How can we reimagine the economic status quo?

As governments around the world get to grips with the flaws of the current economic system, what are the alternatives on offer - and do the benefits outweigh the drawbacks? Sam Sachdeva reports from the Otago Foreign Policy School.

Margaret Thatcher’s (in)famous line about the market economy, that “there is no alternative”, is under attack like perhaps never before.

With inequality under the spotlight, and concerns about whether businesses and the financial sector are fit to respond to existential threats like climate change, politicians and the public are looking for alternative models of measuring success - take the Government’s inaugural Wellbeing Budget, and Winston Peters’ declaration during the announcement of his coalition decision that capitalism had to regain “its human face”.

What those alternatives look like, and how they stack up against the status quo, was a topic many speakers at the Otago Foreign Policy School attempted to tackle.

Lucie Greenwood, a member of KPMG New Zealand’s sustainable value team, spoke about “an age of unprecedented inequality within and between countries”, and the recognition by establishment figures like British Chancellor Philip Hammond of a growing gap between economic market-based theory and what was happening in the real world.

“Too many people are waking up to the reality that the system doesn’t work for them,” Greenwood said.

The view that economic activities were valuable only if they reinvested profits back into the economy, such as by upskilling workers or improving innovation, had been replaced in the 1980s by the widespread belief that value was “in the eye of the beholder” through market prices.

Lucie Greenwood from KPMG New Zealand said private equity firms were "shuffling money around the system" instead of investing in productive activity. Photo: Sam Sachdeva.

Greenwood said the deregulation of the financial sector had led to the rise of asset managers and private equity firms who realised it was more profitable to “shuffle money around the system”, with only 15 percent of money from the entire sector flowing back into businesses in 2016.

Sam Buckle, the deputy secretary for resource efficiency at the Ministry for the Environment, said there was an increased awareness of the economic system’s impact on the planet, coupled with a willingness to challenge old habits through new theories like “doughnut economics” and the circular economy.

“By way of understatement, none of this is easy - but there are opportunities, I think there are plenty of them.”

After dutifully delivering the MFAT-approved parts of a speech on threats to the international trading system - or what he euphemistically referred to as the “technical” part - Trade and Export Growth Minister David Parker lit up as he talked about the causes of middle class insecurity which had led thousands to flood the streets of Auckland in protest against what was then called the Trans-Pacific Partnership free trade deal.

Enormous rises and inequality and wealth accumulating in the hands of the 1 percent had been exemplified by dropping home ownership rates, the Panama Papers had shown large-scale tax avoidance, and cuts to interest rates following the global financial crisis had “enabled people that had huge assets to leverage them further and gain an ever growing share”.

David Parker was at his most expressive talking about one percenters outbidding Kiwis for land assets. Photo: Sam Sachdeva.

“Not only do we have these inequalities rising in the world, they were starting to feed back into the New Zealand economy by one percenters from overseas coming and outbidding New Zealanders for our best land assets,” Parker said.

What had enabled the Government to get the renamed CPTPP across the line, he said, was the decision to ban foreigners from buying existing homes in New Zealand.

“I said things like, one Russian oligarch outbidding the most successful New Zealander for the most beautiful bay of the Bay of Islands is one Russian oligarch too many for me, and it is.”

Greenwood said there was more change in the air, with asset management companies calling shareholders and asking them to send the message that companies had to “pull your socks up on climate change, social justice, environmental justice ... start thinking long-term”.

Impact investment was also on the rise, she said, with more investors looking to achieve a social or environmental goal rather than a specific financial return - although that was not without its challenges, including access to capital.

“When you go into a bank and say that this is my purpose, I have a mission statement, it comes before profit, I still generate returns ... as soon as you say impact and social or environmental purpose finance providers kind of back off and freak out.”

Sam Buckle from the Ministry for the Environment outlined the "conundrum" of finding an alternative to traditional measurements of financial return. Photo: Sam Sachdeva.

That was where governments could step in through state-backed funds which helped particular sectors to grow, Greenwood said.

But challenging the broader attitudes behind that resistance to alternative thinking, and finding a better approach with the same benefits as the current system, was what Buckle deemed a conundrum.

“Financial returns are highly measurable and highly transparent, and that transparency has been important for competition and competition has been important for innovation.

“So how do we introduce a broader definition of value that may be more difficult to pin down without compromising innovation and some of the other benefits we get with the clarity that financial returns bring?”

Some of that could be dealt with through corporate governance structures, he said, but what would best have an impact was people voting with their dollars.

“You can regulate use, you can cajole business, but fundamentally people need to deploy their voice and their dollar and I think that will make a big difference.”

* Sam Sachdeva travelled to the Otago Foreign Policy School courtesy of the University of Otago.

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