The Covid-19 crisis has thrown the fault lines of the United Kingdom's unequal and divided society into sharp relief. A decade of cuts has degraded state capacity, hampering the official response to the virus and exposing entrenched inequalities of income and wealth, deep divides in health and sharp geographical disparities. The scale of the interventions needed to place a floor under incomes during the crisis highlights the ineffectiveness of the social safety net provided by the British state.

There is little public support for the reshaping of the public sector that has taken place over recent decades. Survey evidence shows scant enthusiasm for either the long-run shift to greater tax regressivity or the post-2008 cuts to the public sector. In response to polling questions, the British public increasingly express a desire for greater state capacity and provision, alongside higher taxation to support that capacity.

Long-run demographic change adds to the pressure for reform of the British state. It is something of a cliché to argue that the British public desire Scandinavian-style public services alongside a US-style taxation regime – but the evidence increasingly shows that this is not a fair characterization: the British public want a state that works, and they are prepared to pay for it, especially if they regard the distribution of taxation as fair. Public attitudes to the loopholes and exemptions that allow those at the top of the income distribution to pay less demonstrate that people understand the unacceptability of those at the bottom facing higher marginal tax rates than those at the top.

If we are to face the challenges of the coming decades, from the pandemic and its aftermath to climate change, automation and ageing, a restoration of state capacity is essential and, indeed, inevitable. An effective state requires a stable, robust and fair tax base. Reform of the UK tax system is long overdue.

Vision for change

A new social contract between the British government and its citizens is urgently needed: a contract based on a well-functioning state that provides high-quality public services for all citizens without discrimination, protects the poorest and most vulnerable and provides a decent and comprehensive social safety net. This is what the majority of the British public say they want.

Covid-19 has exposed and exacerbated the failings of a precarious, underfunded, privatized social care sector. Privatization has created a social care system that delivers unsatisfactory care by undertrained and badly treated workers. The pandemic has showed up the false economy of years of neglect, which has taken a huge toll on the lives and wellbeing of those the care system should be protecting.

The shocking number of deaths in care homes has highlighted key failures in the government's approach to managing the pandemic. Not only was it generally unprepared, callously dismissive of the interests of the most vulnerable and committed to an unwarranted belief in the ability of the private sector to prepare for and respond to risks. The government also misused the public sector, by both giving out large contracts to private sector firms instead of using local public health services and fixating on the popular institution of the NHS rather than the public good the NHS is designed to serve.

Thus, protecting and strengthening social care services were given far lower priority than protecting the NHS – hence the fateful discharging of untested patients to care homes ill equipped either to care for them or to protect their other residents. Reserving testing and personal protective equipment for the NHS meant that those both using and providing social care were unprotected, consequently suffering unnecessarily high death rates. These attempts to “save the NHS” may have stopped the institution from going under, but only by sacrificing the health and lives it was set up to protect.

The social care system that entered the pandemic was underfunded, understaffed, undervalued and at risk of collapse. Any response to Covid-19 – however fast or comprehensive – would have needed to contend with this legacy of political neglect. When it comes to rebuilding the economy, it will be important to learn from the current crisis and commit to genuine reform. It should now be clear to everybody that an economic and social system is only as good as the quality of care that it provides.

The Progressive Economy Forum (PEF) was founded in 2018 to highlight the dangers and failings of austerity, provide alternative progressive policies to rebuild the economy, deconstruct economics myths, explain economics to a wider audience and help coordinate the response of the economics profession to the failure of government policy. At the heart of PEF is a Council of leading economists and academics. Since its foundation PEF has produced policy papers, held workshops and delivered public lectures on current economic problems. Many PEF policies were included in the 2019 manifesto of the Labour Party, including proposals for shorter working hours and a pilot of Universal Basic Income.

In May 2020 the Covid-19 pandemic had already caused many deaths and major damage to the economy as the lockdown measures took effect. Temporary measures were put in place to preserve jobs and business; but it soon became clear that this is the time for a major reappraisal of British economic policy and management, to deal with the legacy of austerity, Covid-19, Brexit and climate change all at once. PEF therefore decided to produce this book to help shape the debate for a new economy.

When we embarked upon the project, our friend and colleague John Weeks, coordinator of PEF, enthusiastically embraced the idea and agreed to be an editor. We had already begun working with him on sketching out the book and choosing authors when, tragically, he died, on 26 July 2020. On hearing of John's death the PEF Council decided without hesitation to dedicate this book to his memory.

John Weeks was Emeritus Professor of Economics at SOAS University of London, and a founder member of PEF. He was the first coordinator of the PEF Council and worked assiduously to promote its success. He attended all the Forum's meetings, lectures, events and workshops; and he contributed many blogs to the website.

John was born in Austin, Texas. He gained an undergraduate qualification in economics at the University of Texas in 1963 and then enrolled at the University of Michigan for a PhD, studying Nigerian industrialization. After completing his doctorate, in 1969, John taught at Ahmadu Bello University in northern Nigeria.

The impact of Covid-19 on UK pension provision has been, and will be, profound. Yet, just like the impact of Covid-19 on society in general – public services, the economy, our democracy, etc. – it is an impact that is significantly worse as a result of decades of mismanagement, corporate influence and ideological myopia in UK pension policy. I argue that a (wilful) misunderstanding of the elementary nature of pension provision among UK policy-makers is part of the explanation, creating myriad market failures that the state is intervening to mitigate and that would have been unnecessary had the system been designed more coherently around state-led provision in the first place.

Although the UK's pension problems pre-date Covid-19, the pandemic provides a useful, but tragic, illustration of the system's frailties. These frailties, of course, depend on whether the form of provision in question is (collectivist) defined benefit or (individualized) defined contribution provision. In defined benefit provision, a severe economic shock does not directly impact upon member outcomes, but falling asset values create funding deficits, and make employers less able and/or willing to compensate for shortfalls, which jeopardizes future provision. In defined contribution provision, member outcomes are entirely on how their own invested savings perform in capital markets – and those closest to retirement are acutely affected, as they have little or no time to recover from a period of poor returns. In the absence of any other safe haven assets, pension institutions tend to flock to government bonds – yet gilt yields are at historically low levels, in part as a direct result of macroeconomic policy.

The centrality of investment returns to UK pensions indicates that the country's provision has always been highly financialized. This has shaped understandings of a “crisis” associated with population ageing. The expectation that employers guarantee defined benefit outcomes – as the ratio of active, working-age members to retired members drawing a pension income has declined – has driven the rollout of defined contribution provision, whereby individuals alone shoulder the longevity risks.

China's future will be an urban one, but there are big challenges in building liveable cities and providing work for their inhabitants in the advanced economy of tomorrow. Today China is not so much at a crossroads as at an intersection with many forks. There is no single path that will lead China assuredly to become a wealthy and strong country by 2049, the centenary of the founding of the PRC. Many Chinese would like to see realized this dream of Xi Jinping, but far from all would agree with him and the party leaders on how to build a prosperous and sustainable future. This chapter will look at three challenges that will be crucial: making Chinese cities liveable, reducing energy use without reducing growth and incomes, and becoming a global innovator. These are inter-connected. Indeed, innovation in one form or another is at the centre of all paths to a sustainable future. China will need to develop the capabilities to deliver the science, the technologies and the processes that distinguish a high-income economy from the rest if it is to grow and sustain the living standards of the predominantly urban population.

Cities in China have long been among the largest in the world, yet only 40 years ago 82 per cent of Chinese lived in rural settlements. In 2020, 61 per cent of the population was urban. Rapid economic growth and massive migration swelled existing cities and created vast new urban settlements. Unbridled economic growth has had big environmental consequences, poisoning air, water and land in many parts of the country. China is paradoxically the world's largest emitter of greenhouse gases and the largest producer of renewable energy. Massive investment has created modern urban spaces and efficient intra-and inter-urban transport. The residents of these cities are ardent consumers of Chinese and international brands. Buying a car to get around the new urban areas is a must for the swelling middle class. China is not only the world's largest automobile market for conventional-powered vehicles, but also has more electrical vehicles on its roads than the rest of the world combined.

There is no doubt that the UK economy will take a big hit from the Covid-19 pandemic. Estimates of its actual impact vary, but, at the time of writing, most commentators put the figure at between 11 and 14.5 per cent. To put that into perspective, following the 2007–09 financial crisis, between the first quarter of 2008 and the second quarter of 2009 the UK economy shrank by a little over 6 per cent, and it then took five years to regain its pre-crisis size. The sheer scale of the Covid-19 impact means that the state's support for the recovery will need to include an industrial strategy – something that Britain has not seen in over 40 years.

The nature and effectiveness of that strategy will largely depend upon the relationships between government and the various industrial sectors; much will also hinge on the question “What are companies actually for?”. From Margaret Thatcher's election in May 1979 until very recently, the answer was a very definite “Making profits and delivering value to shareholders”. But fallout from recent events, reminiscent of the interwar years, proves that it is just not that simple.

Beyond profit: the question of corporate purpose

Part of the United Kingdom's response to the 2007–09 financial crisis was to bail out financial institutions deemed “too big to fail”. The fear was that, had they not been rescued, the resulting damage would be more than purely economic. The social dislocation resulting from account holders having no access to funds, losing their savings or being unable to pay their mortgages – plus the consequences of increased unemployment caused by the “Great Recession” that followed – would have been enormous.

The bailouts were therefore a de facto admission that businesses are indeed about more than profit. If that message needed any more reinforcement, it came in the form of admissions, by every government since 2008, that the economy needed rebalancing, with a new emphasis on manufacturing. We have yet to see any action, though. As it stands, the government's proposed post-pandemic recovery programme offers a lot of infrastructure investment; but, inexplicably, both industrial strategy and a business bank remain absent.

An alternative analysis of economic and political dysfunction requires an internationalism of labour operating on three levels, with international arrangements supporting domestic change.

• • Micro: trade union recognition and rights, collective bargaining, other domestic/international industry-level agreements, facilitated and promoted by the International Labour Organization (ILO) and other international institutions.

• • Macro: Bretton Woods 2.0/clearing union exchange mechanism to permit domestic autonomy (including permanently low interest rates and increased government spending) and facilitate international trade but contain speculation; global fund to support economic development.

• • Meso: industry and regional strategies, investment to meet climate emergency, global tax reform, with international coordination as relevant.

The agenda challenges the false opposition between globalization and nationalism. With globalization understood as an internationalism on the terms of capital, internationalism must instead be conducted on the terms of labour.

The relevant interplay of class forces, politics and economics is shown by events over the past century, in particular, the progressive and left debate in the interwar period. The associated policy changes amounted to a first internationalism of labour (IOL), devised as an alternative to both the disastrous internationalism of capital (IOC) implemented in the wake of the First World War and the subsequent degeneration to nationalism. Today's economic, social and political crises are understood as the inevitable consequences of a renewed IOC, most obviously but imprecisely traced back to Thatcher, Reagan and the “Volcker shock” (the sharp rise in US interest rates introduced in 1981/82 by Paul Volcker, the then chairman of the Federal Reserve).

A second internationalism of labour is the correct – and viable – alternative to resumed nationalist degeneration. In November 2018 international trade union economists and officials concluded: “Populism and anti-politics are a reaction to this but instead of an inward-looking agenda the solution must come from the global stage. To foster a global debate on an alternative approach, the global Trade Union movement has a key role to play.”

Nationalist poison makes such change seem far-fetched. It is less farfetched against the scale of the crisis.

In this chapter the present internationalism of capital is outlined, showing how class forces have led to excess rather than deficient supply, and the consequent threat from private debt.

There are some inescapable truths about the transformation of Chinese lives over the past four decades. Hundreds of millions lifted themselves out of poverty, tens of millions became well off to affluent, and many millions are now rich, even super rich. The Chinese are indeed richer than they have ever been; they are also on average taller, healthier and fatter; they are better educated and more productive; and they have previously undreamed-of opportunities to travel within China and abroad. Materially, the Chinese live in a world of abundance compared with even the very recent past. But inequalities are starker too. These have the potential to destabilize and rip apart society. This chapter will explore these aspects of the social and material change that have accompanied four decades of rapid economic growth.

Every week in China in 2017 and 2018 four new dollar-denominated billionaires were minted (Hurun 2018, 2019). China had 819 billionaires in early 2018, 210 more than the previous year, and pulled further ahead of the United States's tally of 571. The US is still home to the richest in the world: Jeff Bezos, Warren Buffet, and Bill Gates head the global rich list. But Beijing is the world's billionaire capital. In 2018, the capital and seat of power for the Communist Party of China was home to 131 billionaires, 39 more than in New York; 10 cities in Greater China had 15 or more billionaires. Little would the 1980s reform leader Deng Xiaoping have imagined his fellow Chinese would embrace with such lust his call to get rich. Even less so, would he have imagined how his party comrades and their families would likewise enrich themselves at the expense of the state and citizenry. Looting of state assets by officials in collusion with private business was covered in the previous chapter. China is truly a country of peculiar dissonance and phenomenal disparities.

More detail on the life, careers and fortunes of the super-rich will follow next, but most of the chapter is devoted to the less extraordinary, focused on the disparities in income, education and health status that are the lived experience of ordinary Chinese.

The Covid-19 crisis has demonstrated one important truth. The international financial system is designed on terms that suit the owners of capital, not on terms that suit nation states, or the majority of the population – as Geoff Tily explains in his chapter in this volume, Chapter 4. He writes that globalization is a system amounting to “internationalism on the terms of capital”, whereas internationalism should be set on terms that benefit the majority – the people who labour by hand and brain. In this chapter, I contend that no reform of the state “for the common good” is possible under terms governed by the current international system of deregulated, globalized capital, constructed on the foundation of vast debts, costly credit and tax evasion.

During the Covid-19 crisis world leaders proved unable to convene an international summit to prevent the spread of the pandemic and to collaborate on a vaccine for the world's people. Some deliberately attacked the system of multilateral coordination to defeat pandemics, organized under the umbrella of the World Health Organization. However, central bank governors, led by the Federal Reserve, did work together and coordinate to save globalized capital markets from the economic consequences of the pandemic. Even while the governments of Trump, Bolsonaro, Modi and Johnson clowned around, grievously mishandling the crisis and causing thousands to die unnecessarily, technocrats at the Federal Reserve, the Bank of England and the Bank of Japan engaged in decisive, expansive and internationally coordinated action to save rentier capitalism. Big Wall Street and City of London financial institutions, corporations such as Apple and the world's airlines quickly became beneficiaries of central bank largesse.

As the Brookings Institution has carefully documented, whereas ordinary Americans faced unemployment and income loss, the Federal Reserve effectively nationalized Wall Street – and, with it, other financial entrepôts. It did so by cutting its target for the federal funds rate, the rate US banks pay to borrow from each other overnight, to a range of 0 per cent to 0.25 per cent and by purchasing securities. Between mid-March and mid-June 2020 the Fed's portfolio of private assets grew from $3.9 trillion to $6.1 trillion. It relaunched the Money Market Mutual Fund Liquidity Facility (MMLF), which backstopped money market mutual funds and massively expanded its repurchase agreement (repo) operations to channel cash into the money markets.

Education in England has been increasingly privatized. The result has not been good. It has not produced a better educational service. When international comparisons are made this becomes painfully clear. It has not become more efficient, because of a proliferation of private nursey classes, the academization of state schools, all new schools being free schools, university student number competition, and so on; it has not resulted in young people in England becoming more able – although it may have persuaded many to believe that they are very able and very clever despite not being able to speak and write in as many languages as children can do elsewhere in Europe – nor to show imaginative ability in mathematics and science (as well as many other subjects), as other young people in Europe can demonstrate when international comparisons are made.

Figure 8.1 gives a summary of the problem. It shows results for mathematics, but much the same can be seen for reading and problem solving. It uses data from 2012, as the repeat OECD organized international surveys taken in 2015 and 2018 did not measure ability up to age 24 but only around age 16. Schools in the United Kingdom are quite good at priming young people to produce an expected answer at age 16 or 18. However, by age 24 a great deal of what was taught in a UK school has been forgotten (greater than is the case in most other European countries, as Figure 8.1 makes clear).

As the figure implies, this may be related to economic inequality. The higher the economic inequality in a country, the worse the real educational performance.

What Figure 8.1 shows is not that economic inequality directly causes poor educational outcomes, but that a country such as the United Kingdom, which has become so economically unequal in recent decades, will tend to move in the direction of other very unequal countries, such as the United States. In contrast, in more equitable countries, such as Japan, Sweden, the Netherlands and Denmark, education at school is carried out in such a way that, when young adults are later tested in their early twenties, they are still – on average – quite competent in mathematics.

Introduction

A fifth of humanity lives in abject poverty. This is something that should be unacceptable to the more affluent for two related reasons. First of all, it affronts our sense of common humanity. Secondly, it undermines international security, as poverty eventually engenders violence and revolt. Enlightened self-interest therefore dictates that poverty should be alleviated. In short, it is difficult to separate the development and security agenda. The reduction of absolute poverty yields a double dividend by simultaneously addressing security considerations and developmental concerns. Thus, the achievement of the millennium development goals (MDGs) regarding poverty reduction is twice blessed: it serves both the altruistic and security minded motives of the donor community.

Most wars nowadays are intra-state or civil wars. The overwhelming majority of these civil wars occur in developing countries. Ultimately, wars are irrational when compared to negotiated settlements, because wars destroy part of the initial endowment of belligerents, no matter what the final outcome. But the logic of bounded or myopic rationality can sometimes make war rational. Furthermore, there is an intimate link between poverty and conflict. On the one hand, war prevents the achievement of the MDGs, perpetuating poverty, underdevelopment and the lack of growth. On the other hand, poverty provides fertile grounds for conflict entrepreneurs, as potential combatants have less to lose from death and destruction on account of their own poverty. For all of these reasons, ending conflict, or reducing its intensity, must be a high policy imperative in the development, poverty reduction and international security agenda.

Despite the reservations of some, economic growth constitutes the principal avenue by which sustainable poverty reduction can be attained in low-income developing countries. Redistributing income, without making the cake bigger, only serves to make the already poor more equal. Thus, growth is a necessary condition for poverty reduction in low-income countries. Growth can reduce poverty if some of the benefits of growth trickle down to the poor, even if its principal beneficiaries are the wealthy. This is where other notions of propoor growth, such as those advocated by Kakwani and Pernia (2000), become relevant.

Introduction

The contribution of well-functioning financial system towards economic growth has been highlighted in the development economics literature. Thinking about the importance of financial development can be traced back to the middle of the nineteenth century when Walter Bagehot (1878), founder of the Economist magazine, explained how capital markets efficiently allocated resources towards productive investment in England. Furthermore, seminal works by King and Levine (1993a, 1993b) and Levine et al. (2000) show that the level of financial development can be considered as a predictor of economic growth for a large number of developing economies. There is a positive relationship between financial development and per-capita income across countries.

Armed conflict, particularly in its common contemporary form of civil war, is gaining increasing attention from academics and policy makers as a major cause and consequence of development failure (see, e.g., Murshed 2010). Civil war involves the use of armed forces between at least two parties, at least one of whom is the state (Gleditsch et al. 2002: 618). On-going violent conflict's battle related deaths have been recorded by the Uppsala Conflict Data Program (UCDP) since 1946. A recent peak in the number of conflicts is observed in 1991 (52 armed conflicts in 38 countries). Since then, a decreasing pattern is noticeable in armed conflict occurrences, although the duration of armed conflict might not be declining. The recent updates for 2012 recorded the number of armed conflicts as 32 in 26 different locations around the world and also estimated battle-related death ranging from 37,175 to 60,260 (Themner & Wallensteen 2011). Moreover, the consequences of armed conflicts can be seen as not only a source of immense human suffering, but also causing diminution of the capital stock and productive capacity, hampering the growth of GDP (Collier 1999).

When we first envisage the effect of civil war on financial development, the matter becomes complex and is characterized by the paucity of previous analyses. Financial development is based upon a well-functioning financial system along with continuous financial innovation, progress in institutional and organizational quality, increasing competitiveness of markets with reduced transaction costs and the utilization of physical and human capital (Hartmann et al. 2007).

Introduction

‘Commerce is the grand panacea’, so argued Richard Cobden (1835), by which he meant the pacific and civilizing effects of international trade and its role in assuaging tensions between nations. In contemporary political science the term liberal peace is employed to explain the absence of fatal conflict between democratic nations that are also economically interdependent. The expression, liberal peace, therefore, has an economic dimension, as well as an element based on a common polity and sets of values. Ultimately, these two strands of the liberal peace are inseparably linked; the literature on the liberal peace, however, may be dichotomized into ideal and economic tendencies. The ideal theory is traceable to Immanuel Kant's notions of foedus pacificum (league of peace) in his essay on the Perpetual Peace (1795) where the simultaneous adoption of a republican constitution generates a cosmopolitan peace. Its modern counterpart is to be found in the contemporary philosopher, John Rawls’ (1999), thought. Economic theories of the liberal peace probably originate in some of Montesquieu's ideas (1748) about the pacific benefits of commerce between peoples; a review of contemporary thinking can be found in Gartzke (2007), where it is labelled the ‘capitalist’ peace. Gleditsch (2008) has outlined a liberal ‘tripod’ where common democratic values, joint membership of international organizations and economic inter-dependence together buttress the ‘liberal’ peace. The term ‘liberal’ internationalist should be underscored in this regard, to distinguish this school of thought from ‘realist’ strands in political science and international relations, or for that matter neo-conservative thinking which also stresses the joint merits of market capitalism and democracy.

While it is an empirical fact that advanced industrialized democracies do not go to war with another, this does not mean that democracies do not engage in wars. For example, according to the Human Security Report (2005), the UK has been involved in the greatest number of inter-state wars (21) during the 1946‒2003 period ahead of France (19) and the USA (16). The Human Security Report also reports the total incidence of (internal as well as inter-state) conflict in different countries.

Introduction

This chapter examines inter-state hostility between India and Pakistan, which is arguably one of the most prominent inter-state conflicts still extant, whose saliency is highlighted by the presence of nuclear weapons on both sides. Conflict reduction is also necessary if the region is to release resources from military expenditure for poverty reduction. We analyse some of the factors that might lead to conflict abatement between these long-standing rivals, including the role of trade and a mutually democratic orientation. In doing so, we hope to utilize this important case of bilateral inter-state conflict to shed some light on the voluminous liberal peace literature.

India and Pakistan emerged as separate nation states in August 1947, when British India was partitioned following independence from colonial rule. Latterly, in 1971, the Eastern wing of Pakistan separated to become Bangladesh. In many ways, India and Pakistan share a common heritage, including overlapping languages and ethnicities, as two major provinces of British India were split up in the partition process (Punjab and Bengal). The ostensibly differentiating factor is religion; although Pakistan is predominantly Muslim, up to 10 per cent of India's population continues to be Muslim, and as much as 15 per cent of Bangladesh's population is non-Muslim.

The hostility between India and Pakistan dates back to the very inception of these countries as independent states. They have had six wars or fatal conflicts; three over the disputed territory of Kashmir in 1947‒48, 1965 and 1999, the Rann of Kutch in 1965, one in connection with the secession of Bangladesh in 1971, and sporadic fighting over the uncharted Siachen Glaciers in the 1980s. The territorial dispute over Kashmir remains unresolved. Even when they are not engaged in outright war, Indian and Pakistani troops confront each other every day, with fingers literally on the trigger, along the ceasefire line or line of control established on 1 January 1949 in Kashmir. India also unilaterally amassed troops more generally along the Pakistan border in 1951 and 2002. India has, with considerable justification, accused Pakistan of fomenting, aiding and abetting the insurgency in Indian Kashmir since 1989, and wider acts of terrorism inside India (with less justification).