For many low-income countries, the Covid-19 crisis has further damaged already struggling economies. 52 countries are currently experiencing a debt crisis, where the size of debt payments undermines the government’s ability to protect the basic economic and social rights of its citizens. A further 100 plus countries are considered at risk. 2020 saw a huge flight of overseas capital from developing economies.
Since May 2020 the Debt Service Suspension Initiative (DSSI), initiated by the rich G20 countries, with the World Bank and IMF, has postponed debt repayments for some of the poorest countries during the pandemic. Many indebted countries are however choosing not to take part, for fear of this impacting on their sovereign credit rating and therefore the costs of future debt.
There are now widespread calls for a more comprehensive package of debt relief for the poorest and most indebted countries. One possibility is that this could be funded by earmarking the rise in the value of gold reserves over recent years. Innovative proposals have also been put forward to combine debt relief with environmental action, where countries agree to ‘swap’ debt relief for quantifiable commitments to reduce deforestation or enhance conservation.
Eurodad (the European Network on Debt and Development) criticises the G20’s Covid debt relief package (the DSSI) for its limited impact and failure to get multilateral and private lenders to participate.
Looking back at previous debt relief programmes, the Overseas Development Institute argues that imposing strict spending conditions on debt postponement, is too complex to monitor and erodes trust between countries, and proposes a more flexible approach.
The Jubilee Debt Campaign outlines how the IMF could fund debt relief for the world’s poorest countries from the significant recent rise in the value of the IMF’s gold reserves.
Carbon Brief explain how China and other countries with high levels of overseas investment could help low-income nations tackle environmental degradation and climate change through ‘debt-for-nature’ swaps.
The Heinrich Böll Foundation shows how debt-for-climate swaps could be a ‘triple-win’ instrument, tackling the climate crisis through the protection of precious terrestrial and marine ecosystems, while also contributing to debt relief and economic recovery.
The principle of financial transactions taxes can also be applied to currency trading. Currency transactions taxes (CTTs) act to slow down currency transactions by raising their cost, thus reducing volatility. This makes them effectively a form of capital control – a tool that can be used to help regulate the flow of money into and out of economies.
As Covid-19 unfolded many countries faced significant capital outflows, strengthening arguments for using CTTs as a partial response, particularly for emerging markets.
The International Monetary Fund’s series of recent papers marks a softening in its position on capital controls, advocating their use in certain circumstances. One of the tools they cautiously recommend using is currency taxes.
IPPR calls for the introduction of a currency transaction tax. It suggest thats the tax starts low and rises over time, with an additional rate levied for 'speculative' large capital outflows. Its report notes that such a tax could be introduced unilaterally but would be more effective if internationally coordinated.
The UK has the lowest rate of corporate taxation in the G7 group of wealthy countries, at just 19%. Despite this, business investment in Britain is easily the lowest in these economies.
Tax rates are not the key factor in determining the profitability and the attractiveness of investments; more important factors are the availability of skilled labour and efficient infrastructure, and the overall demand in the economy. These require government spending and investment.
Corporate taxation can be highly progressive because it is primarily paid by shareholders, and share ownership is concentrated among the wealthiest groups in society. In recent years a number of multinational corporations have paid very low taxes in some countries, because they have managed to shift their declared sales and profits to countries with lower tax rates.
Governments fear losing investment and tax revenues to other countries. This has led them to cut corporate tax rates. This combination of tax avoidance and “tax competition” is eroding overall tax revenues and allowing many of the largest firms to pay very little tax.
Simon Tilford argues that tax competition is not only cutting revenues, but undermining competition and fuelling monopoly.
The National Bureau of Economic Relations reports that close to 40% of multinational profits are shifted to tax havens globally, and that urgent action is required to prevent this practice from further aggravating inequality.
A World Bank blog calls for governments to improve the equity of the tax system, including through closing international loopholes for corporations and individuals
The IPPR proposes an "alternative minimum corporation tax" based on national sales revenues, to be levied on multinational corporations that consistently declare low or zero profits.
Tax Justice UK has published research by Laurie Macfarlane and Christine Berry which identifies six companies in finance, outsourcing, retal, real estate, mining and pharmaceuticals which have made £16bn in excess profits over the pandemic. The report calls for a one-off windfall tax on pandemic profits, amongst other proposals to equalise taxation of capital gains and more.
The Biden administration has released plans for a global minimum corporation tax with its “Made in America Tax Plan”. Tax Justice UK estimates that the American proposals would translate to a £13.5 billion increase in annual tax revenue for the British government.
Corporate governance in the UK is strongly shaped by the principle of shareholder primacy. This means that the interests of shareholders take priority over those of other stakeholders in a firm, such as workers, suppliers or consumers. There is strong evidence that this encourages an excessive focus on short-term profitability, at the expense of long-term investment.
It is often argued that the UK’s model of corporate governance should better reflect the wider interests of a company’s stakeholders, not just its shareholders. Proposed reforms include giving firms an explicit duty to pursue long-term purpose or value creation, and to tie executive pay to a range of metrics rather than just a firm's profitability or share price.
A particular focus for reform is the make-up of company boards. Advocates of worker representation on company boards - which is commonplace in many European countries - argue that it would tend to strengthen investment, because workers have a longer-term interest in their companies than short-term shareholders. By fostering a culture of cooperation between managers and workers, it would also boost productivity. There are also widespread calls for mandatory improvement in the gender and racial diversity of company boards.
The Big Innovation Centre calls for firms to have an explicit duty to pursue long-term value creation and for executive pay to be linked to long-term firm performance. They advocate for shareholders to have differential voting rights and for measures to encourage the inclusion of more long-term shareholders.
The IPPR calls for changes to company law to make it explicit that directors have a responsibility to promote the long-term success of a company and to institutionalise employee representation on company boards.
The Trades Union Congress has called for regulatory reform to give workers a voice in the running of companies, arguing this would boost productivity and overall economic performance.
Common Wealth's report on 'Asset Manager Capitalism' explores how asset management firms have become the dominant shareholders in corporations throughout the global economy. It articulates a new framework for more democratic corporate governance.
The UK has a flourishing economy of cooperatives (companies owned by their workers or consumers) and other forms of social enterprise (non-profit-distributing businesses with social goals). Such businesses have a long history in the UK and around the world, their origins often in mutual self-help initiatives among working class and other marginalised communities. They are characterised by democratic ownership and governance, and often a social mission.
Mutual building societies – which borrowed money from members of a local community to lend to others for housebuilding and purchase – were once a pillar of the UK financial system, but most became commercial banks in the privatisations of the 1980s and 90s. Both in the UK and around the world credit unions have performed a similar role of mutual borrowing and lending within a local or occupational community. Today a new wave of mutual banks is emerging to fill a gap in finance for social good.
Worker-owned cooperatives continue to be the mainstay of the cooperative movement, with the Mondragon network in the Basque country of Spain the single largest group. In the UK John Lewis remains the most famous employee-owned business, though its governance structure is not fully democratic. The Cooperative Group and regional cooperative societies are consumer-owned mutuals. In recent decades a vibrant movement of community enterprises has emerged: socially-owned businesses committed to advancing social and employment goals, often in low-income areas.
Cooperatives UK’s annual survey of the cooperative sector found that in 2020 the UK’s 7000 independent co-ops employed nearly 250,000 people with a combined annual turnover of £38 bn (and rising). 14 million people are members of consumer or worker coops.
Power to Change profiles the wide variety of community businesses in England. Over 11,000 businesses have a combined turnover of nearly £1bn a year, over 37,000 paid staff and nearly 150,000 volunteers.
Profiling a number of case studies, CLES argues that locally-owned and socially-minded enterprises are more likely to employ, buy and invest locally, so should form the foundation of ‘community wealth building’ strategies in local economies.
The Mondragon Corporation in the Basque region of Spain is the largest and most advanced cooperative economy in the world, employing over 81,000 worker-owners in 96 separate, self-governing cooperative businesses.
The New Economics Foundation’s Change the Rules platform showcases inspiring enterprises across the UK, from community businesses and employee-owned cooperatives to credit unions and regional co-operative banks.
The Democracy Collaborative in the US profiles ‘mission-led employee-owned firms’, whose ownership and purpose-driven goals embody a powerful model of enterprise for an economy of environmental sustainability and social equity.
Governments have provided various forms of support to businesses, and in some cases whole sectors, to enable them to survive the pandemic. Many people have argued that, particularly for larger businesses, such ‘bailouts’ should not be unconditional.
In return for financial help, companies should be required to meet a set of minimum standards of good corporate behaviour, such as environmental commitments and payment of tax.
A range of commentators have further called for the government to take equity stakes in the businesses it bails out, as it did for example with the Royal Bank of Scotland after the 2008 financial crash.
This would give the government a long-term stake in the future direction of such companies, helping to focus them on long-term investment and environmental sustainability. Revenues returning to the government from equity stakes could support long-term economic recovery, or form the basis of a social wealth fund.
Writing for the Institute for Government, former economic adviser to Theresa May, Giles Wilkes, analyses how bailout measures can be designed to support long-term business development, arguing for the use of equity stakes and direct grants as well as loans.
A coalition of NGOs and think tanks have called for the Government to apply six conditions to corporate rescue plans, including a priority on job retention, a moratorium on dividend payouts, and the adoption of climate targets.
The Tax Justice Network outlines a set of ‘tax-responsible’ rules for company bailouts across the world, including a ban on support for companies that invest in tax havens.
The High Pay Centre argues that bailout conditions should include fair pay ratios, including no more than 10:1 between the highest paid and median employees, and worker representation on boards.
IPPR and Common Wealth argue that public equity stakes should play a key role in supporting businesses through the pandemic. Such stakes could form the bedrock of a National Wealth Fund providing long-term returns to the government.
Far more money needs to be mobilised to avoid the worst impacts of the environmental emergency. Not only must investment in green activity increase, funding for environmentally destructive activity must decrease.
Governments are committing to a green recovery from the pandemic and interest rates are at a record low - so a range of voices argue that there is a case for greater public and private spending on sustainable investments.
Evidence shows that sustainable investments deliver high financial returns and can create lots of quality jobs, offering an opportunity to improve social and economic outcomes as well as restoring the environment.
UCL's Institute for Innovation and Public Purpose suggests that green investment must increase threefold over the next 15-25 years to finance the transition to an economy run on low-carbon energy.
Another independent panel of economists chaired by the former head of the UK Civil Service, Sir Bob Kerslake, presented a green financial strategy to the previous Shadow Chancellor. Some areas explored include central banking, public investment banks, and the regulation of private banks.
UCL's Institute for Innovation and Public Purpose and the EIC-Climate KIC sets out a comprehensive framework for green financial reform. They focus on the three tiers of central banks and regulators; state investment banks; and how to match firms with green finance.
The idea of a circular economy turns on the current linear model of resource extraction, usage and disposal on its head.
It aims to design out waste, eliminate toxic chemicals, and transform product design. This means going beyond simply increasing recycling and instead reducing the creation of waste in the first place, intentionally using the waste that remains as new economic inputs.
The rationale for this is economic as well environmental. Global demand for resources is rising, scarcity is increasing, wasteful resource use costs large amounts of money, and digitalisation is allowing for greater disruption of traditional business models.
The Ellen MacArthur Foundation has a series of in depth reports on the circular economy, including on the business and economic rationale, and a shorter summary of the key arguments and evidence.
The EU’s Green Deal involves a Circular Economy Action Plan (CEAP) to assist their net zero target and halt biodiversity loss.
The World Resources Institute lists five ways to operationalise the circular economy includes calling for commitments to the circular economy to be central to climate agreements.
At the same time as neoclassically-based economics has been criticised for its influence over orthodox economic policy, its central role in the teaching of economics has also come under scrutiny.
Complaining that traditional economics courses did not reflect the post-financial crash world they were experiencing, economics students have campaigned for reform of the curriculum. They and others have argued for economic ‘pluralism’, an acknowledgement that there are a variety of economic perspectives, not a single correct one.
New ways of teaching the subject have been developed which start with real world problems and data about them, not stylised theory.
The student movement Rethinking Economics campaigns for a pluralist economics curriculum.
The CORE project has developed a new open-source curriculum for teaching undergraduate and postgraduate economics based on studying real world problems.
Members of Economists for Inclusive Prosperity, Can Erbil and Geoffrey Sanzenbacher explain Why, When, and How to Teach the Fundamentals of Inequality to economics students.
Felicia Odamtten, founder of The Black Economists Network (TBEN), explained that a lack of diversity in economics "can exacerbate the lack of attention paid to the issues faced by particular communities, and ultimately lead to poor decision-making and negative outcomes for these communities.”
Central banks around the world have already reduced interest rates to zero or below to reduce borrowing costs and discourage saving. Some central banks have moved towards negative interest rates – charging certain depositors for keeping their cash in the bank. While some argue for going further, others worry that negative interest rates could reduce the stability of the system.
Central banks have also restarted and expanded post-crash programmes of quantitative easing (QE) – colloquially known as printing money, but in practice taking the form of asset purchasing programmes.
These programmes attempt to place a floor beneath falling asset prices to prevent insolvencies and a destabilising cycle of debt deflation. One criticism of QE programmes has been that they exacerbate social inequality and disproportionately benefit high-carbon firms. Alternative green QE versions have been proposed but not adopted.
Gabriel Chodorow-Reich, in a paper for the Brookings Institute, weighs up the long-term costs and benefits associated with lower interest rates and quantitative easing. He finds that in the US, wider system stability has not been affected, even though low interest rates since the crash encouraged banks to take riskier bets.
The Institute for New Economic Thinking concludes that QE programmes in the USA after the financial crash increased inequality. They suggest this is largely because it exacerbated deep-seated structural problems in the economy, such as decreasing job prospects and wage stagnation.
The New Economics Foundation and academics from UWE, SOAS and the University of Greenwich find that post-pandemic QE disproportionately benefits high-carbon companies. In response they propose new low carbon versions of QE to correct this.
