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“Fifty years ago Klaus Schwab first proposed his theory that businesses are not only responsible to their shareholders, but also to all their stakeholders. With a global economic system generating deep divisions and inequalities, Klaus renews his call for a form of capitalism that works for everyone and where businesses don't just take from society but truly give back and have a positive impact. Stakeholder Capitalism is an urgent call to action.”

—Marc Benioff, Chair and CEO, Salesforce

“If you think this is just another pre-COVID/post-COVID book, think again. Klaus Schwab draws on his vast experience to take us on a roller-coaster ride past the highs and lows of post-war capitalism. His knack for economic storytelling gives you a real and deep insight into where we are headed and what we should be aiming for.”

—Alexander De Croo, Prime Minister of Belgium

“We can no longer think short term. Companies need to answer to more than their shareholders; they need to be accountable to higher morals. Now, in the middle of the COVID-19 crisis, Klaus Schwab shows us that we cannot go back to business as usual. He inspires us to look at the current response of global solidarity between people, companies, and governments to this health crisis and see it as the unequivocal way to a new paradigm to tackle the climate crisis and the scandal of rising inequality in the world.”

—Angélique Kidjo, Musician and UNICEF Goodwill Ambassador

“For a half-century, Klaus Schwab has been consistent in his belief that public companies can drive great returns for their shareholders AND address society's most important priorities. The world now understands that the system he envisioned—what we call Stakeholder Capitalism—can align capital to those outcomes better than any other.”

—Brian Moynihan, CEO, Bank of America

“Stakeholder Capitalism offers a timely analysis that shows how the neoliberal economic system privileges billionaires and extractive corporations over the dignity of billions of people and the protection of our planet. As COVID-19 has deepened despair and economic, gender and racial inequalities, governments must—with stakeholders—act decisively to depart from shareholder-first capitalism and instead put human rights at the heart of our economy.”

—Gabriela Bucher, Executive Director, Oxfam International

“Professor Schwab's new book offers us insightful perspectives on the world's economic history and the thinking that has led us towards the greatest challenges we face today – none larger than climate change. More importantly, it offers a blueprint for the future, inviting us to build a more inclusive, prosperous, healthier and greener world by embracing Stakeholder Capitalism at scale.”

—N. Chandrasekaran, Executive Chairman, Tata Sons

“In Stakeholder Capitalism my good friend Professor Schwab outlines an inspiring way forward in making the global economy more equitable, sustainable and future-proof. A vision that fits in perfectly with all his efforts over the years to build a better world. Once again, Professor Schwab gives us food for thought and reflection with this fascinating book.”

—Mark Rutte, Prime Minister of the Netherlands

STAKEHOLDER CAPITALISM

A GLOBAL ECONOMY THAT WORKS FOR PROGRESS, PEOPLE AND PLANET

KLAUS SCHWAB

with Peter Vanham

Copyright © 2021 by World Economic Forum. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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COVER ART & DESIGN: PAUL MCCARTHY

To my parents, Eugen Wilhelm Schwab (†) and Erika Epprecht (†), who taught me firsthand the value of education, collaboration, and the stakeholder principle

About the Authors

Professor Klaus Schwab is the founder and executive chairman of the World Economic Forum. In 1971, he first published Modern Enterprise Management in Mechanical Engineering. In the book, he argues that a company must serve not only shareholders but all stakeholders to achieve long-term growth and prosperity. To promote the stakeholder concept, he founded the World Economic Forum the same year.

Since his first publication, Schwab has authored and co-authored various books and reports, including the yearly World Economic Forum Global Competitiveness Report (1979–present), The Fourth Industrial Revolution (2016), a worldwide best seller translated into 30 languages, Shaping the Future of the Fourth Industrial Revolution (2018, with Nicholas Davis), and COVID-19: The Great Reset (2020, with Thierry Malleret). Alongside his leadership of the World Economic Forum, Schwab also started the Schwab Foundation for Social Entrepreneurship with his wife, Hilde (1998), The Forum of Young Global Leaders (2006), and the Global Shapers Community (2011).

Professor Schwab holds doctorates and master's degrees in economics (University of Fribourg) and in engineering (Swiss Federal Institute of Technology) and obtained a master's degree in public administration (MPA) from the Kennedy School of Government at Harvard University. In 1972, he became a professor at the University of Geneva, where he is now honorary professor. Throughout his career, Schwab has received 17 honorary doctorates. Schwab was knighted in France (Knight of the Légion d'Honneur, 1997), in England (by Queen Elisabeth II, Knight Commander of the Order of St Michael and St George, 2006), and Germany (Knight Commanders Cross, 2012). He also received the Grand Cordon of the Rising Sun of Japan (2013), among many other national distinctions. He lives in Geneva with his wife, Hilde.

Peter Vanham is the head of Chairman's Communications and the International Media Council at the World Economic Forum. He previously led the Forum's US media relations from New York, and worked as a journalist in Philadelphia, London, Zurich, and Berlin. Vanham is the author of Before I Was CEO (2016), recounting the life and career lessons from CEOs before they made it to the top, and has contributed stories on emerging markets and business leadership to The Financial Times, Business Insider, Harvard Business Review, and many other media. He holds master's degrees in business and economics journalism (Columbia University) and commercial engineering (KU Leuven). He lives in Geneva with his wife, Valeria.

Preface

In early February 2020 I sat down in Geneva to discuss this book with a colleague, when the phone rang in my office. It turned out to be what you could call an AC/BC moment, when attention shifted from the time before COVID-19 to the reality that set in after COVID-19.

Before that call, me and my colleagues had been preoccupied with the long-term challenges of the world economy, including climate change and inequality. I had reflected in depth on the global economic system built in the 75 years since the end of the Second World War, and the 50 years since the creation of the World Economic Forum. I examined the various elements of our globalized world today, including the benefits, trade-offs, and dangers. Then I considered what changes to the system were needed in the next 50 or 75 years, to make sure it would be more equitable, sustainable, and resilient for future generations.

But in one call, that long-term agenda was upended. My focus moved to the immediate crisis that was about to be faced by all of us, in every country on the planet.

On the other end of the line was the head of our Beijing representative office in China. Usually, these kinds of calls cover routine matters, providing a chance to catch up on established initiatives and programs. But this one was different. The director had called to update me on the epidemic that had hit China hard earlier that winter: COVID-19. Initially confined to the city of Wuhan, this novel coronavirus, which often causes a severe respiratory disease, was rapidly becoming a primary public health concern across the country. Our colleague explained that much of Beijing’s population had travelled beyond the city to attend Lunar New Year celebrations and, as they returned, they carried the novel coronavirus with them, causing an outbreak and subsequent lockdown in the capital.

My colleague kept his cool, providing objective facts on what the lockdown meant for our employees and operations. But from his voice, I could tell that he was very worried. His family, and everyone in his life, was affected, facing the dangers of infection and the lockdown in place. The measures taken by authorities were drastic. Employees would be forced to work from home indefinitely, only being allowed to leave their apartments under very strict conditions. If anyone showed symptoms, they’d be tested and quarantined immediately. But even with these draconian measures, it wasn’t certain that the health threat would be kept in check. The epidemic was spreading so rapidly that, even as people were locked inside, they were terrified of contracting the virus. Meanwhile, news from the hospitals was that the disease was very aggressive, hard to treat, and overwhelming the health system.

Back in Switzerland, we had known about SARS-CoV-2, the virus that causes COVID-19, since our Annual Meeting in late January 2020. It had been a topic of conversation in public health discussions, among participants from or with major operations in Asia. But until that phone conversation, I had hoped the outbreak would be limited in its duration and geographic spread, similar to how the coronaviruses SARS and MERS had been contained. I hoped it would not personally affect so many of my own colleagues, friends, and family.

During the phone call, my understanding of the global public health threat changed. In the days and weeks following, I halted the work on this book, and the World Economic Forum went into crisis mode. We set up a special task force, asked all employees to work from home, and focused all our efforts on aiding the international emergency response. It was not a moment too soon. A week later, the virus forced a lockdown in much of Europe, and a few weeks after that, much of the world was facing a similar situation, including the United States. In the following months, several million people died or were hospitalized, hundreds of millions of people lost their jobs or income, and countless businesses and governments went physically or virtually bankrupt.

As I write this preface in the fall of 2020, the global state of emergency caused by the first wave of COVID-19 has mostly receded, but a new wave of infections is putting the world once more on high alert. Countries around the world cautiously resumed social and economic life, but the economic recovery is very uneven. China was among the first major countries to end its lockdowns and reopen businesses, and is even expected to see economic growth over the full year 2020. In Geneva, New York, San Francisco, and Tokyo, our other permanent bases, by contrast, parts of public life have resumed also, but in a much more fragile way. And all around the world, many lives and livelihoods were lost; billions were spent to keep people, businesses, and governments afloat; existing social divisions deepened and new ones emerged.

By now, we have some distance from the initial crisis, and many of us—including myself—have come to realize the pandemic and its effects are deeply linked to problems we had already identified with the existing global economic system. This perspective brought me back to the discussion I had been having in February 2020 on the date of that fateful phone call from Beijing. Many of the analyses we had previously been working on were more true than ever. You will be able to read about them in this book. I will present in what follows my observations on rising inequality, slowing growth, sputtering productivity, unsustainable levels of debt, accelerating climate change, deepening societal problems, and the lack of global cooperation on some of the world’s most pressing challenges. And as I hope you will agree, these observations are as valid after COVID-19 as they were before.

However, one thing has changed in the interim period between “BC” and “AC”: there is, I notice, a greater understanding among the population, business leaders, and government that creating a better world would require working together. The idea that we need to rebuild differently post-COVID is widely shared. The sudden and all-encompassing impact of COVID-19 made us understand, much more than the gradual effects of climate change or increasing inequality, that an economic system driven by selfish and short-term interests is not sustainable. It is unbalanced, fragile, and increases the chance of societal, environmental, and public health disasters. As COVID-19 demonstrates, when disasters strike, they put an unbearable strain on public systems.

In this book, I will argue that we can’t continue with an economic system driven by selfish values, such as short-term profit maximization, the avoidance of tax and regulation, or the externalizing of environmental harm. Instead, we need a society, economy, and international community that is designed to care for all people and the entire planet. Concretely, from a system of “shareholder capitalism,” which prevailed in the West in the past 50 years, and a system of “state capitalism,” that gained prominence in Asia, and is centered on the primacy of the state, we should move to a system of “stakeholder capitalism.” That is the core message of this book. In what follows, I show how such a system can be built, and why it is so necessary to do so now.

Part I (Chapters 1 through 4) provides an overview of global economic history since 1945, both in the West and Asia. It explores the major achievements and shortcomings of the economic system we live in, including increased economic growth, and also inequality, environmental degradation, and debts for future generations. It also looks at how societal trends, such as increased political polarization, are related to the state of the economy and our governance systems. Part II (Chapters 5 through 7) digs deeper in the possible causes and consequences of our economies’ problems and progress. It looks at the role played by technological innovation, globalization, and trade, and the use of natural resources. Finally, Part III (Chapter 8 through 11) looks at possible changes to our global economic system. It provides a definition of stakeholder capitalism, and shows what it can mean in practice for businesses, governments, international organizations, and civil society.

Throughout the book, I have tried to be fair and even-handed, whether in presenting the global problems we are facing, their possible causes and consequences, and the solutions I see to create a better world going forward. But I should immediately add that the views I present here are my own, and inevitably colored by my personal life experiences. I talk about some of those formative experiences as a child, student, and young professional in the first chapter of this book. I hope they help you as a reader to understand my world view, which is based on the belief that the best outcomes in a society and economy result from cooperation, whether between the public and the private sector, or peoples and nations from around the world.

I hope this book inspires you, whoever you are, to help build such a system. By working together to build an economic system built on inclusivity, sustainability, and equality, we can change COVID-19’s legacy. While it inevitably includes death and ruined lives and livelihoods, it can perhaps help us orient ourselves toward a more resilient world. In that way, I hope the post-pandemic world could be to our generation what the post–World War II era was to my parents’ generations: a moment of unity, where the recent past is a stark reminder of a world that nobody wants, and the present and future are an opportunity to create a world where everyone can thrive.

In the decades after the war, we did so by building a social compact at home—including a social market economy in Europe, and a “Great Society” in the US. We also created a multilateral system aimed at preserving peace, fostering collaboration, and creating financial home—including institutions such as the World Bank, International Monetary Fund, and the UN.

Now, I hope we will use the post-COVID recovery to enact stakeholder capitalism at home, and a more sustainable global economic system all around the world.

Thank you for reading,

Klaus Schwab

Geneva, December 2020

PART I
THE WORLD I GREW UP IN

1
75 Years of Global Growth and Development

In the 75 years since the end of World War II, there has been a surge of global economic development. But despite this, the world is living a tale of two realities.

On the one hand, we have rarely been as well off as we are today. We live in a time of relative peace and absolute wealth. Compared with previous generations, many of us live long and mostly healthy lives. Our children get to go to school, even often college, and computers, smartphones, and other tech devices connect us to the world. Even a generation or two ago, our parents and grandparents could only dream of the lifestyle many of us have today and the luxuries that come with abundant energy, advances in technology, and global trade.

On the other hand, our world and civil society are plagued by maddening inequality and dangerous unsustainability. The COVID-19 public health crisis is just one event that demonstrates that not everyone gets the same chances in life. Those with more money, better connections, or more impressive ZIP codes were affected by COVID at far lower rates; they were more likely to be able to work from home, leave densely populated areas, and get better medical care if they did get infected. This is a continuation of a pattern that has become all too familiar in many societies. The poor are consistently affected by global crises, while the wealthy can easily weather the storm.

To understand how we got here—and how we can get out of this situation—we must go back in time, to the origins of our global economic system. We must play back the picture of post-war economic development and look at its milestones. The logical starting point for this is “Year Zero” for the modern world economy: 1945. And there is perhaps no better place from where to tell this story than Germany, for which that year was truly a new beginning.

Foundations of the Post-War Global Economic Order

Children like me, who started primary school in Germany in 1945, were too young to understand why the country they lived in had been at war before or why the next years would change so markedly. But we understood all too well that future conflict was to be avoided at all costs. As in the years following the First World War, “Nie Wieder Krieg,” or “Never Again War,” became a rallying cry all over Germany. People had had enough of conflict. They wanted to rebuild their lives in peace and work together toward a better quality of life.

This would not come easily, in Germany or elsewhere. As World War II came to an end, the country lay in ruins. Barely a fifth of the historic buildings in Germany's main cities still stood. Millions of homes had been wiped out. Swabia, the region in southern Germany where I grew up, was no exception. In its most industrialized city, Friedrichshafen, almost every factory was razed to the ground. This included those of Maybach and Zeppelin, two legendary manufacturers of cars and aircraft whose production capacity had been used by the Nazi government for military purposes during the war.

It is one of my earliest memories, how on the roof of my parents’ house, just 18 kilometers away from Friedrichshafen, we watched the fires that led to Friedrichshafen's destruction. We prayed that the raid would not also hit our hometown, and luckily it didn't, but 700 people died in the last raid of Friedrichshafen alone. I remember how my parents cried when they heard the news, knowing many people personally in this neighboring city. By the war's end, only a quarter of the 28,000 original inhabitants of Friedrichshafen remained.¹ The rest had fled, disappeared, or died.

Ravensburg, where I lived, was one of the rare towns spared by Allied bombardment, a fate likely due to its lack of military-industrial capacity. But the consequences of war were all around us. By the end of the war, as the French Allied army moved in, Ravensburg had become a vast shelter for internal refugees, forced laborers, prisoners of war, and wounded soldiers.² The chaos in the city was complete. The only silver lining at midnight on May 8, 1945, was that the war had truly ended. In Germany, we came to mark this moment as the “Stunde Null,” or “Zero Hour.” Historians such as Ian Buruma later referred to the year that followed as “Year Zero.”³ Germany's economy was a wasteland, and it could only hope to be allowed to begin again, with a clean slate.

The other Axis powers, Italy and Japan, faced similar challenges. The Axis nations’ productive capacity had been decimated. Turin, Milan, Genoa, and other Italian cities had suffered extensive bombings, and Hiroshima and Nagasaki saw unparalleled devastation by atomic bombs. other European countries were also shell-shocked and went through an initial period of chaos. Further east, China and much of Southeast Asia were mired in internal conflicts. Economies in Africa, the Middle East, and South Asia were still shackled by colonial rule. The Soviet Union had suffered enormous losses during World War II. Only the economies of the Americas, led by the United States, had come through the war largely unscathed.

It was thus up to Washington and Moscow to lead the post-war era, each in its sphere of influence. In Swabia, then part of Allied-occupied Germany, the future depended in large part on the choices the United States would make.

America faced a difficult balancing act. It was determined not to repeat the mistakes from the Treaty of Versailles, which ended World War I. Signed in 1919, the Treaty of Versailles saddled the defeated Central Powers (Germany, Austria-Hungary, the Ottoman Empire, and Bulgaria) with an unbearable debt load. This curtailed their economic development and led to an erratic economic recovery, which planted the seeds for the Second World War.

After World War II, Washington took another approach. It wanted to revive the European economies that lay within its sphere of influence, including the parts of Germany under British, French, and American occupation. The United States wanted to promote trade, integration, and political cooperation. As early as 1944, America and its allies had created economic institutions such as the International Monetary Fund and the International Bank for Reconstruction and Development (now part of the World Bank).⁴ Over the decades that followed, they continued their efforts to develop a stable, growing economic system in West Germany and throughout Western Europe.

From 1948 onward, the United States and Canada also provided specific regional aid. Through the Marshall Plan, named after then–US Secretary of State George Marshall, the United States helped Western European countries purchase American goods and rebuild their industries, including Germany and Italy. Providing aid to former Axis powers was a contentious decision, but it was deemed necessary because without the German industrial motor, there could be no strong, industrial Europe. (The Organisation for European Economic Cooperation and Development (OEEC), the forerunner of the OECD, was an important administrator of the program.)

America did not limit its efforts to aid. It also encouraged trade by setting up European markets for coal, steel, and other commodities. That led to the creation of the European Coal and Steel Community, the embryonic form of what is now the European Union. In Asia, too, the United States provided aid and credit to countries including Japan, China, the Republic of Korea, and the Philippines. Elsewhere, the Soviet Union expanded its sphere of influence, promoting an economic model based on centralized planning and state ownership of production.

Local governments, industries, and workers also played a role in the reconstruction effort. For example, in 1947, the Zeppelin Foundation transferred almost all its assets to the city of Friedrichshafen⁵ in the hopes of reigniting a prosperous future for the Zeppelin companies and their workers. At the same time, Friedrichshafen's citizens worked long days to rebuild their homes. Women played a special role in this rebuilding and in much of the initial work of reconstruction. German magazine Der Spiegel later recalled: “With so many men killed in the war, the Allies relied on women to do the hard work of clean-up.”⁶

Just as a jigsaw puzzle requires every piece to be placed correctly to create a complete picture, the work of reconstruction required every resource to be deployed and every human effort to be mobilized. It was a task that the entire society took to heart. One of the biggest, most successful manufacturers in Ravensburg was a family enterprise that eventually renamed itself Ravensburger.⁷ It resumed its production of puzzles and children's books, a business that continues to this day. And in Friedrichshafen, ZF, a subsidiary of the Zeppelin Foundation, re-emerged as a manufacturer of car parts. Companies like these, often from Germany's famous Mittelstand, i.e., the small and mid-sized businesses that form the backbone of the German economy, played a critical part in the post-war economic transformation.

The Glorious Thirty Years in the West

For many people living in Europe—myself included—the relief of the end of the war soon made way for the fear of another one. The free market approach in US-occupied West Germany and the rest of Western Europe clashed with the centrally planned economic model of the Soviet Union, which held sway over East Germany and the rest of Eastern Europe. Which would prevail? Was peaceful coexistence possible, or did things have to end in a head-on conflict? Only time would give us the answers.

At the time, the results were not clear to us or anyone else. This was a battle of ideologies, economic systems, and geopolitical hegemony. For decades, both powers entrenched their positions and their competing systems. Asia, Africa, and Latin America saw the same ideological battle between capitalism and communism play out.

With the benefit of hindsight, we know that the economic institutions the United States created, based on capitalism and free markets, were building blocks for an era of unparalleled shared economic prosperity. Combined with the will of many people to rebuild, they laid the groundwork for decades of economic progress and economic dominance of the West over the “rest.” The Soviet model of centralized planning initially bore fruit, too, allowing it to prosper at first, but it would later collapse.

Beyond the economic shifts, other factors shaped our modern era. Many parts of the world, including the United States and Europe, had a baby boom. Workers were drawn away from the nihilistic demands of wartime production to the socially productive work during peacetime. Education and industrial activity expanded. The leadership provided by heads of government, such as Konrad Adenauer in Germany or Yoshida Shigeru in Japan, was a crucial piece of the puzzle too. They committed themselves and their governments to reconstructing their economies and societies in an inclusive way and to developing strong relations with the Allies aimed at a sustained peace, rather than give in to the quest for revenge that had dominated after the First World War. Given the national focus on community and economic reconstruction, there was an increase in societal cohesion (which is more deeply discussed in Chapter 4).

Between 1945 and the early 1970s, these factors came together to drive a Wirtschaftswunder, or economic miracle, in Germany and the rest of Europe. A similar boom got underway in the United States, Japan, and South Korea (and, initially, in the Soviet Union). The West entered its golden age of capitalism, and the innovations of the Second Industrial Revolution were widely implemented: highways for car and truck transport were built en masse, the age of commercial flying arrived, and container ships filled the sea lanes of the world.

In Swabia, too, new technologies were implemented on the back of this economic miracle. At Ravensburger, for example, sales tripled in the 1950s, kicking off the phase of mass industrial production that began in 1962. Family board games like Rheinreise (which literally translates as “Journey on the Rhine”) became extremely popular⁸ as the children of the baby boom came of age. Ravensburger expanded further in the 1960s,⁹ when the company introduced puzzles to its product line. (The brand's logo, a blue triangle on the corner of its boxes, became iconic.) Around the same time, ZF Friedrichshafen resurfaced in the 1950s as a manufacturer for automotive transmissions, complementing its assortment with automatic transmissions by the mid-1960s.¹⁰ It helped propel German car manufacturers such as BMW, Audi, Mercedes, and Porsche to the top, at a time when the European car industry was booming. (ZF's success lasts until this day, as the company in 2019 posted global revenues in excess of $40 billion, had almost 150,000 employees worldwide, and operations in over 40 countries around the world.)

Looking at economic indicators in the leading economies of the world, it seemed as though everyone was winning. Annual economic growth averaged up to 5, 6, and even 7 percent. Gross domestic product (GDP) is the monetary value of the goods and services produced in a given economy. Often used to measure economic activity in a country, it doubled, tripled, and even quadrupled in some western economies over the next decade or two. More people went to high school and into middle-class jobs, and many baby boomers became the first in their families to go to college and climb up the socioeconomic ladder.

For women, climbing up that ladder had an extra dimension. At first slowly, then steadily, emancipation advanced in the West. More women went to college, entered and stayed in the workforce, and made more conscious decisions about their work-life balance. The booming economy had plenty of room for them, but they were also supported by advancements in medical contraception, the increased accessibility of household appliances, and, of course, the emancipation movement. In the United States, for example, female labor-force participation jumped by 15 percent between 1950 and 1970, from about 28 to 43 percent.¹¹ In Germany, the percent of female students at university rose from 12 percent in 1948 to 32 percent in 1972.¹²

At the Ravensburger company, women came to the forefront, too. Starting in 1952, Dorothee Hess-Maier, a granddaughter of the company's founder, became the first woman at the helm of the company, alongside her cousin Otto Julius. It was exemplary of a broader trend. Women's liberation in Western societies continued for the remainder of the century and into the 21st. Anno 2021, there are more women than men enrolled in university in many countries around the world, including the US and Saudi Arabia¹³(!), and women form close to half of the workforce in many countries. Despite this, inequalities related to pay and other factors remain.¹⁴

Over the course of those early post-war decades, many countries used their economic windfall to build the foundations of a social market economy. In Western Europe, notably, the state offered unemployment benefits, child and education support, universal health care, and pensions. In the United States, pro-social policies were less en vogue than in Europe, but thanks to the rapid economic growth, more people than ever did ascend to the middle class, and social security programs did grow both in the number of beneficiaries and the overall funds allocated to them, especially in the two decades between 1950 and 1970.¹⁵ Median wages rose sharply, and poverty fell.

France, Germany, the Benelux countries, and the Scandinavian countries also promoted collective bargaining. In most German companies, for example, the Works Council Act of 1952 determined that one-third of the members of the supervisory board had to be selected by workers. An exception was made for family-owned companies, as ties between the community and management there were typically strong, and social conflict was rarer.

As I grew up in that golden era, I developed a keen appreciation for the enlightened role the United States had played in my country and the rest of Europe. I became convinced that economic cooperation and political integration were key to building peaceful and prosperous societies. I studied in both Germany and Switzerland and came to believe the borders between European nations would one day disappear. In the 1960s, I even had the opportunity to study one year in the United States and learn more about its economic and management models. It was a foundational experience.

Like so many of my generation, I was also a beneficiary of the middle-class, solidarity society European countries had developed. Early on, I became very intrigued by the complementary roles business and government played in shaping the future of a country. For this reason, it was natural to write one of my theses about the right balance between private and public investments. Having worked during more than a year on the shop floor of companies, experiencing real blue-collar work, I also developed a special respect for the contribution of workers in developing economic wealth. My belief was that business, like other stakeholders in society, had a role to play in creating and sustaining shared prosperity. The best way to do so, I came to think, was for companies to adopt a stakeholder model, in which they served society in addition to their shareholders.

I decided to turn that idea into action by organizing a management forum where business leaders, government representatives, and academics could meet. Davos, a Swiss mountain town that in Victorian times had become famous for its sanatorium treatment of tuberculosis (before antibiotics such as isoniazid and rifampin¹⁶ were invented), offered an optimal setting for a sort of global village,¹⁷ I thought. High up in the mountains, in this picturesque town known for its clean air, participants could exchange best practices and new ideas and inform each other of pressing global social, economic, and environmental issues. And so, in 1971, I organized the first meeting of the European Management Forum (the forerunner of the World Economic Forum) there, with guests such as Harvard Business School Dean George Pierce Baker, Columbia University Professor Barbara Ward, IBM President Jacques Maisonrouge, and several members of the European Commission.¹⁸

The Tumultuous 1970s and 1980s

But just then, in the beginning of the 1970s, it became clear the economic miracle wasn't to last. As we gathered in Davos, cracks in the system had already come to the surface. The post-war boom had plateaued, and social, economic, and environmental issues were emerging. My hope though, was that by more actively learning about successful American management practices, European businesspeople, politicians, and academics could continue to spur prosperity on the continent.

Many European companies did in fact make the step toward neighboring international markets. The European Coal and Steel Community (ECSC), which as the name implied focused on a common market for a few key resources, had in the preceding years evolved to become the more all-encompassing European Economic Community (EEC). It allowed for a freer trade of goods and services across the continent. Many Mittelstand companies used that opening to set up subsidiaries and start sales in neighboring EEC countries. It was thanks in part to this increase in intra-regional trade that growth could continue in the 1970s.

But some economic variables with a critical effect on growth, employment, and inflation, such as the price of energy, were not favorable. Oil, which alongside coal had fueled the post-war boom, brought a first shock to the system. The price of the world's most important energy source rose fourfold in 1973 and then doubled in 1979, as the major oil-producing and -exporting countries (OPEC)—many of them former Middle Eastern and Arabian colonies of the European powers—flexed their muscles. Controlling the vast majority of the global oil supply at the time, the OPEC countries decided to implement an oil embargo in response to the Yom Kippur War. During that war, many of OPEC's Arab members opposed Israel, which during and after the armed conflict expanded its territory in the region. The embargo, targeted mainly against Israel's western allies including the US and the UK, was very effective.

It was no wonder perhaps, that the OPEC countries used their newly gained market power. In the preceding two decades, many of its members—often former European colonies in Asia, the Middle East, and Africa—had finally gained their independence. But unlike most Western countries in that era, these developing countries were often consumed by political and social turmoil. The economic boom in Europe and the United States remained out of reach for many newly independent countries in Asia, the Middle East, and Africa. The OPEC nations were among the few exceptions, as their most important resource, oil, fueled the world economy.

As economic and industrial progress had been so great in the West over the three previous decades, some people also warned that the expansion was unsustainable and that a new economic system would be needed that is more sustainable for the planet, its limited natural resources, and eventually, humans themselves. Among these voices were European scientists and industrialists of the Club of Rome, who had come to believe that the state of the world, and notably the environmental degradation of the planet, was a major problem for human society. Indeed there were great warning signs for anyone who would take heed, and at the Forum's meetings in Davos, we paid close attention. In 1973, Aurelio Peccei, the club's president, gave a keynote speech at Davos about his organization's findings, warning of an impending end to growth.

Still, after surviving multiple recessions and introducing some energy-saving measures such as daylight savings time and car-free Sundays, the world eventually returned to its familiar growth path in the 1980s. The days of 5 and 6 percent GDP growth were over (at least in the West), but growth levels of 3 to 4 percent there were not at all out of the ordinary. Other economies, including the Asian Tigers (South Korea, Taiwan, Hong Kong, and Singapore) helped to make up for the shortfall.

But beginning in the 1980s, a fundamental change in perspective started to emerge about what had enabled post-war economic growth. During the immediate post-war years, it was believed that increased economic prosperity was something that everyone had contributed to, and so it had to be shared by all. It was an industrial model of progress built on partnership between company owners and their workforces. By contrast, the growth phase of the 1980s was based more on market fundamentalism and individualism and less on state intervention or the building of a social contract.

I think this was a mistake. The stakeholder model requires businesses to think beyond their direct, primary interests and to include the concerns of employees and their communities in their decision-making. In the early years of our Davos gathering, participants had even committed to this in a “Davos Manifesto”:¹⁹

THE 1973 DAVOS MANIFESTO

A. The purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders.

B. 1. The management has to serve its clients. It has to satisfy its clients’ needs and give them the best value. Competition among companies is the usual and accepted way of ensuring that clients receive the best value choice. The management's aim is to translate new ideas and technological progress into commercial products and services.

2. The management has to serve its investors by providing a return on its investments, higher than the return on government bonds. This higher return is necessary to integrate a risk premium into capital costs. The management is the shareholders’ trustee.

3. The management has to serve its employees because in a free society leadership must integrate the interests of those who are led. In particular, the management has to ensure the continuity of employees, the improvement of real income and the humanization of the work place.

4. The management has to serve society. It must assume the role of a trustee of the material universe for future generations. It has to use the immaterial and material resources at its disposal in an optimal way. It has to continuously expand the frontiers of knowledge in management and technology. It has to guarantee that its enterprise pays appropriate taxes to the community in order to allow the community to fulfil its objectives. The management also has to make its own knowledge and experience available to the community.

C. The management can achieve the above objectives through the economic enterprise for which it is responsible. For this reason, it is important to ensure the long-term existence of the enterprise. The long-term existence cannot be ensured without sufficient profitability. Thus, profitability is the necessary means to enable the management to serve its clients, shareholders, employees and society.

But despite the initial enthusiasm for the Davos Manifesto and the stakeholder-centered approach it advocated, a narrower shareholder-centric paradigm prevailed, particularly in the United States. It was the one put forth by University of Chicago economist and Nobel Prize winner Milton Friedman starting in 1970. He held that the “only social responsibility of business is to increase its profits”²⁰ and that free markets are what matters above all else. (This is discussed further in Chapter 8.)

The result was unbalanced growth. Economic growth returned in the 1980s, but an ever smaller part of the population benefited from it, and even more harm was done to the planet to achieve it. Union membership started to decline, and collective bargaining became less common (though much of continental Europe, including Germany, France, and Italy clung to it until the 2000s, and some, like Belgium, still do today). Economic policies in two of the West's leading economies—the United Kingdom and the United States—were largely geared toward deregulation, liberalization, and privatization, and a belief that an invisible hand would lead markets to their optimal state. Many other Western economies later followed their path, in some cases after more left-leaning governments failed to jumpstart economic growth. On a more positive note, new technologies also made their contribution, leading to a Third Industrial Revolution. The personal computer was invented and would become one of the key components of every organization.

Die Wende

These trends did not happen in isolation. As the 1980s progressed, the economies of Eastern Europe started to collapse. Their failure at this industrial transition point showed that the state-led economic model put forth by the Soviet Union was less resilient than the market-based one promoted by the West. In China, the government of new leader Deng Xiaoping started its own Reform and Opening-Up in 1979, gradually introducing capitalist and market-based policies (see Chapter 3).

In 1989, Germany experienced a moment of euphoria, as the Berlin Wall, which separated East from West, fell. Shortly thereafter, political reunification of Germany was at last established. And by 1991, the Soviet Union had officially disintegrated. Many economies that lay in its sphere of influence, including those of East Germany, the Baltics, Poland, Hungary, and Romania, turned toward the West and its capitalist, free-market model. “The end of history,” as Francis Fukuyama would call it later,²¹ had arrived, it seemed. Europe got another boost, this time leading to even deeper political and economic integration and the establishment of a common market and a monetary union, with the euro currency as its apex.

At Davos, we felt the winds of change as well. Whereas initially the European Management Forum had been primarily a meeting place between European and American academics, policymakers, and businesspeople, over the course of the 1980s it had become global. The 1980s saw the inclusion of representatives from China, India, the Middle East, and other regions and a shared, global agenda. By 1987, a name change had become necessary. We were thenceforth known as the World Economic Forum. It was fitting for the era of globalization that followed.

Globalization in the 1990s and 2000s

Indeed, following the Soviet Union's collapse, for more than a decade the world's economies became more intertwined. Countries all over the world started to set up free-trade agreements, and the motors of global growth were more varied than ever. The relative importance of Europe declined, and so-called emerging markets, such as South Korea and Singapore but also larger ones such as Brazil, Russia, India, South Africa, and, of course, China, came to the forefront. (There is no formal definition of emerging markets, as it's a classification made by particular private financial institutions, but one common trait that they share is that they are non-Western economies that often have or had higher-than-average growth rates for a number of years, which could help them gain or regain developed-economy status over time.)

In this way, globalization—a process of growing interdependence between the world's economies, signaled by increasing flows of goods, services, people, and capital—became a dominant economic force. Trade globalization, measured by international trade as a percentage of global GDP, reached its highest level ever—15 percent—in 2001, up from 4 percent at its nadir in the Year Zero of 1945.

Swabia's prominent companies surfed this wave of globalization, too. “China was at the top of ZF's agenda,” Siegfried Goll, then a prominent ZF manager, testified in the company's written history.²² “The development of our business relations began already in the 1980s, initially by means of license contracts. When I retired in 2006, we had no fewer than 20 production locations in China.” According to the company's own records, “The first joint venture was established in 1993,” and by 1998, “ZF's position in China was so firmly entrenched that the first-ever founding of a fully owned Chinese subsidiary was possible: ZF Drivetech Co. Ltd. in Suzhou.”

For some, though, this globalization was too much, too quickly. In 1997, several Asian emerging economies experienced a severe financial crisis, caused in large part by unchecked financial globalization, or the flow of hot money, international investor money that flows easily from one country to another, chasing returns, relaxed capital controls, and bond speculation. At the same time, in the West, an anti-globalization movement took hold, as multinational companies started to have more control over national economies.

Even Ravensburger didn't escape the backlash. In 1997, the company management announced that it wished to “introduce a ‘pact for the safeguarding of production sites,’ as a ‘preventive initiative for the maintenance of national and international competitiveness,’” the European Observatory of Working Life wrote in a later case study on the mater.²³ The result was the so-called Ravensburger Pact, in which the company offered its employees job security in exchange for concessions.

Although the pact was accepted by most workers, it also led to a deterioration in employee-employer relations. The industry union argued it went against collective bargaining agreements for the sector and that it was unnecessary, as the company had good economic performance. In the end, the hotly contested pact made all parties reconsider their relationship to each other. The union, which had typically been weak in the family-owned enterprise, grew stronger, and management took on a more constructive approach to its Works Council going forward.

In Germany, similar societal and corporate stresses around economic growth, employment, and the integration of the former East German states ultimately led to a new social pact in the early 2000s, with new laws on co-determination, “mini jobs,” and unemployment benefits. But the new equilibrium was for some less beneficial than before, and even though Germany afterward returned to a period of high economic growth, the situation soon got more precarious for many other advanced economies.

A first warning sign came from the dot-com crash in late 2000 and early 2001, when America's technology stocks came crashing down. But the greater shock to US society and the international economic system came later in 2001. In September of that year, the US faced the greatest attack on its soil since the attack on Pearl Harbor in World War II: the 9/11 terrorist attacks. Buildings representing both the economic and the military hearts of America were hit: the Twin Towers in Manhattan and the Pentagon in Washington, DC.

I was in New York that day on a work visit to the UN, and like everyone there, I was devastated. Thousands of people died. The United States came to a standstill. As a sign of solidarity, the following January we organized our Annual Meeting of the World Economic Forum in New York—the first it was held outside Davos. After the dot-com crash and 9/11, the Western economies entered a recession. For a while, the path of economic growth through trade and technology advances hung in the balance.

But the seeds of yet another economic boost had already been planted. As exemplified by ZF's increased presence there, China, the world's largest country by population, had become one of the fastest-growing economies after 20 years of Reform and Opening-Up, and in 2001, it entered the World Trade Organization. What other countries had lost in economic momentum, China gained and surpassed. The country became the “factory of the world,” lifted hundreds of millions of its own citizens out of poverty, and at its peak became responsible for more than a third of global economic growth. In its path, commodity producers from Latin America to the Middle East and Africa benefitted as well, as did Western consumers.

Meanwhile, on the ruins of the dot-com crash, surviving and new technology firms started to lay the beginnings of a Fourth Industrial Revolution. Technologies such as the Internet of Things came to the forefront, and machine learning—now dubbed “artificial intelligence”—had a revival and rapidly gained traction. Trade and technology, in other words, were once more back as twin engines of global economic growth. By 2007, globalization and global GDP had reached new peaks. But it was globalization's last hurrah.

The Collapse of a System

From 2007 onward, the global economy started to change for the worse. The world's major economies saw their growth motors sputter. The US went first, with a housing and financial crisis turning into a Great Recession that lasted several quarters. Europe followed next, with a debt crisis that started in 2009 and lasted several years. Most other global economies were caught in the middle, with a global recession in 2009 and real economic growth that hovered around between 2 and 3 percent in the following decade. (Specifically, between a low of 2.5 percent in both 2011 and 2019 and a high of 3.3 percent in 2017, according to the World Bank.²⁴)

Slow growth now seems the new normal, as the motor of all economic growth, productivity gains, is lacking. Many people in the West are stuck in low-paying, insecure jobs, with no outlook for progress. Moreover, the IMF had already noted well before the COVID crisis that the world had reached unsustainable debt levels.²⁵ Anno 2020, public debt, which had previously reached a high in the 1970s crises, was again at or near record levels too in many countries. According to the IMF's 2020 fiscal monitor, public debt in advanced economies reached more than 120 percent of GDP in the wake of the COVID crisis, an increase of over 15 percent in a single year, and in emerging economies shot up to over 60 percent of GDP (from just over 50 percent in 2019).²⁶

Finally, more and more people are questioning even how useful it is to pursue growth as an indicator of progress. According to the Global Footprint Network,²⁷ 1969 was the last time the global economy didn't “overspend” nature's resources for the planet. Fifty years on, our ecological footprint is greater than ever, as we use up more than 1.75 times the resources the world can replenish.

All these macroeconomic, social, and environmental trends are mirrored in the incremental effects of decisions taken by individuals, companies, and governments, both local and national. And it confronts those same societies, which have come so far from the era of wars, poverty, and destruction, with an unpleasant new reality: they grew rich but at the expense of inequality and unsustainability.

▪▪▪

Swabia in the 21st century, is in many ways as wealthy as it has ever been, with high wages, low unemployment, and many leisurely activities. The beautiful city centers of Ravensburg and Friedrichshafen in no way resemble the sorry state they were in in 1945. Ravensburg still provides a welcome for refugees, but this time the wars are further afield. Even the city's puzzle game manufacturer has adapted to a world of global supply chains and jigsaws disrupted by digital gaming.

But the puzzle the people of this region, its drivetrain and jigsaw manufacturers, and other societal stakeholders here and in other parts of the world have to solve is not an easy one. It is a global one, with many complex and interdependent pieces. So before we attempt to solve it, we need to list those pieces. It is this assignment that we will take on in the next chapter. And to guide us, we will get the help of a famous economist.

2
Kuznets’ Curse : The Issues of the World Economy Today

There might have been no better person to piece together the puzzle of the world economy today than Simon Kuznets, a Russian-born²⁸ American economist, who died in 1985.

It may seem odd at first that a man who passed away in the mid-1980s would be so relevant to today's global economic challenges, but I believe the issues we are facing today may not have become so problematic had we better heeded the lessons of this Nobel Prize–winning economist.

Indeed, Kuznets warned more than 80 years ago that gross domestic product (GDP) was a poor tool for economic policymaking. Ironically, he had helped pioneer the very concept of GDP a few years earlier and had a hand in its becoming the holy grail of economic development. He also warned that his own Kuznets curve, which showed that income inequality dropped as an economy developed, was based on “fragile data,”²⁹ meaning data from a relatively brief period of the post-war Western economic miracle that took place in the 1950s. If the period of his study turned out to be an anomaly, the theory of this curve would be disproven. Kuznets also never approved of the curve's off-shoot, the so-called environmental Kuznets curve, which asserted countries would also see a drop in the environmental harm they produced as they reached a certain state of development.

Today we live with the consequences of not having been more rigorous in our analyses or having been too dogmatic in our beliefs. GDP growth has become an all-consuming goal, and at the same time, it has stalled. Our economies have never been so developed, yet inequality has rarely been worse. And instead of seeing a drop in environmental pollution, as one might have hoped, we are in the midst of a global environmental crisis.

That we are facing this myriad of economic crises may well be Kuznets’ curse. It is the ultimate “I told you so” of an oft misunderstood economist and forms the root of the feeling of betrayal people have toward their leaders. But before we get deeper into this curse, let's examine who exactly Simon Kuznets was and find out what people remembered him for.

The Original Kuznets’ Curse: GDP as Measure of Progress

Simon Smith Kuznets was born in Pinsk, a city in the Russian Empire in 1901, the son of Jewish parents.³⁰ As he made his way through school, he showed a talent for mathematics and went on to study economics and statistics at the University of Kharkiv (now in Ukraine). But despite his promising academic results, he would not stay in the country of his birth after reaching adulthood. In 1922, Vladimir Lenin's Red Army won a years-long civil war in Russia. With the Soviet Union in the making, Kuznets, like thousands of others, emigrated to the United States. There, he first got a PhD in economics at Columbia University and then joined the National Bureau of Economic Research (NBER), a well-respected economic think tank. It was here he built his illustrious career.

His timing was impeccable. In the decades after his arrival, the US grew to become the leading world economy. Kuznets was there to help the country make sense of that newly found position. He pioneered key concepts that dominate economic science and policymaking to this day such as national income (a forerunner to GDP) and annual economic growth and became himself one of the world's most prominent economists along the way.

The economic development curve of the United States in those years was a turbulent one. In the 1920s, the country was on an economic high; it came out of the First World War swinging. The US emerged as a political and economic power and put its foot next to that of an already enfeebled British Empire. Britain had dominated the world during the First Industrial Revolution, ruling a third of the world until 1914. America instead became a leader of the Second Industrial Revolution, which really took off after World War I. US manufacturers introduced goods such as the car and the radio to the country's huge domestic market, selling them to a public hungry for modern goods. Aided also by a spirit of free trade and capitalist principles, a positive spiral of investment, innovation, production, consumption, and trade ensued, and America became the world's wealthiest country in GDP per capita terms.

But the heady experience of the “Roaring Twenties” turned into the calamitous Great Depression. By 1929, the booming economy had spiraled out of control. Inequality was sky-high, with a handful of individuals, such as John D. Rockefeller, controlling colossal amounts of wealth and economic assets, while many workers had a much more precarious existence, still often depending on payday jobs and agricultural harvests. Moreover, an ever-rising stock market, not backed by any similar trend in the real economy, meant financial speculation was reaching a fever pitch. In late October 1929, a colossal collapse of the stock market occurred and set in motion a chain reaction all over the world. People defaulted on their obligations, credit markets dried up, unemployment skyrocketed, consumers stopped spending, protectionism mounted, and the world entered a crisis from which it would not recover until after the Second World War.

As US policymakers grappled with how to contain and end the crisis at home, they lacked the answer to a fundamental question: How bad is the situation, really? And how will we know if our policy answers will work? Economic metrics were scarce, and GDP, the measure we use today to value our economy, had not been invented.

Enter Simon Kuznets. An expert in statistics, mathematics, and economics, he developed a standard way of measuring the gross national income (GNI) or gross national product (GNP) of the United States. He was convinced this measure would give a better idea of just how much goods and services were produced by American-owned companies in a given year. A few years later, he also became the intellectual father of the closely linked GDP, presenting the slightly different concept in a 1937 report to US Congress.³¹ (GDP takes into account only the domestically produced goods and services, while GNI or GNP include income or products produced abroad by companies owned by a country's citizens.)

It was a stroke of genius. Over the remainder of the 1930s, other economists helped standardize and popularize this measure of economic output to such an extent, that by the time the Bretton Woods conference was held in 1944, GDP was confirmed as the main tool for measuring economies.³² The definition of GDP that was used then is still valid today: GDP is the sum of the value of all goods produced in a country, adjusted for the country's trade balance. There are various ways of measuring GDP, but the most common is probably the so-called expenditure approach. It calculates total gross domestic production as the sum of consumption that stems from it (adjusting for exports and imports):

Since then, GDP has been the metric you will find in World Bank and IMF reports on a country. When GDP is growing, it gives people and companies hope, and when it declines, governments pull out all the policy stops to reverse the trend. Although there were crises and setbacks, the story of the overall global economy was one of growth, so the notion that growth is good reigned supreme.

But there is a painful end to this story, and we could have foreseen it had we better listened to Simon Kuznets himself. In 1934, long before the Bretton Woods Agreement, Kuznets warned US Congress not to focus too narrowly on GNP/GDP: “The welfare of a nation can scarcely be inferred from a measure of national income,” he said.³³ In this he was right. GDP tells us about consumption, but it does not tell us about well-being. It tells us about production but not pollution or the resource use. It tells us about government expenditure and private investments but not about the quality of life. Oxford economist Diane Coyle told us in an August 2019 interview³⁴ that, in reality, GDP was “a war-time metric.” It tells you what your economy can produce when you're in war, but it does not tell you how you can make people happy when you're at peace.

Despite the warning, no one listened. Policymakers and central banks did everything they could to prop up GDP growth. Now, their efforts are exhausted. GDP does not grow like it used to, and well-being stopped increasing a long time ago. A feeling of permanent crisis has taken hold of societies, and perhaps with good reason. As Kuznets knew, we never should have made GDP growth the singular focus of policymaking. Alas, that is where we are. GDP growth is our key measurement and has permanently slowed.

Low GDP Growth

As we outlined in Chapter 1, the global economy in the last 75 years has known many periods of rapid expansion, as well as some significant recessions. But the global economic expansion that started in 2010 has been tepid. While global growth³⁵ reached peaks of 6 percent and more per year until the early 1970s and still averaged more than 4 percent in the run up to 2008, it has since fallen back to levels of 3 percent or less³⁶ (see Figure 2.1).

The number three matters, because it acted for a long time as a pass-or-fail bar of standard economic theory. Indeed, until about a decade ago, the Wall Street Journal pointed out, “Past IMF chief economists called global growth lower than either 3% or 2.5%—depending on who was the chief economist—a recession.”³⁷ One explanation came from simple math: from the 1950s until the early 1990s, global demographic growth almost consistently lay at 1.5 percent growth per year or higher.³⁸ A global growth rate that was only slightly over the rate of population growth meant large parts of the world population were in effect experiencing zero or negative economic growth. That type of economic environment is discouraging to both workers, companies, and policymakers because it indicates little opportunity for advancement.

Figure 2.1 World GDP Growth Has Been Trending Downward since the 1960s

Source: Redrawn from World Bank GDP growth (annual %), 1960–2019.

Perhaps in response to slowing economic growth, economists have since changed their definition of what constitutes a global recession. But it does not alter the fact we have seen meager global economic growth ever since. As a matter of fact, economic growth of less than 3 percent per year seems to be the new normal. Even before the COVID crisis, the IMF did not expect global GDP growth to return to above the 3 percent threshold for the next half decade,³⁹,⁴⁰,⁴¹ and that outlook has been negatively affected by the worst public health crisis in a century.

From the perspective of conventional economic wisdom, this could lead to systemic fault lines, as people got used to economic growth. There are two reasons for that.

First, global GDP growth is an aggregate measure, which hides several national and regional realities that are often less positive still. In Europe, Latin America, and Northern Africa, for example, real growth is edging closer to zero. For Central or Eastern European countries that still have economic catching up to do with their neighbors to the West or North, such low growth is discouraging. It may accelerate the brain drain, as motivated and educated people seek economic opportunities in higher-income countries, thereby exacerbating the problems of their home countries. The same is true in regions like the Middle East, Northern Africa, and Latin America, where many people still don't have a fully middle-class lifestyle and where jobs that offer financial security are lacking, as are social insurance and pensions.

Second, in regions where growth is higher than the average, like in Sub-Saharan Africa, even top-line growth of 3 percent or more per year isn't enough to allow for rapid per capita income growth, given their equally high rate of population growth. Low- and lower-middle-income countries that have posted relatively high growth levels in recent years include Kenya, Ethiopia, Nigeria, and Ghana.⁴² But even if they were to grow consistently at 5 percent per year for the foreseeable future, it could take an entire generation (15–20 years) for their people's incomes to double. (And that is assuming that most of the fruits of economic growth are shared widely, which often is not the case.)

Rapid progress and shared economic growth, like that seen in China in the early 21st century, require real growth rates of 6 to 8 percent in the least developed economies. Lacking this kind of super boost, the great convergence of economic standards of living between North and South, as predicted by some economists, will materialize very slowly, if at all. As Robin Brooks, chief economist at the Institute of International Finance (IIF) told James Wheatley of the Financial Times in 2019: “More and more, there is a discussion that the growth story for emerging markets is just over. There is no growth premium to be had any more.”⁴³

Looking beyond GDP does not provide more promising prospects. Other economic metrics, notably debt and productivity, are also pointing in the wrong direction.

Rising Debt

Consider first rising debt. Global debt—including public, corporate, and household debt—by mid-2020 stood at some $258 trillion globally, according to the Institute of International Finance,⁴⁴ or more than three times global GDP. That number is hard to grasp, because it is so big and because it includes all sorts of debt, going from public debt sold through government bonds to mortgages from private consumers.

But it has been rising fast in recent years, and that certainly is “alarming,” as Geoffrey Okamoto of the IMF said in October 2020. Not since World War II were debt levels in advanced economies so high, the Wall Street Journal calculated,⁴⁵ and unlike in the post-war period, these countries “no longer benefit from rapid economic growth” as a means to decrease their burden in the future.

The COVID pandemic, of course, brought an exceptional acceleration of the debt load in countries around the world, and especially for governments. According to the IMF, by mid-2021, in the span of a mere 18 months, “median debt is expected to be up by 17 percent in advanced economies, 12 percent in emerging economies, and 8 percent in low-income countries”⁴⁶ compared to pre-pandemic levels.

But even without the pandemic, debt had been creeping up in the past three decades. As one example: in advanced economies, public debt rose from about 55 percent in 1991, to over 70 percent in 2001, and more than 100 percent in 2011. It is estimated to reach more than 120 percent in 2021.⁴⁷

Faced with slowing global growth over the past decades, especially in advanced economies, governments, companies, and households nevertheless increased their debt. Could that have ever been a good idea? Theoretically, yes. When used to invest in productive assets, debt can be a lever of future economic growth and prosperity. But all debt does of course need to be repaid at some point (unless it evaporates because of inflation, but that has been less than 2 percent on average in advanced economies in the past 20 years⁴⁸). The only alternative is to default, but that is akin to playing Russian roulette.

So what kind of debt has been made in recent decades? The debt of governments is often a mix of high-quality and low-quality debt. High-quality debt includes that used for building modern infrastructure or investments in education, for example. High-quality debt is typically paid back over time—and can likely even provide a return on the investment. Such projects should be encouraged. By contrast, low-quality debt, such as deficit spending to boost consumption, generates no returns, even over time. This type of debt should be avoided.

Overall, it is safe to say low-quality debt is on the rise. In part, this is because low interest rates in the West incentivize lending, which discourages borrowers from being careful with their spending. For governments, deficit spending has become the norm in recent decades, rather than the exception. The COVID crisis that erupted in the early months of 2020 hasn't made that picture any rosier. Many governments have effectively used “helicopter money” to sustain the economy: they printed money, creating an even higher debt with their central banks, and handed it to citizens and businesses in the form of one-off subsidies and consumption checks so they could get through the crisis unscathed. In the short term, this approach was necessary to prevent an even worse economic collapse. But in the long run, this debt too will need to be repaid. Overall, it adds to the large amounts of debt in recent years that wasn't used to spur long-term economic growth or to make the switch toward a more sustainable economic system. This debt will thus remain a millstone, hanging around many governments’ necks.

One silver lining comes from emerging and developing markets. Before the COVID crisis, they had relatively lower public debt levels of around 50–55 percent,⁴⁹ with much of it invested in infrastructure (though during the COVID crisis, the debt level increased by about 10 percent). Some of these countries can be considered to have a demographic dividend, meaning a population with an average age in the low twenties, that is, heavily skewed toward younger generations. This type of population pyramid could make repaying debt more feasible if the coming surge in their working-age population is complemented by an equally high surge in available jobs. (The latter, however, has proven problematic in some Arab and African economies. Faced with a job shortage, a demographic dividend can rather turn into a ticking time bomb.⁵⁰, ⁵¹)

How some ageing Western countries are supposed to repay their debts in a slowing economy, though, is highly questionable. The economies with the highest government debt load have historically been Japan and Italy. In addition to their debt, they have some of the world's most rapidly shrinking and ageing populations. While private savings of Japanese households can alleviate many of the most acute problems this trend could cause, the country's debt will sooner or later come back to haunt it, as its population shrinks from 127 million to fewer than 100 million over the next three decades, and its ratio of workers to retirees falls even further. It could easily increase the debt burden per head by another quarter or third.⁵²

Other European countries such as France, Spain, Belgium, and Portugal, all of which have gross public debt of over 110 percent of GDP⁵³ (and often much higher than that), could one day find that they are facing a similar fate. In a significant development, the United States joined the 100 percent club in the early 2010s, with its debt rapidly rising further in recent years, to over 130 percent in 2020.⁵⁴ The US situation raises a peculiar uncertainty because US government bonds are among the most traded in the world, and the US dollar is the de facto world reserve currency. A US government default is unlikely, given that its Federal Reserve has its hands on the printing press, but if it does happen, the global economic system as we know it might collapse.

It is in the combination of high debt and low growth that things really get problematic, from a financial point of view. In an environment where growth of 3 percent and more can be expected, government debt can quickly evaporate: the relative importance of past debt would decline in comparison to a growing GDP. Even in the recent past, countries like Germany and the Netherlands managed to considerably lower their debt burden on the back of favorable economic growth. But if low growth does remain the new normal, which seems likely, there is no easy mechanism for countries to repay their historical debt. Looking away certainly will not solve this problem.

Low-Interest Rates and Low Inflation

There was one life buoy for low growth and debt until now: low interest rates. Having a low interest on your loan, as many homeowners or student borrowers know, is a blessing. It allows you to pay back your debt without having to worry about the debt load getting larger.

Since the financial crisis, central banks have ushered in an era of low lending rates, giving governments, companies, and consumers low interest rates as a form of relief. The goal is to, ultimately, restore higher growth as people consume more, companies invest more, and governments spend more.

In the United States, the Federal Reserve kept interest rates near zero from 2009 until 2016. It then gradually raised them again to 2.5 percent, half the historical normal rate. But in 2019, the Fed once again cut interest rates⁵⁵ several times, and when COVID hit, it crashed back down to 0.25 percent.⁵⁶ Given the challenging macroeconomic environment, a return to the era of high interest rates is very unlikely anytime soon. In other advanced economies, rates are even lower. The European Central Bank has kept its key borrowing rate for the eurozone at under 1 percent since 2012, and at zero since 2016. Most other European countries have similar low rates; Japan and Switzerland even charge depositors for buying bonds, in fact meaning they have a negative interest rate.

As indicated, this is a blessing for governments, companies, and individuals alike who are willing and able to take up new loans or for governments who want to refinance their historical debt. Some observers may even go as far as to suggest the historical debt-to-GDP burden is not as big a problem as it seems, as it can be perpetually refinanced.

But this view fails to consider that repayment problems can quickly get out of hand as government funding gaps for other liabilities increase. Costs related to pensions, health care, and infrastructure are becoming an ever-growing burden on governments, not to speak of consumption subsidies, such as governments paying a part of oil and gas prices for consumers.⁵⁷ They produce low-quality debt and are hard to roll back, given their popularity with voters.

Public health care spending, notably, already rose by 66 percent from 2000 to 2016—long before the COVID-19 crisis hit—according to the World Health Organization.⁵⁸ During the same period, GDP growth in OECD countries was only 19 percent. In aggregate, public health care spending in OECD countries now represents close to 7 percent of GDP, with peaks in the United States and Switzerland at double that rate, and that percentage can be expected to rise further as populations age and more viruses or even non-communicable diseases threaten the population. Unless governments can unload these costs to their citizens, many will increasingly struggle to balance their books.

There are more growing government liabilities. The Global Infrastructure Hub calculated the world faces a $15 trillion infrastructure funding gap from 2016 to 2040.⁵⁹ But infrastructure represents an investment, on which a return could be earned. The problem posed by pensions and retirement savings is an order of magnitude larger, and returns are much lower: unless policies are changed, the World Economic Forum estimates⁶⁰ the pension savings gap will balloon to $400 trillion in the eight countries with the world's largest pension systems by 2050, with unsecured public pension promises making up the lion's share of that shortfall.

On top of this debt burden is low inflation. Historically, interest rates and inflation tended to be inversely correlated, and central banks used their power to set interest rates as a tool to either curb inflation or stimulate it. By setting high interest rates, central banks gave people, companies, and governments an incentive to save money rather than spend it, easing upward pressure on prices. By setting low interest rates, they gave people the reverse incentive, namely to spend money and push up prices, since saving it wouldn't yield interest anyway.

Since about a decade, however, this inverse correlation has all but ceased to exist in the West, with the situation particularly dire in Europe and Japan. Despite years of near-zero interest rates, inflation often remained close to zero as well. While this is no problem in the short run, it does take away a long-term lever to ease the debt load. With rising prices, nominal debt tends to become relatively less of a burden. With flat prices, however, historical debt remains as heavy as a burden tomorrow as today.

But the nexus between low growth, low interests, low inflation, and increasing debt has one more ingredient, and it could be the most lethal of them all: slowing productivity growth.

Declining Productivity Growth

Compounding many of the structural issues outlined in this chapter is the fact that productivity gains have been low in recent years. Indeed, it was because of rising productivity, more so perhaps than demographic growth, that the middle class in the West saw their incomes rise quickly during the first decades after the war.

Productivity goes up most often because of innovations in the way things are made or done. Well-known examples of productivity gains are the assembly line Ford introduced in the early 1900s, the introduction of digital computers instead of typewriters in the 1970s and 1980s, or the optimizing of a taxi route thanks to apps such as Waze today. All these innovations enable a given worker to produce the same output, or do the same job, in considerably less time. That in turn allowed companies to increase wages.

In the past, the world knew periods of high productivity gains, which translated into high wage growth. During America's golden age of capitalism in the 1950s and 1960s, for example, the annual productivity growth was almost 3 percent per year.⁶¹ But productivity gains afterward fell to lower levels, and, problematically, even when productivity did rebound, less of it was translated into take-home pay for American workers. Instead, it remained with the businessowners and executives, a phenomenon known as the “decoupling” of wages from productivity.⁶²

Since the 2007–2009 financial crisis, US productivity growth has fallen to the meager level of 1.3 percent per year. That is a problem, because it means it is not possible to grow the pie for everyone anymore. The distribution of today's economic gains is a quasi-zero-sum game. Other countries, such as Germany, Denmark, and Japan, have kept up productivity gains better and translated them also in higher wages. But the trendline is unmistakable: productivity gains in the West are experiencing a marked decline.

Taken together, the indicators presented in this chapter—growth, interest rates, debt, and productivity—point to a systemic design error in the Western economic development model. Much of its prosperity model was based on perpetual economic growth and productivity gains. Now, that growth is grinding to a halt, and problems that had been festering under the surface are becoming more acute by the day.

Kuznets’ curse is coming back to haunt us. GDP was never a perfect measure for well-being. And now that it is becoming an ever-greater challenge to grow it, we will have to deal with a whole basket of other problems we created while pursuing that higher growth.

The Second Kuznets’ Curse: Inequality

While the original Kuznets’ curse of our recent past is the result of the blind pursuit of GDP growth, there is a second Kuznets’ curse. This one relates more directly to the phenomenon Kuznets became known for in his lifetime: the so-called Kuznets curve.

As Kuznets continued his work as an economist in the 1950s, he started to theorize on an interesting phenomenon. He noticed that US income inequality had started to decline in the post-war period, as the economic boom intensified. That contrasted to the pre-war period, in which America had become a major economic power, but income and wealth were concentrated in the hands of a few. A similar observation, though less extreme, could be made for many other developed countries.

Kuznets theorized about the numbers he found, in a paper for and presidential address to the American Economic Association.⁶³ He derived a potential game-changing insight for development economics, provided the findings held true over time. Indeed, it implied a sort of economic law. Inequality worsens as a nation begins to develop, but as development continues, inequality subsides. In other words, the price of inequality societies pay for development early on is offset by higher development and lower inequality later.

The theory put forth by Kuznets became a worldwide sensation, especially after Kuznets won the 1971 Nobel Prize for Economics, awarded for his contributions to national income accounting (rather than the theory of the Kuznets curve). Throughout the 1980s, economists built on Kuznets’ optimistic theory, plotted graphs that showed how it applied to various countries and periods, and prescribed economic development models because of it.

Figure 2.2 Kuznets waves: How income inequality waxes and wanes over the very long run

Source: Redrawn from Lindert, P. H., & Williamson, J. G. (1985). Growth, equality, and history. Explorations in Economic History, 22(4), 341–377..

There was just one problem: over time, the theory no longer held true. Some of the facts we face today reveal this.

Inequality in fact began rising again in highly developed countries. In a 2016 note, economist Branko Milanovic suggested that the current upswing in inequality could be viewed "as a second Kuznets curve", or indeed, as a "Kuznets wave" (Figure 2.2).

Income Inequality

There is a festering wound in our global economic system, and that wound is rising income inequality.

The story starts with an unexpected twist. Global income inequality, measured by plotting incomes of everyone from all over the world, has actually been steadily declining over the last 30 years⁶⁴ (see Figure 2.3). This may come as a surprise to many readers, given the perception that the opposite is true in many countries. But the global trend is clear: around the world, people earn more equal incomes, not less.

The decline in inequality happened because of one incredibly powerful force: the huge economic leaps forward in incomes in some of the largest (and previously poorest) countries in the world. China, notably, went from being a low-income country to an upper-middle-income⁶⁵ one since its Reform and Opening-Up. By its own calculation, it lifted some 740 million people out of poverty.⁶⁶ India, too, knew various periods of rapid growth, and thereby managed to raise the income of many of its people.

The impact of these two countries on global inequality has been all-encompassing: economist Zsolt Darvas of the Bruegel Institute showed that without the changes in China and India, global inequality would have remained exactly where it was, or even gone up quite a bit, depending on the calculation method (see Figure 2.3).

This clarifies the real problem posed by inequality today. Global inequality may have declined, but inequality within nations has drastically worsened.

Figure 2.3 The Impact of China and India on Global Income Inequality (Measured in Gini Indices)

Source: Redrawn from Zsolt Darvas, Global income inequality is declining – largely thanks to China and India, April 18, 2018.

In many people's experience, it matters much more how they fare compared to their fellow citizens than to the rest of the world population. In all but a few countries, national inequality has been rising and often rather fast.

The traditional measure of inequality, the Gini coefficient, doesn't do justice to the severity of the problem. The Gini coefficient translates the degree of inequality into a number from 0 (everyone has the same income) to 1 (one person has the entire economy's income). While a higher score over time tells us that inequality has risen, it's difficult to understand what that means in practice. In the US, for example, the Gini coefficient rose from its low point of 0.43 in 1971 to a post-war high of 0.58 today.⁶⁷ It is an increase, of course, but precisely how good or bad is either number?

Thomas Piketty, a French economist, laid out the problem in a better way. In his 2013 book Capital in the Twenty-First Century,⁶⁸ he revealed how the share of income that went to the top 10 percent of earners evolved over time. In 1971, his data showed the top 10 percent earners took home one third of national income. In the early 2010s, they took half of income. This leaves the vast majority of workers—the remaining 90 percent—with only half of the national income to divvy up among themselves.

Later numbers from the World Inequality Report, of which Piketty is a co-author, showed how the trend was even more pronounced for the top 1 percent. Over the same period, 1971 to the early 2010s, their income share doubled⁶⁹ and their incomes more than tripled. This means that in the early 2010s, more than 20 percent of the national income went to the top 1 percent of earners. For those at the bottom of the income pyramid, the situation was much bleaker. Many workers saw their real incomes and purchasing power decline since the early 1980s (Figure 2.4). In the UK a similar shift took place.

The social and economic outcomes of this worsening inequality in the US have been highly problematic. There are again many working poor in America, a painful outcome in the wealthiest country the world has ever known. Guy Standing, a British economist, even coined the term precariat, to point to “an emerging class, comprising the rapidly growing number of people facing lives of insecurity, moving in and out of jobs that give little meaning to their lives.”⁷⁰

Seen from this perspective, it is no wonder that in 2011, a one-page call for action in an activist magazine led to one of the most supported American protest movements of this century. The page in AdBusters read, “17 September. Wall Street. Bring Tent.” Protestors did in fact show up in lower Manhattan on that day, they brought tents, and with that, Occupy Wall Street was born. Referencing the extreme inequality in America, the movement's rallying cry became “We are the 99 percent,” and the protestors decried the wealth, income, and power accumulated by the 1 percent richest individuals and corporations in America. As you can see from Figure 2.4, this dichotomy between the 1 percent and the rest of income earners was not imaginary.

The same pattern exists in other parts of the world, and in some countries the outrage over these inequalities has erupted with equal force as it has in the English-speaking world. In fact, it was movements in the Mediterranean and Middle East that inspired Occupy Wall Street, Kalle Lasn, one of the founders of Occupy, told one of us in a 2012 interview.⁷¹ There, in the early years of this decade, Spanish Indignados took to the streets in protest. A year later, Arab Spring protesters in Tunisia, Egypt, Syria, and other countries took the streets to express their anger over economic inequities within their countries. In Tunisia, they forced a regime change.

Figure 2.4 In the US, Income Inequality Has Risen Sharply

Source: Redrawn from Piketty, Saez and Zucman (2018), World Inequality Report 2018..

“We saw what happened in Tunisia, with the regime change, and started to brainstorm about what that would look like in America,” Lasn said. A “soft regime change” in the US, he said, would be to take away power and money from large corporations, which decided “every part of my life. We felt that we had reached a situation—with unemployment of young people, huge student debt, and no good jobs—where if we didn't fight for our future, we wouldn't have a future. That was the core impulse behind Occupy Wall Street.”

In other countries, particularly in emerging Asia, the social outrage over rising inequality has been less pronounced. In China, India, and many ASEAN nations, national inequality also rose. However, overall economic growth in that region was much higher, so a rising tide did in fact lift most boats. Still, the specter of class tensions looms over some of these countries as well (see Chapter 3).

As author James Crabtree highlighted in his book The Billionaire Raj, India is now one of the most unequal societies in the world, to the point of embodying a new Gilded Age society. Unlike in India, in China, most of the population started on the same footing when the country opened to the world. Despite this, China has seen its inequality surge, too, with the top 10 percent now capturing 41 percent of their nation's income.⁷² In many other emerging markets, the situation is even worse. Just as in the United States, the top 10 percent are taking home more than half their nation's income in countries across the Middle East, Sub-Saharan Africa, and many Latin American countries, including Brazil.

Inequality in continental Europe is slightly less pronounced, with 37 percent of income captured by the top 10 percent of earners. While inequality has been rising, it has done so at a considerably slower pace than in most other leading economies. This is partially due to Europe's greater system of check and balances to facilitate income distribution and redistribution.

But some uncomfortable realities remain here, too. In much of Southern and Eastern Europe, for example, unemployment remains stuck at high levels, especially for the young. Well-paid jobs there are increasingly hard to get, often to the detriment of both blue-collar workers and university-educated youth. Even Northern European economies, which kept a decent growth pace after the European debt crisis put a strain on Europe-wide growth as of 2010, saw their income inequality levels rise in the past decade. Counterexamples such as Belgium,⁷³ Estonia, Romania, Slovakia, or the Czech Republic,⁷⁴ which experienced declining inequality, remain the exception.

Wealth, Health, and Social Mobility

The Kuznets curve has been disproved when looking at other inequality metrics too. Wealth inequality, which reflects the savings, investments, and other stocks of capital individuals have, is even more lopsided in many countries. And, in lockstep with this wealth disparity, private education and quality health care, which can require large sums of money, are becoming more of a privilege reserved for the upper-middle and upper classes. This is especially the case in countries without proper public alternatives.

This reality is perhaps most keenly felt in the United States, which in this sense looks more like the emerging markets of India and Mexico than the advanced economy it is. Economists Emmanuel Saez and Gabriel Zucman calculated that the wealth held by the one percent richest Americans rose from less than 15 percent in the 1970s to over 40 percent in the early 2010s.⁷⁵ As such, wealth inequality is twice as high as income inequality.⁷⁶

These two inequalities—wealth and income—also build on one another and create a vicious cycle.⁷⁷ A 2020 Financial Times article summarized that by the end of September 2019, a record 56 percent of all US equities was held by the top one percent wealthiest households, amounting to $21.4 trillion. Read that again: the “one percent” does in fact own more than half of all stocks in America. That percentage had steadily gone up in the past three decades, and the rise had been “driven by stagnant wages for many Americans, which held them back from partaking in the stock market's gains of the past decade.”

The 0.1 percent made even greater strides. They accumulated well over a fifth of America's wealth by the 2010s, a share almost three times higher as in the mid-1970s. Those at the bottom, on the other hand, saw their wealth share and savings plummet, to the point even of often not being able to cover for health emergencies and education,⁷⁸ as has become painfully clear during the 2020 pandemic.

The consequence of this increasing wealth disparity, Nobel Prize–winning economist Joseph Stiglitz asserts, is that US economic mobility is increasingly a thing of the past; even a long or healthy life is out of reach for many. He decried the situation in his 2019 book People, Power and Profits: Progressive Capitalism for an Age of Discontent, and a prior Scientific American essay. “Families in the bottom 50 percent hardly have the cash reserves to meet an emergency,” he wrote. “Newspapers are replete with stories of those for whom the breakdown of a car or an illness starts a downward spiral from which they never recover. In significant part because of high inequality, US life expectancy, exceptionally low to begin with, is experiencing sustained declines.”⁷⁹

And indeed, the phenomenon Anne Case and Angus Deaton called “deaths of despair,”⁸⁰ is on the rise in America (and increasingly, the UK⁸¹). People are falling off the economic ladder and wither or die because of opioid overdoses, depression, or other health issues associated with their poor economic status.

No phenomenon displays this “wealth and health” nexus in America more than COVID-19, which affected those with fewer means much more than others. New York City provides a striking example. In the early weeks of the pandemic, many of the wealthier Manhattanites could seek shelter in an upstate or out-of-state property, get care in a private hospital, or otherwise protect themselves from the virus. Poorer New Yorkers, by contrast, were much more exposed. They were more likely to work and live in at-risk environments, less likely to have adequate health care coverage, and largely unable to physically move elsewhere. As a result, one early study found, “Coronavirus-related hospitalizations and deaths were highest in the Bronx, which has the highest proportion (38.3%) of African Americans and the lowest annual median household income ($38,467) and proportion (20.7%) of residents with at least a bachelor's degree.”⁸² That pattern repeated itself elsewhere in the United States—and indeed the world.

But despite the global trend of diseases like COVID hitting poorer communities harder, in other advanced economies, health disparities have so far remained much more constrained, and life expectancy continues to rise. This should hardly come as a major surprise, as outside the US virtually all advanced economies have some form of universal health care. Among the 36 member states of the Organization for Economic Co-operation and Development, for example, only Mexico had a lower percentage of people covered than the US, and most countries achieved a 100 percent coverage rate,⁸³ either through public or primary private health insurance.

The global record on social and economic mobility are more mixed. The World Economic Forum's 2020 Global Social Mobility index found that “there are only a handful of nations with the right conditions to foster social mobility” and that “most countries underperform in four areas: fair wages, social protection, working conditions and lifelong learning,” even as achieving higher levels of social mobility is an important part of implementing a stakeholder-based model of capitalism. Specifically, the report said:

Looking at all economies and average income levels, those children who are born into less affluent families typically experience greater barriers to success than their more affluently born counterparts. Furthermore, inequalities are rising even in countries that have experienced rapid growth. In most countries, individuals from certain groups have become historically disadvantaged and poor social mobility perpetuates and exacerbates such inequalities. In turn, these types of inequalities can undermine the cohesiveness of economies and societies.⁸⁴

Other studies found similar dynamics. A 2018 World Bank report showed that only 12 percent of young adults in regions like Africa and South Asia have more education than their parents—often a prerequisite to climb higher up the socioeconomic ladder.⁸⁵ Other regions, including East Asia, Latin America, and the Middle East and Northern Africa, did see their average economic mobility improve, according to the report. But it also warned, “While mobility tends to improve as economies get richer, there is nothing inevitable about this process. Rather, as economies develop, mobility is likely to increase if opportunities become more equal, which typically requires higher public investments and better policies.”⁸⁶In other words: lacking public investments—an increasingly likely reality for budget-strained governments—economic mobility in many countries could get worse, rather than better.

So, what would Simon Kuznets have to say about all these findings, many of which go against his own theory?

We do not need to speculate. According to his colleague at the National Bureau of Economic Research Robert Fogel, Kuznets repeatedly warned that his “allusions to fragmentary data were not evidence but ‘pure guesswork.’”⁸⁷ Kuznets, in other words, was all too well aware that his findings in the 1950s may have been only valid in very specific circumstances, which indeed this golden era of capitalism turned out to be. Fogel also noted that even at the time, Kuznets found “factors that arose during the course of growth, and that created pressures both to increase and to reduce inequality.”

Branko Milanovic, a former lead economist at the World Bank, recently tried to build a new Kuznets curve in light of these insights. Kuznets notably pointed to technology as a factor that could have a positive or a negative effect on inequality. Milanovic derived from it an inequality curve that seems much more complete, given the evolution we've seen in recent decades. He calls it the Kuznets Wave, and it shows that inequality fluctuates, as waves of technological progress and policy responses to them take hold (see Figure 2.5 below).

In this graph, Milanovic's First Technological Revolution roughly equates to the first two Industrial Revolutions, which saw the implementation of trains and steam power, and the internal combustion engine and electricity, respectively. The second technological revolution equates roughly to the Third and Fourth Industrial Revolutions, which brought us the computer and artificial intelligence, among other innovations. His point is clear: technology has a tendency to increase inequality, but as we adapt to it and take measures to deal with the inequality it creates, we can achieve a reduction of inequality later. We will come back to this notion in Part II of the book.

Figure 2.5 Expected Pattern of Changes in Inequality versus Income per Capita, Based on State of Technological Revolution

Source: Redrawn from Piketty, Saez, and Zucman (2018), World Inequality Report 2018..

But in spite of Kuznets’ early warnings and Milanovic's more recent work, policymakers around the world went ahead and implemented policies that favored top-line growth over inclusive development and quick technological deployment over more considered technological governance. That was a mistake, because the current times of rapid technological development have a natural tendency to increase inequality. It has therefore become much more important for policymakers to take countermeasures to slow or halt this trend. That we haven't done so constitutes Kuznets’ second curse and implies many people around the world are paying a very high price for the technological progress we have made recently.

The Third Kuznets Curse: The Environment

There is a third and final Kuznets curse, and it has to do with the environment. As the Kuznets curve was gaining traction in the 1960s and 1970s, some people started to worry about externalities caused by the West's high economic growth rates: an increase in pollution, environmental degradation, and depletion of resources. With consumerism taking hold in the West and populations growing quickly globally, one could reasonably ask what toll our socioeconomic system took on our global commons. This was the age of cars and factories laying a thick layer of smoke over cities, the discovery of a growing hole in the protecting ozone layer of the earth's sky, the introduction of nuclear plants and waste, and the widespread use of plastics and other harmful materials such as asbestos in construction.

In a similar vein to Kuznets’ temporary observation on inequality, however, some economists thought there was not all too much to worry about: no sooner had they discovered the environmental pollution had been rising than hopeful signs emerged that it too would go down over time. Indeed, as production methods became more sophisticated, they also became cleaner and more resource efficient. On a per-product basis, environmental harm seemed to follow an environmental Kuznets curve. Give it another few years or decades, the thought went, and this problem, like inequality before it, would solve itself. Unfortunately, that isn't how things turned out.

A Degrading Environment

The final reality we must confront, and perhaps the most devastating, is the continued and increasing degradation of the environment caused by our economic system and the life-threatening risks posed by global warming, extreme weather events, and continued overproduction of waste and pollution.

While most reports on the environment today home in on global warming, that is only a subset of a much larger issue. The economic system we have created is utterly unsustainable, notwithstanding the hopeful signs in environmental Kuznets curves. The World Economic Forum first raised awareness on this emerging problem in 1973. Then, Aurelio Peccei, who was the president of the Club of Rome, a think tank, gave a speech in Davos about his famous study on “The Limits to Growth.” The publication of this study a year earlier had “caused a sensation for calling into question the sustainability of global economic growth.” The authors, who had “examined several scenarios for the global economy,” outlined in Davos “the choices that society had to make to reconcile economic development and environmental constraints.”⁸⁸

They warned that with the current growth trajectory, there would be a “sudden and serious shortage” of arable land in the next decades.⁸⁹ They warned that there was only a limited supply of freshwater on earth and that with increasing demand, competition and conflict would arise over who would get access to it.⁹⁰ And they warned that many natural resources, such as oil and gas, were overused and that they led to exponential rates of pollution.⁹¹

But their warnings were to no avail. The worst of the scenarios the Club of Rome laid out did not come true, so much of the message was forgotten. After a lull in the 1970s, economic production has reached record levels almost every single year since, and left an ever-larger ecological footprint. Despite the Club of Rome's inaccuracies about short-term resource depletion, today we can see just how much foresight the Club of Rome had. In 1970, a mere two years before The Limits to Growth was published, humanity's global ecological footprint was still below what the earth could regenerate, albeit only by a small margin. If we had continued to produce and consume the way we did then, we may have stayed in equilibrium, keeping the earth habitable and fertile for many generations to come.

But things took another turn as the global population kept rising. Today, the world has about double the number of people it did in the early 1970s. And with standards of living going up as well, the Global Footprint Network (GFN) calculated⁹² that by 2020 humanity had used “nature's resource budget” for the entire year by sometime in August, meaning that we overused natural resources during the equivalent of four to five months each year (see Figure 2.6). (The COVID-19 crisis, including the months of mandatory confinement and the halting of many economic activities, did positively affect the “overshoot day,”⁹³ though it certainly wasn't sustainable.) The caveat, as GFN's chief science officer David Lin told us, is that our “ecological footprint” is of course only an accounting measure: there is no way of saying for sure just how detrimental our economic production and consumption processes really are. But it is clear the world's use of natural resources is unsustainable and is exacerbating many other harmful trends, such as global warming. What exactly is our record on this front?

Figure 2.6 “Earth Overshoot Day” Has Been Taking Place on an Earlier Date Almost Each Year since 1970

Source: Redrawn from Global Footprint Network and Biocapacity Accounts 2019, Earth Overshoot Day.

Consider first fossil fuels, which can regenerate only over millions of years. Even though they can only be used once, coal, oil, and natural gas still account for about 85 percent of the world's primary energy consumption⁹⁴ and two thirds of world's electricity production.⁹⁵ In fact, their use has nearly doubled about every 20 years in the past century. Despite calls to phase them out, their production even increased in 2018. It is a statistic that unnerved even BP's chief economist Spencer Dale:⁹⁶ “At a time when society is increasing its demands for an accelerated transition to a low-carbon energy system,” he wrote in his group's 2019 Statistical Review, “the energy data for 2018 paint a worrying picture.”

It is not only fossil fuels. More broadly, over the past five decades, the use of natural resources tripled, according to the UN Environment's International Resource Panel.⁹⁷ Their extraction and processing have “accelerated” over the last two decades, and “accounts for more than 90 percent of our biodiversity loss and water stress and approximately half of our climate change impacts,” the organization warned.

These trends coincided with one of increased pollution of at least three sorts: water, air, and soil.

Take first the issue of water. UN Water, the agency coordinating the United Nations work on water and sanitation, estimated that globally 2 billion people live in countries experiencing high water stress,⁹⁸ often due to climate change. But even when water is available, it is often heavily polluted. Globally, the agency said,⁹⁹ “it is likely that over 80% of wastewater is released to the environment without adequate treatment,” with pollution often happening because of   “intensive agriculture, industrial production, mining and untreated urban runoff and wastewater.” It threatens the access of clean water everywhere from cities to rural areas and poses a great health risk.

Moreover, there is the issue of plastics, whose impact will be felt most dramatically in the coming decades, as the plastic that is currently accumulating in the world's oceans may affect life on land in a myriad of ways. Microplastics have become ubiquitous in the world's water, in part because they take decades to decompose: by current measures, it is estimated we could end up with more plastic than fish in our oceans by 2050.¹⁰⁰ The most famous example in popular imagination is the “Great Pacific Garbage Patch” consisting largely of the debris of microplastics in the Pacific Ocean. But the issue is a global one, affecting all of the world's bodies of water.

Second, almost two-thirds of the world's cities also exceed WHO guidelines on air pollution, according to Greenpeace.¹⁰¹ Many of the large metropoles of Asia are so polluted it is unhealthy even to walk outside,¹⁰² as many who live or have been there will be able to attest. And third, according to the Food and Agricultural Organization of the UN (FAO),¹⁰³ soil pollution is a hidden reality all over the world and a direct threat to human health.

This rapid exploitation and pollution also started to wreak havoc on the world's natural ecosystems and threatened to make global warming spin out of control, with major consequences for people in regions hit hard by climatic change and for future generations. Other data also reveal the human impact on the environment.

The UN-sponsored Intergovernmental Platform on Biodiversity and Ecosystems Services (IPBES) concluded in a 2019 report that “nature is declining globally at rates unprecedented in human history,” with species already becoming extinct “at least tens to hundreds of times faster than the average over the past 10 million years.”¹⁰⁴ Quoting the research, the Financial Times also wrote that “one million of Earth's estimated 8 million plant and animal species are at risk of extinction.”¹⁰⁵

Another specialized UN agency, the Intergovernmental Panel on Climate Change (IPCC), issued a warning late 2018 that the current path of CO₂ emissions would also lead to an unstoppable cycle of global warming—with major disruptions for life on earth—if major reductions weren't achieved by 2030. It said, “Pathways limiting global warming to 1.5°C with no or limited overshoot would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems.”¹⁰⁶ But hopes for even that narrow path to a limited global warming of 1.5°C had all but evaporated two years later. The World Meteorological Organization, another UN-affiliated institution, in July 2020 said that a 1°C warming would already be a reality in the next five years (2020–2024) and believed there was a one in five chance that warming would already reach 1.5°C in that period.¹⁰⁷

There is no one who hasn't experienced at least some of the realities of a changing climate. As I write this, the past two summers have once again been among the hottest on record.¹⁰⁸ Even high in the Swiss Alpine town of Zermatt, where I go to walk in summer and where temperatures are usually quite moderate, global warming and extreme weather events are hitting home—literally. The Theodul Glacier is retreating further every year, and when I visited in the summer of 2019, the melting glacier caused flooding in the valley, even though not a drop of rain had fallen in days.¹⁰⁹

Faced with these changes down the ages, people have responded with one simple act: they have started moving. Today, the UN Migration Agency IOM warns that “gradual and sudden environmental changes are already resulting in substantial population movements. The number of storms, droughts, and floods has increased threefold over the last 30 years with devastating effects on vulnerable communities, particularly in the developing world.”¹¹⁰ It expects that the total number of climate migrants alone will by 2050 be as great as the total number of international migrants in the world today, at 200 million people.¹¹¹

Business leaders know environmental risks are rising, as they rank them ever-more prominently in the World Economic Forum's yearly Global Risks report. For the first time in 2020, it said, “Severe threats to our climate account for all of the Global Risks Report's top long-term risks.”¹¹² It pointed to the risks associated with extreme weather events, failure of climate-change mitigation and adaptation, human-made environmental damage, major biodiversity losses, resulting in severely depleted resources, and major natural disasters.

We should not take these risks lightly like we did in the 1970s, especially as the next generation is already looking over our shoulder, wondering what legacy we plan to leave. That would be nothing short of a betrayal of future generations.

Indeed, the dangers posed by global warming have become a major worry for the next generation of youth these past few years, as they start to demand more urgent climate action. Inspired to a large degree by peers such as Swedish school student Greta Thunberg, hundreds of thousands of climate activists have been hitting the streets, giving speeches to whomever would listen and changing their own habits where possible. We understand their concerns and for this reason invited Greta Thunberg to speak at our Annual Meeting in 2019. Thunberg's foremost message was that “our house is on fire”¹¹³ and that we should act with an utmost sense of urgency.

We hope we will heed the next generation's call to create a more sustainable economic system with more urgency than in 1973. Since Aurelio Peccei's speech, decades have passed. Since then, we failed to act with sufficient results and have, in doing so, worsened the economic, health, and environmental outlook for future generations—and still left many people behind economically. It was Kuznets’ final curse. He had never suggested that our economic system was indefinitely sustainable.

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We did not listen to Simon Kuznets’ cautious warnings: he told us GDP was a poor measure for broad societal progress, as it was more geared toward measuring production capacity than any other signs of prosperity. He wasn't convinced that the declining income inequality during the 1950s would be a permanent feature but rather saw it as a temporary effect of the specific technological advances that favored inclusive growth at the time. And he never subscribed to the notion of any “Environmental Kuznets’ Curve,” which hypothesized that harm to the environment would decline as an economy developed. We are now paying the price for it.

But before we try to make up for those errors in our economic development though, we must first ask: Is another development path already available? And to what extent can it be found in the East, in the rise of Asia?