hope for an international response to the growing wealth divide

The Financial Crisis of 2008/9 caused chaos and heartache around the world, but it has also allowed for a debate about the morality of our current economic model. During the years of growth and prosperity, few people questioned the wisdom of allowing the market to operate virtually unregulated. The principle suited the ideologies of both the Conservatives and the Liberal Democrats, for whom faith in the markets and thus a de-regulating agenda had long been established. For social democrats, the idea of using the profits generated by this system to fund re-distribution and investment programs also made free-market capitalism appealing.

 

This economic model has been seriously damaged by the explosion of the financial crisis and, as the dust begins to settle, it is also revealing harsh realities about the years between 1997 and 2008.

 

A report commissioned by The Institute of Fiscal Studies in 2009 showed that medium family income increased from £200 per week to £350 per week. It also, however, showed a growing disparity at the polar opposites of the scale, with nearly three times as many families netting more than £1,500 per week and twice as many families living on an average of “zero.” This has had a significant impact on the average ratio of chief executive-to-employee pay, which has risen from an average of 1:47 to 1:128 over the past 10 years. The financier John Pierpont Morgan, founder of JP Morgan, once said that no one at the top of a company should earn more than 20 times those at the bottom. Among FTSE-100  Index companies last year, only two chief executives met Morgan's test, with Tesco's boss, Sir Terry Leahy, being paid more than 900 times as much as a Tesco's average worker.

There have been attempts, especially in recent years, to try and curb these startling salary ratios as politicans realised the economic and social damage it was causing. Alistair Darling’s 50 per cent tax band and the levy on bankers’ bonuses were introduced in recognition that 60 per cent of the increase in the recent gap between the richest and poorest is attributable to soaring earnings in the financial sector.

These well-intended measures, however, have only resulted in tinkering at the edges and have not served to address the underlying problems, at the heart of which lie moral and democratic questions about the nature of our economy in the 21^st Century.

The policies of New Labour may have left the majority of people in this country better off, but they have also created an economy in which the average salary of a chief executive is now 100 times higher than that of a school teacher. The pact with the City has created a new class of super rich and fostered a culture that views success purely in terms of profit making ability. These are serious moral concerns that we all need to address.

It is increasingly clear, however, that these are issues which no one country can tackle alone. Finance and commerce are more internationally bound than ever before. A global financial crisis requires a global solution as banking reform in one country will always face limitations by banking policies in another. Had Mr. Darling taken harsher measures in 2009, in line with public opinion, it could have driven leading profit makers out of Britain and would have run the risk of leaving our economy even weaker still. Our national politicians were held to ransom by the international nature of the problem that confronted them.

Democracy was raised in the cradle of the nation state, but it has failed to develop adequately beyond this and its immaturity has been spectacularly unmasked over these last few years. Commerce and capital, on the other hand, have long escpaed from the control of individual countries and they now stalk the earth virtually uncontrolled. The result has been the creation of a world in which the views of people are detached from the economic forces which control their lives. In order to create an economy which serves the people rather than the reverse, democracy and accountability need to step up to a global level.

We are already beginning to see what can be achieved when action is taken on an international level. The Basel III conference has produced substantive reforms which should help create a stronger banking system with an agreement to enact new capital and liquidity rules in countries throughout the world. Despite this, Basel III has many short-comings and this conference must be seen as a first step rather than an a comprehensive solution to the problems uncovered by the financial crisis. The reforms that have been agreed upon are designed to create a stronger global economy, but not a fairer one. There was no mention of the escalating salary ratios or the culture of greed which plagues the financial sector. The delegates at this conference were bank govenors and technocrats, not politians or other democratically elected representatives. The voice of the majority remained unheard. 

In a recent survey, 73 per cent of people in this country said they would support a government move to impose a new tax on all bonuses of more than £100,000 and similar views are held across most of the economically developed world. It is not lack of support that is limiting reform, but lack of ability, as international institutions are proving painfully inadequate. We must focus more of our attention on reform of institutions such of the United Nations and the World Bank. They need to become more democratic in order to channel people’s views onto the international stage and more powerful to ensure that those views can be turned into enforceable rules. This is the only way to properly tame capitalism, create strong economies and halt the growing wealth divide, both nationally and internationally.

It will be challenging, but it is a cause that social democrats must not shy away from. Our determination to ensure that people are free from poverty and the excesses of market forces mean that we must continue to adapt to our increasing globalised world.