Economics that looks at the lower half of the pyramid

Source: The post is based on the article “Economics that looks at the lower half of the pyramid” published in The Hindu on 26th May 2023

Syllabus: GS3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About economic inequalities and economic policies.

News: Recently, the Global Solutions Summit was conducted in Berlin.

What are the key takeaways of the Global Solutions Summit?

The Global Solutions Summit is an international conference aimed at addressing key policy challenges facing the G20 and G7 and other global governance fora. The theme of this year’s summit was “Realigning Societies: Towards a sustainable, inclusive, and common future”.

The think tanks of the G-20 and other countries at the summit called attention to global problems of climate change, increasing economic inequalities within and among countries, and the effects of the financial and trade sanctions imposed by the most powerful nation, which affects the other 85% most of all.

What are the implications of economic inequalities?

Divisions among the economic “haves” and “have nots” are changing the political dynamics around the world. For instance, the economic disparity forces both the left and right of the political spectrum and has gained strength in all countries.

The G7 countries represent only 15% of the world’s citizens. But they autocratically and undemocratically force other governments representing 85% of the people to turn into a democracy.

How does free market capitalism change socialist economies over time?

After the global depression, economies were reformed towards “socialism” in the last century. They aim to rebalance incomes and wealth.  For example, Many European countries adopted a socialist model while maintaining their cultural traditions. Similarly, the U.S. introduced social security, increased taxes to raise resources for the government, and introduced laws enabling labour unions within enterprises.

The economic ideology of free markets in the 1980s struck at the base of socialist economies. Free market capitalism is founded on the principle of liberty in the economy, with rights for everyone to use their properties as they will. Free market economy models do not have much place for “socialist” values of equality and fraternity. 

Further, the objectives of reforms imposed by the International Monetary Fund and the World Bank on countries whenever they needed economic assistance required the undoing of socialist reforms made earlier.

How does private sector involvement limit government spending?

Ronald Reagan once said the “government is not the solution…, it is the problem.” He followed a policy which required governments to reduce their budgets and taxes to make more room for capital markets. “Subsidies” for the poor became bad, while “incentives” for investors were good.

The private sector is not expected to subsidise the cost of its services. Therefore, economic reforms favouring the private sector have increased economic precarity even in rich countries.

With the spread of financial capitalisation, an elite class of global citizens and multinationals emerged. They are residents in many countries but they avoided paying taxes in any. Thereby reducing government spending.

What should be done?

The model of economic growth that has guided national and international policies since the 1990s will not create healthy democracies.

-Economics needs urgent reform to progress towards universal social, and ecological well-being.

-Instead of focusing on the ease of doing business and the reduction of risks of financial investors, the Ease of living of the poorest citizens and the reduction of economic disparity must be the principal measures of good governance.

-Indian economists must rethink the economic policies and concentrate on the requirements of the lower 50% of the people in the pyramid, and not trust wealth to trickle down on its own.