Economic Insights
A Shift in the Capitalist Structure?
A Shift in the Capitalist Structure?<br/>資本主義結構改變?

Before the onset of the coronavirus pandemic, the debate over the future of capitalism was already well under way, with a focus on identifying an alternative economic model that better reflects conditions on the ground. 

For detractors of conventional capitalism, issues such as worsening socioeconomic inequality, deteriorating living environments, and an emphasis on short termism have all led to a decline in the overall quality of life while fuelling a rise in public discontent and populism. 

A 2019 survey of Americans by the Pew Research Center found that a third of respondents held a negative view of capitalism as it was seen as a contributor to an unfair and imbalanced economic structure that only benefits a small number of people. That sense of inequality has been further reinforced by the pandemic, with the less well-off being disproportionately affected. 

High-income office workers have generally been less impacted over the past year and have not suffered a significant drop in pay. This is in contrast with frontline workers in the retail and hospitality sectors that have borne the brunt of the pandemic, as consumption dried up and habits changed. With the acceleration in digitization across many industries, automation has become a real threat to many low-skilled jobs.

The pandemic has also led to a widening gulf between the have and have-nots. To prop up their economies, central banks around the world have carried out several rounds of quantitative easing programmes by injecting massive amounts of money into the financial markets to keep interest rates low. This has caused a surge in prices across virtually all asset classes and, in the process, further enriching the so-called elites. 

The realisation that the existing economic structure is unsustainable has given rise to calls for reform. One of these involves a review of the existing shareholder-driven model that focuses mainly on financial returns in favour of one that is more stakeholder-driven, which instead places more emphasis on social and environmental outcomes. 

The benefits of switching operating models are compelling. In addition to better managing compliance, competition and reputational risks, businesses can also reap financial dividends by reducing their tax obligations. Carbon taxes, for example, are increasingly being favoured by governments to discourage the use of fossil fuels. 

Businesses, especially financial institutions, are also taking note of market trends as investors increasingly demand that investments and projects fulfil environment, social and governance (ESG) principles. BlackRock, one of the world’s biggest money managers, announced that it will offer more sustainable investment options to meet clients’ demand. According to a survey that the firm conducted in December 2020, investors planned to double their allocations to sustainable investments over the next five years, and 20% said that the pandemic had accelerated their investments in such assets. BlackRock has also promised to screen all investments against sustainability criteria and to divest from companies in polluting industries.

For such a change to gain traction, collective action is critical. Governments will have to play a part: for instance, by providing a fiscal and regulatory environment that incentivizes businesses to focus less on short-term monetary gains and more on creating purposeful value. Furthermore, there has to be a way to measure how a company is doing in living up to its commitments. A proliferation of standards means that companies can be confused and overwhelmed, especially in the case of SMEs and those that are about to develop an ESG framework.  

Despite the damage wrought by the pandemic, it has brought to the fore much-needed discussions on promoting conscious capitalism, which can also be profitable and therefore more lucrative for businesses. Taking the financial markets again as an example, funds that screened out companies that performed poorly in ESG matters attracted four times more cash inflows in 2020 compared to 2019, with many of these outperforming the S&P 500. 

The unparalleled disruption caused by the pandemic has given rise to unprecedented actions – including measures that would have been unimaginable under normal circumstances – to fight back against the virus and deal with the consequent economic fallout. Such an overhaul should also extend to a reassessment of policies that are no longer compatible with sustainable goals. 

Just as ESG investing once represented a marginal activity in the financial world, but has since assumed centre stage, conscious efforts should be made to reinvent capitalism as we know it. This would help pave the way for a better world in which businesses create value with and for a wide range of stakeholders, instead of a privileged few. After all, a polarized world does not exactly provide an ideal environment for businesses to grow and flourish.

 

Wilson Chong, wilson@chamber.org.hk 

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