believed that trade is the engine of economic growth Walsh and Whelan (2000): structural change, R&D growth

67 Globalisation and inequality Market integration increases economic inequality and vulnerability (from Stolper- Samuelson on) gap increases between North and South Capital outflows from capital-rich countries to LDCs increases inequality in DC (Ha, 2008; Tsebelis 2002). Tax competition on capital reducing welfare outsourcing

68 ,5 CAPITAL MOBILITY THREATEN Fdi in % of World GDP 4 3,5 3 2,5 2 1,5 1 0,5 0 FDI, net inflows (% of GDP)

69 Financialisation Dominance of capital financial systems over bank-based financial systems (Krippner, 2005), The increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies (Epstein 2005: 3-4). In numbers: +2 trillion $ each day of volume of foreign exchange transactions in 2006 (-/+ GDP of France). In 1989, this volume was about 500 billion $ per day (-/+ the GDP of Greece).

70 Market Finacialization: (% of GDP) Australia Canada Denmark France Germany Greece Ireland Italy Japan Netherlands Norway Portugal Spain Sweden Switzerland nited Kingdom United States

71 Avg. Growth of GDP per capita in EU and US, ,5 Growth before and during financialisation 4 3,5 3 2,5 2 1,5 1 0,5 0 Germany France Spain Italy EU15 USA

72 US average compensation Average compensation in the financial sector Average compensation in the rest of the economy

73 25 Expansion and retrenchment of Welfare State (Public Social Expenditure, % of GDP) EU-21 OECD-34

74 Welfare evolution I used a revised and updated version of the approach used by Esping-Andersen (1990) who ranks welfare models mainly according to the level of social spending, to the level of (de)commodification of welfare and to degree of extension of welfare among citizens (3 groups: Liberal, Continental and Scandinavian models) A new classification, five models: the three above + the Mediterranean group and the Central and East European Countries (CEEC)

75 Main features to identify the model Public social spending Financialisation Gini EPL Wage share

76 Social Spending, % GDP The evolution of welfare and the break in Social spending by welfare models, Continental Scandinavian Liberal Mediterranean CEEC

77 Wage Share % GDP 65 Wage Share by group of countries (compensation/va) Continental Europe 50 Scandinavian countries Anglo-Saxon countries 45 Mediterranean countries 40 CEEC

78 0,4 Inequality (Gini coeffients) among OECD countries 0,35 0,3 0,25 0,2 0,15 0,1 0,

79 INEQUALITY BY WELFARE MODELS 0,4 Gini coefficients since 1980s 0,35 0,3 0,25 continental scandinavian liberal mediterranean 0,2 0,

80 epl_ Financialisation vs labour flexibility Portugal Czech Republic Germany Netherlands Slovenia Italy Austria Poland Norway Korea Denmark Greece Sweden France Finland Spain Israel Belgium Australia Ireland Japan Canada United Kingdom United States financialisation_2012

81 .25.3 gini_ labour flexibility and inequality United States United Kingdom Japan Ireland Australia Spain Greece Canada New Zealand Estonia Italy Korea Poland France Netherlands Germany Hungary Austria Sweden Belgium Slovak Republic Finland Denmark Norway Slovenia Czech Republic epl_2013

82 .25.3 gini_ Financialisation and inequality Israel United States Portugal Greece Ireland Spain Japan United Kingdom Australia Estonia New Zealand Italy Poland Korea France Canada Germany Netherlands Hungary Austria Slovak Republic Czech Republic Slovenia Denmark Norway Belgium Sweden Finland financialisation_2012

83 gini_ The role of welfare Chile Mexico Turkey Israel United States Australia Greece United Portugal Kingdom Japan Spain Ireland Canada Estonia New Zealand Italy Poland France Switzerland Netherlands Germany Luxembourg Austria Sweden Finland Belgium Norway Denmark Public social spending 2012

84 The empirical analysis Given that a more sophisticated model was tested, according to the following equation: 42 EU and OECD countries, on a panel between 2007 and 2013

85 Regression Model on a Longitudinal Panel Dep Var.: GDP per capita (Log Natural) Variable Coeff. (standard errors) P-values Public Social subsidies (% of GDP) ( ) Education_Expend. (public), % of GDP ( ) Import, % GDP ( ) Export, % GDP ( ) Investment (capital formation), % GDP ( ) FDI (out), % GDP ( ) FDI (in), % GDP ( ) Constant ( ) Time dummies (Years 2007, 2008, 2009, 2010, 2011, 2012): YES R-sq (between) = sd(u_i + avg(e_i.))= Prob > F = Number of obs = 240; Number of groups = 42 Panel ( ) Hausman Test (BE vs FE): b (BE) = consistent under Ho and Ha; obtained from xtreg Between-group effects (BE) B (FE) = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(12) = (b-b)'[(v_b-v_b)^(-1)](b-b) = Prob>chi2 = Hausman Test (BE vs RE): b (BE) = consistent under Ho and Ha; obtained from xtreg B (RE) = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic

86 General results Best performing countries are those that rely on a corporative socio-economic model rather than on a liberal competitive model. This means that countries that managed to keep higher levels of public expenditure and higher levels of welfare state are better off today in the global economy. The empirical analysis focused on the period of the crisis that started in 2007.

87 Stronger welfare and mercantilist globalisation As the regression table suggests, social subsidies and education expenditures, both with positive and significant coefficients, are functional to higher GDP. Positive coefficients and significance are noted for the variable Export (as a percentage of GDP), while a negative significant coefficient is noted for the variable Import (as a percentage of GDP) the corporative socio-economic model

88 The winner is the supremacy of the compensation hypothesis is confirmed: regulated globalisation and an expanded welfare state are better able to produce higher GDP per capita. In other words, countries that perform the best during this period ( ), results suggest, invested more in welfare state (social subsidies and public education expenditures) and adopted mercantilist policies, importing less and exporting more without being as open towards FDIs. These countries do not properly represent an orthodox model of liberal capitalist economy. On the contrary, they represent a corporative or social market economy model

89 best-performing countries are Continental and Scandinavian European economies 0-2 continental scandinavian liberal CEEC mediterranean Performance Index (g+n) - U average

90 Lessons to be learned 1: during the crisis In the years of the crisis ( ): countries that had better performance are those that managed not to retrench the welfare state under the process of globalisation and therefore reached the eve of the crisis in 2007 better equipped in terms of the welfare state.

91 Lessons 2 welfare evolution.3 Liberal1990 Liberal2010 Mediterranean GINI Mediterranean1990 Continental1990 Continental Scandinavian2010 Scandinavian SOCIAL_SPENDING

92 Lesson 3 - from the trilemma: globalisation and welfare Winners in globalisation: did not embrace tout court financialisation and did not retrench welfare. Investing in social dimensions is the best policy option not only because it reduces inequality but also because it produces better performance (GDP and labour market). Hence, from the trilemma (globalisation, welfare and financialisation), it is better to adopt globalisation and welfare because any other solution would contribute to poorer socio-economic performance.

93 Lesson 4 : a new classification evolution of welfare states leads us toward a new classification of only 2 socioeconomic models among advanced economies quite polarised 1. Financial Capitalism regime 2. Welfare Capitalism regime

94 Welfare Spending (% GDP) Very high Middle Very low Very high Liberal Model Financialisation (market capitalisation index, % GDP) middle Scandinavian Model Mediterranean Model Very low Continental Model

95 Poles apart: Welfare Capitalism and Financial Capitalism (data 2010)

96 Conclusion 1 Countries that reacted to globalisation challenges by the implementation of the efficiency thesis, did not achieve better economic performance and during the crisis suffered the most (Liberal and Mediterranean models). Their income distribution worsened and inequality. On the contrary, econometrics exercises show that the compensation thesis was better able to produce higher economic growth along with better labour market performance and better income distribution.

97 Conclusion 2 A new classification emerged on the basis of welfare spending, financialisation and inequality: 1. Welfare Capitalism (Continental /Scandinavian) 2. Financial Capitalism (Liberal/Mediterranean) Welfare Capitalism shows a better Performance Index and lower inequality; On the contrary, countries of the Financial Capitalism have lower Performance Index and higher inequality.