I do not normally upload work-related articles on to this blog as they are often too technical. However, this comment may be of more general interest. It is from the February issue of IPE.
Pension funds and asset managers should focus more on their role of providing retirement income and less on political questions. Indeed, it would be best if the pensions industry ditched entirely what has become known as ESG (environmental, social and governance).
The focus on ESG within the pensions industry is astounding. There are inevitably big debates about climate change, sustainability, child welfare, human rights, divesting from Israeli firms and much more. No doubt, such discussions make participants feel good but they should consider their negative consequences.
For a start, they seem to have forgotten that most people still receive a meagre retirement income. For example, a recent study of the British market by Aviva estimated that the current typical saving and investment is only £53,793 (€71,900, excluding the value of their home). That would deliver income of between £3,117 a year if an annuity is bought, or £3,635 each year if invested in a drawdown plan over 25 years. On top of a basic state pension of up to £115.95 a week that amounts to a total weekly income of perhaps £185 per person.
Naturally such figures should be put into perspective. The basic state pension in Britain is lower than in many countries. The estimate is also an average. Relatively affluent individuals do much better but many people subsist on a bare minimum. The aspiration should be that everyone has a reasonable retirement income.
Not that the pensions industry is primarily responsible for the low level of payouts. Pension levels depend fundamentally on the general level of prosperity. Any payout is ultimately derived from an economy’s current output. When people invest for retirement they do not build up a stock of goods and services for future consumption. In essence, they get a claim on economic production once they have retired.
This points to one reason why ESG is problematic. Its environmental preoccupations lead to a curbing of economic growth. For example, the discussion of climate change often leads to the conclusion that consumption should be curtailed. Yet it is rising prosperity that provides the possibility of better pension payouts for all. Similarly greens forget that coal power can be enormously beneficial to poorer countries in particular.
ESG is also fundamentally undemocratic. Political topics should be debated in the public realm in a free society and not be restricted to the relatively narrow world of financial institutions, public officials and campaigning groups.
The plaudits given to Mark Carney, the governor of the Bank of England, for his comments on climate change typify this undemocratic tendency. An unelected technocrat should not be using his position to make public statements on such matters.
Political discussions belong in the sphere of politics rather than inside the pensions industry.
I will be debating “are greens the friends or the enemies of progress?” at the Zurich Salon on the evening of Tuesday 19 January. The other speakers are Thomas Vellacott (CEO of WWF Switzerland), Silvio Borner (professor of economics) and Stephen Tindale (director of the Alvin Weinberg Foundation). It will be chaired by Sabine Beppler-Spahl of the Freiblickinstitut think tank. More details of the event can be found here.
This is my book review from yesterday’s FT.
What would you do if you were walking past a shallow pond in which a small child was drowning? There can be little doubt that the vast majority of people would wade in to save the child even if it came at the relatively trivial cost of getting their clothes muddy.
This is the starting point of a famous essay by Peter Singer, an Australian moral philosopher, first published in 1972. It has just been republished, along with two additional essays by Singer and a foreword by Bill and Melinda Gates.
Of course, Singer does not stop with the example of the drowning child. His next step is to argue there is no moral difference between letting the child drown and letting one die in a faraway country as a result of extreme poverty.
The two cases are different in psychological terms, though. The small child in the hypothetical example is in front of you whereas those living in severe poverty are generally a long way away. But in moral terms, Singer argues, the challenge posed is the same.
In both cases it is possible to eliminate the suffering at no risk to our physical well-being. We might get our clothes muddy or be able to afford fewer luxuries, but that is miniscule when set against the value of a human life.
Over the years Singer’s argument has inspired countless philanthropic initiatives around the world. With the endorsement of Bill and Melinda Gates in this new edition it has gained public recognition from perhaps the world’s greatest philanthropists.
Perhaps its influence is not surprising since, at first sight, its argument seems unimpeachable. Who, after all, would want to be seen arguing the case for letting a small child drown? However, a closer examination shows there are reasons to question Singer’s moral reasoning. In particular, the use of a small child as a starting point risks infantilising the people it is ostensibly designed to help: the poor themselves. It casts western philanthropists as heroic saviours of the helpless and those living in dire conditions as passive victims of dire circumstances.
An alternative starting point would be to see human beings as capable of shaping and reshaping their own circumstances. People have the ability to transform the world around them for the better, rather then simply lying back helplessly and accepting their fate.
This sense of agency is the main force for eliminating poverty. Perhaps the most striking recent example is China’s widely acknowledged success in lifting hundreds of millions of people out of poverty from the 1980s onwards. This was achieved by a drive to transform its economy, rather than allowing itself to become the object of western pity.
That is not to say contemporary China is perfect or that its model should be followed slavishly. Only that, through their own efforts, people have often succeeded in lifting themselves out of poverty through economic growth.
Indeed, long before China’s rapid surge in development began in the late 1970s, that is precisely how the west’s own prosperity was created. Western affluence is primarily the result of concerted action by earlier generations, rather than the gift of external charity.
This alternative view does not, of course, preclude saving drowning children or even giving aid to those suffering in an emergency. A key problem with Singer’s argument is precisely that it blurs these exceptional circumstances with the everyday business of conquering poverty.
In fact, Singer is, at least in passing, critical of the forces that do most to eliminate poverty. In his original 1972 essay on famine he favourably cited two of the most prominent critics of economic growth of the time.
There are additional reasons to resist Singer’s arguments. His explicit condemnation of those who fail to accept a duty to eschew new clothes or cars for the sake of the poor risks generating resentment. He is essentially trying to guilt-trip westerners into giving up luxuries.
Yet there is not a fixed amount of wealth in the world. It is quite possible — indeed, it has been the norm in recent times — for the world’s poor to have become richer at the same time as the affluent countries have also become wealthier. Those who want to contribute to famine relief or poverty alleviation should be free to do so. But viewing the world’s poor as mere passive recipients of western charity is a temptation that should be resisted.
Famine, Affluence, and Morality, by Peter Singer, Oxford University Press
I will be debating Inequality: should we really be worried? at a Battle of Ideas satellite event at the Kulturhuset Stadsteatern in Stockholm on at 2.15pm next Saturday. There are two other sessions the same afternoon on Migrants, Refugees and Borders and Europe’s Changing Drugs Laws. Please come along if you are in the area.
I will be speaking at an extra Battle of Ideas session on whether we need the new Sustainable Sevelopment Goals from the United Nations at 4pm this coming Saturday.
I will be speaking on the End of the East Asian miracle? at the Battle of Ideas at 5.30pm on Saturday 17 October. Come along to the session or, better still, to the whole weekend.
This is my latest book review for the Financial Times.
It is hard to imagine how the rapid development of many poorer economies in recent decades could have happened without the emergence of super-rich individuals. No doubt for most Financial Times readers the two go together. The rise of popular prosperity depends on the vibrancy of wealth- creating entrepreneurs.
But it is important to remember that many people do not see it that way. For some critics, the existence of the super-rich alongside many millions in poverty is immoral. For many others, life is inevitably a zero-sum game: more riches for the few must, by definition, mean less wealth for the many.
Rich People Poor Countries should be understood against the backdrop of this debate. Caroline Freund, a senior fellow at the Peterson Institute for International Economics, a Washington DC-based think-tank, begins the book with an exchange that encapsulates the contrasting views. At the World Economic Forum in Davos this year, Winnie Byanyima, executive director of Oxfam International, referred to the relief charity’s findings that the richest 1 per cent of the world’s population would own more than 50 per cent of the world’s wealth by 2016.
In response, Sir Martin Sorrell, chief executive of WPP, the advertising group, said: “I make no apology for having started a company 30 years ago with two people and having 179,000 people in 111 countries and investing in human capital each year to the tune of at least $12bn a year.”
The first part of Freund’s work is essentially a taxonomy of the super-rich in the emerging world. Her study’s starting point was an examination of the changing composition of the Forbes list of the world’s billionaires. From there she worked with an assistant, Sarah Oliver, to research every individual to determine how they achieved their fortune and the sectors with which they are associated.
On this basis, she determined that extreme wealth in emerging markets is largely self-made. Although some wealth is acquired by inheritance, its importance is declining. The typical emerging market billionaire builds a globally competitive mega-company that also plays a role in transforming their home country.
There are, of course, variations by region and sector. East Asia is, not surprisingly, the most dynamic. Mainland China went from being unrepresented in 1996 to making up 40 per cent of east Asian billionaires by 2014. The Middle East was exceptional in a negative sense, as the only region where inherited wealth had increased.
The second part of the book argues strongly that the rising prosperity of poorer countries has been closely associated with the growth of large companies. As countries have grown richer, so have companies and, in many cases, individual entrepreneurs.
In 1996, fewer than 3 per cent of global Fortune 500 companies were from emerging markets. By 2014, the figure was nearly 30 per cent. These large companies have played a central role in generating employment and exports for poorer countries. They have also helped economies shift from an emphasis on agriculture to industry and services. Of course, it is always possible some individuals will accrue great wealth by corrupt means. For Freund, an important way to guard against this is to ensure companies operate in a competitive environment.
This includes making it easy for individuals to set up businesses and maintaining an openness to trade. In such conditions, she argues, it is harder for powerful forces to hijack the wealth creation process for their own benefit.
Although Rich People Poor Countries clearly shows how the development process is closely connected to the rise of large companies, it is unlikely to convince sceptics. It is doubtful that those with a moral aversion to the accumulation of extreme wealth will be convinced simply by facts. And those who believe development is tightly constrained by scarce resources will continue to insist that more for some must necessarily mean less for others.
Winning the debate on the benefits of popular prosperity requires a culture war waged on several fronts. It means, among other things, showing through the force of argument that everyone can benefit from a wealthier society. It is also necessary to tackle the moral qualms about mass affluence. The fight cannot be won with evidence alone.
I haven’t updated this website for a while as I’ve been incredibly busy with various tasks. However, I hope to be back before too long.
Since this is my last blog post for Fundweb allow me to indulge a little. I want to try to unravel a debate that has increasingly preoccupied policymakers, as well as myself, in recent years. That is the discussion of excessive inequality.
The arguments on the subject can be incredibly frustrating because they are often at cross-purposes. Few take the trouble to listen carefully to what others are saying.
Anyone who has read some of the key discussions on the topic should first of all be clear that no influential voices are calling for equality. They certainly do not advocate the removal of material inequalities or the abolition of social classes. On the contrary, they often make the point explicitly that they are not calling for an equal society.
Instead the near universal call is for the allegedly damaging implications of extreme inequalities to be contained in some way. This is the thrust of the argument made by leading politicians (such as Barack Obama), religious leaders (including the Pope and Justin Welby), central bankers (Mark Carney and Janet Yellen), influential economists (James Heckman, Thomas Piketty and Joseph Stiglitz), international organisations (including the IMF and the OECD), philosophers (such as Michael Sandel and the late John Rawls) and the billionaires who attend the World Economic Forum at Davos.
It should be clear from this glittering roll call that this argument is thoroughly mainstream. Although some may favour a limited degree of redistribution there is nothing inherently radical about their obsession with inequality. On the contrary, it could reasonably be described as an elite preoccupation.
The primary concern is about what is sometimes called social cohesion. That is a fear that the super-rich at the top of the hierarchy (rather than the merely rich) and the socially excluded at the bottom could between them pull society apart. There is also a secondary and related worry that high levels of inequality could damage economic growth.
Although I disagree with the conclusions drawn by Mark Carney, the governor of the Bank of England, he succinctly expressed the mainstream view in a speech to last year’s Conference on Inclusive Capitalism in London. Using sociological jargon he argued the debate was really about “social capital” which he defined as “the links, shared values and beliefs in a society which encourage individuals not only to take responsibility for themselves and their families but also to trust each other and work collaboratively to support each other.” (For those who are interested, he took the concept from Robert Putnam, a Harvard sociologist).
Carney then went on to say: “My core point is that, just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system.” He therefore introduced a limited form of anti-capitalism – in the sense of opposition to an unconstrained free market – into his scheme.
Although Carney was careful not to call openly for state regulation of people’s lives, that is where this fearful outlook inevitably leads. That is why it embodies a potent drive to restrict individual freedom. But the premise on which the argument is built is false. The anxiety about social disintegration is greatly overdone. It reflects the outsize insecurities of a technocratic elite rather than the realities among the bulk of the population.
On that note, I would like to wish the best to all my readers.
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Ferraris For All, my book defending economic progress, has just been published in an extended edition in paperback and on Kindle with a new chapter on the inequality debate.Amazon.com, Amazon.co.uk, Amazon.ca, Amazon.de,
Please see the Buy the book page for more details.