A New Social Contract for a New Kind of Economy

Minouche Shafik’s new book,?What We Owe Each Other: A New Social Contract?seems perfectly timed, with the world teetering between the 2008 financial crisis and a global pandemic. The book is not written for the general reader, but I think that they too might like it. They would like it for her astute observations about the state of the world, and how the leading actors – governments, businesses and society (the rest of us, ordinary citizens) – can do something about it.

In fact, the way it begins it reads as though it might be written for the lay reader, by having to explain what a social contract is. I thought that was unnecessary. And I wondered at the start, if Shafik was going to compare the different kinds of social contracts that prevail across the world today, and then make policy prescriptions. However, the book is not conceived or organized in that manner. Shafik looks at the social contract from the point of view of various constituencies and sectors that need the most attention today and shares her thoughts and views on how they can be improved.

The book is divided into chapters on what is a social contract, children, education, health, work, old age, generations and a new social contract. In the first chapter, she does write about William Beveridge and welfarism as it was born in the UK before it travelled to Europe, as well as Bismarck’s contribution to it in Germany. Her main thrust or argument through the book is not welfarism in the tax-the-rich-and-redistribute-the-income-to-the-poor way that most of us understand it. In fact, she doesn’t overtly argue in favour of any particular kind of economic system or political economy as has become rather fashionable these days, to argue for a certain type of capitalism vs another. However, from the kinds of views and opinions she expresses in the book, I got the impression that she would perhaps prefer to see the current capitalist system with a lot more government intervention, gravitating towards social democracy in some form. A lot like Paul Collier, whose book,?The Future of Capitalism?I had?reviewed?in my blog long ago.

Much of the way the book begins reminded me of what I was attempting over 15 years ago, when I began putting down my thoughts on brands in Delhi. Since brands are all about relationships that companies and their products have with people, I had looked at individuals, families and society as the three most important pillars or constituencies important in the context of brands. I had left the government out, because its role in the context of brands is small, but I suppose one could include it as the fourth constituency presiding over the other three, as its policies do sometimes have an effect on brands. Minouche Shafik imagines these constituencies as concentric circles, circling out from the individual at the centre and the government forming the outermost circle that governs everyone within.

The main focus of?What We Owe Each Other?is about the huge economic challenges that the world faces and how we can bring about change as well as steer economies in the right direction. In each of the chapters, she identifies the main problem areas that confront us today, and in the future, and how countries are responding to it. In the process, she shares her views on each subject. If Shafik draws a comparison between different countries’ policies, it is mainly to help us realise that there is more than one way of tackling the problem.

For example, in the chapter on children, Shafik writes about childcare, and how it differs when it is provided by the state as opposed to privatized childcare. She writes about how in Northern Europe, especially the Nordic countries, it is state-funded, while in Southern Europe it is private. She discusses which encourages more women to work and to return to work, as well as parental leave for men and the difference it makes to children’s development as well as to work. She also writes about the Korean and Japanese experience in this regard, where social values and attitudes have to still adjust, with Korea having the lowest fertility rate as a result. Having weighed the options, Shafik shares her views on the way forward:

“Ideally, governments would provide a menu of options for families – maternity and paternity leave, or better yet, parental leave that can be shared – and public funding for institutionalized childcare as well as for home care. These choices are deeply personal and depend hugely on individual circumstances. The critical change that must occur is that caring for the next generation can no longer be ignored, taken for granted or discounted as unpaid work. It needs to become an essential part of public services infrastructure, like health or education services. It also needs to be flexible to recognize the ways that the organization of both work and families is changing. This will help improve the lives of both men and women, support children more effectively and create jobs, often for women.”

The book offers a balanced and nuanced view of the kinds of changes in policy that are required on all these several fronts. It is also very well-written and Shafik articulates her assessment of the way things are and what needs to be done in a very sensitive and comprehensive way. She avoids judgment even on what are clearly problem areas, preferring to leave it to factors like personal choices, or social attitudes that need change.

In the chapter on education, Shafik again writes about state-funded education vs private education, especially at the primary level, and the experiences of various countries in this area. She writes that because a child’s early years are the most formative, the emphasis ought to be on problem-solving and flexibility.

“Given these various factors – the burgeoning demand for cognitive skills on the one hand, and the impending reality on the other that jobs will change and that job stability is decreasing – what we need is a system of education that is more?flexible. It needs to equip children not just with knowledge and skills but with the ability to?acquire?knowledge and skills.” (italics, the author’s)

She also writes about the importance of lifelong learning and skill upgradation, as job markets get more competitive and technology advances rapidly. She writes about some countries where the state subsidises the cost of skill upgradation for working people. Shafik discusses the use of tax credits in countries such as Germany, Austria, Singapore and the Nordics to encourage companies to provide training to their employees and where these costs are seen as investment in human capital. As a reference note, she also cites an OECD report,?Getting Skills Right: Engaging Low-skilled Adults in learning?which mentions government subsidies being used in South Korea in small and medium-sized enterprises; government subsidies can be used to hire external consultants to assess training needs of the entire organization, CEO down, and for the provision of necessary upskilling.

In chapters such as those on work and ageing, Shafik discusses the changes in demography as well as the influences of technology and their enduring impact on people’s lives and work. From phenomena such as the gig economy as well as caring for the elderly and entitlement programmes, she argues for a system that has more safeguards built in.

I thought that the book could have done with a chapter on women as contributors to the economy and all that needs to be done to ensure that they have a fair chance at it. While she does discuss women in the context of childcare and as a provider for the family, she has ignored the needs of women in education and at work. I find the fact that Shafik didn’t see women as an important constituency in their own right, somewhat disappointing. There is plenty that needs to be done to improve girls’ and women’s health, education, jobs and career development, gender pay parity, women’s rights at work and in life, including ownership of property, which can be contentious issues in some countries.

The other important area that Shafik has left out of the book is the tremendous and enduring impact of technology in our lives. From ensuring more equitable access to technology, to safeguarding users’ privacy and rights, as well as regulating the intrusive influence of technology in areas from study and work to healthcare and work-life balance, not to mention cyber-security and cyber warfare, there is plenty that needs to be done in this area as well, as more and more of our lives and work is conducted using technology.

The third aspect that hasn’t been addressed adequately is the environment and climate change. Shafik does discuss it in the chapter on generations, as one of the legacies we ought to be concerned about, in addition to the mountain of debt that we leave to the next generation. But I am not sure that is sufficient to get the attention of policymakers around the world, in building a new social contract. Especially when many of them are climate change deniers. I thought a chapter dedicated to the environment could also have addressed what businesses can do in addition to the government’s responsibilities.?

I don’t think any discussion on a social contract can be complete without discussing women, technology and the environment, and those are drawbacks of?What We Owe Each Other. Especially, if as Shafik says in the last chapter, The New Social Contract, there are three broad principles that underpin all of her arguments: 1) Security for all, 2) Maximum investment in capability and 3) Efficient, fair sharing of risks.

In this chapter she goes on to outline what the new social contract might look like. And she also writes of three key strategies that are required: increased productivity, rethinking fiscal policy and a new contract with business. Increased productivity, according to Shafik would require increasing the pace of technology adoption or digitization, in which she refers to a paper by economist Robert Gordon of Northwestern University. It would also come from better regulation by government of increasing concentration of market power and skilling people better for working with technology.

Rethinking fiscal policy, Shafik says, is an imperative and goes on to consider how countries might finance the extra spending required. Based on a study by World Bank, she says it should be possible for advanced economies (where taxes are 40% of GDP) and even low-and-middle income countries (where tax to GDP ratios are much lower) to increase spending on primary education, water, sanitation, and income support. This entire package, according to the World Bank, would cost a low-to-middle-income country such as India 5.1% of GDP.

From Minouche Shafik’s book, What We Owe Each Other, a diagrammatic representation of a new contract with business

And finally, when it comes to the new contract with business, Shafik envisages a multi-tier system with varying levels and kinds of intervention. Government and publicly financed programmes work at the guaranteed minimum level, and work upwards and outwards with lower levels of mandates, greater firm-and-individual-financed programmes, at each successive stage, with purely business-financed and voluntary programmes at the highest level.

When you see the kinds of intervention required for achieving the three strategies, women, technology and the environment are absolutely key considerations. That said, inadequate treatment of these constituencies doesn’t make the book less significant for policy matters.?What We Owe Each Other?is still an important and elegantly written book on the most crucial contemporary issues that face our world.

This article first appeared on my blog on April 8, 2022.