(This essay was published in South China Morning Post on 28 January 2015.)
Since 1980 the world has experienced the highest rate of growth in real GDP per capita in human history. This has coincided with the global economy becoming more open, free and integrated, and with poverty rates declining significantly. World income inequality has fallen from 0.665 in 1980 as measured by the Gini-coefficient, to 0.61 in 2006.
Yet in every country the popular media is full of reports that globalization has worsened income inequality and further impoverished the poor. Why?
Many in the middle-income class in rich developed countries, who are actually among the world’s high-income class, have experienced no improvement in their standard of living.
This is a political problem for national governments and it has attracted daily media attention, but it has led to the mistaken belief that the world today is more unequal and impoverished because of globalization.
Globalization has made enormous economic achievements in alleviating world poverty and promoting growth, but this has been hugely under-appreciated.
For as long as I can remember, talk of a tradeoff between economic efficiency and social equity has framed political debate in most countries. The right favors more efficiency and faster economic growth and the left wants greater equity at the expense of economic progress – even though, since 1980, there does not appear to have been any tradeoff between the two.
However, there are looming challenges. The coming Third Industrial Age will shed many jobs as businesses innovate and become more technologically productive. This could create social and political problems.
Should governments retain less productive companies in order to save jobs?
Japan props up inefficient, low-productivity businesses to keep people employed and the entire economy suffers as a consequence.
In Hong Kong, highly intelligent people believe it was a mistake to privatize public housing estate shopping spaces because it harms the livelihood of a small group of older shopkeepers.
This idea of retaining sunset industries is another side of the narrative about tradeoffs between efficiency and equity.
An alternative would be to rely on non-profit corporations to create jobs, especially quality jobs, to absorb displaced workers. But to do this, the non-profits must innovate and raise productivity.
In the past, heavy reliance on government subvention discouraged innovation by non-profits, because innovation requires experimentation and inevitable failures, and governments do not like failures. Government funding tends to be awarded for familiar ways of doing things.
Innovation and productivity could be encouraged among non-profits by diversifying funding sources to foster competition for clients, and giving non-profits greater operational flexibility.
Too often, direct government subvention of service agencies removes the client as the focal point. The main relationship ends up being between the government and the agencies. The only form of competition becomes that between service agencies for political influence and funding – not market competition to serve the client better.
Instead, conditions should be created under which a task is outlined by government, but carried out locally and on a competitive basis by both non-profit and for-profit non-government corporations, which are reimbursed so that public funding is given directly to clients rather than agencies.
At present in Hong Kong, vouchers are used to fund kindergarten places, elderly outpatient medical fees, and bed places in elderly homes; many more services could adopt such arrangements. Some services are provided by a mix of for-profit and non-profit corporations, but funding is primarily through subventions to agencies rather than reimbursements to clients.
Alternative funding could come from for-profit corporate sponsorship, private philanthropy, and client payment with reimbursement. Government funding could be made more effective by using it to match or reimburse private sources.
Developing these alternative sources of funding would necessitate making non-profits more transparent and accountable. Here the government could establish a governance and supervisory framework, set standards of reporting, mandate audits, and require as much transparency as publicly-listed companies.
Funding diversification can encourage non-profits to behave and compete like for-profit corporations. Only when the Third Sector succeeds in innovating and raising productivity will our economies be able to provide quality jobs for future displaced workers and address domestic inequality.
Efficiency and equity do not have to be conflicting objectives, but they can only be made compatible by harnessing the forces of competition. As globalization has demonstrated, increased economic growth rates and reduced world income inequality can be achieved at the same time.