“We live in a more shock-prone world,” IMF Managing Director Kristalina Georgieva recently observed, “and we need the strength of the collective to deal with shocks to come.” She’s right. In the space of just a few weeks, Russia’s invasion of Ukraine has already shifted geopolitical lines, plunging the world into widespread uncertainty and opening new diplomatic rifts. Societies will need to redefine their choices to account for new global dynamics affecting fundamental issues such as food, energy, and digital security, and the organization of global trade.
While globalization may not end imminently, its acute vulnerabilities certainly have been exposed. Structural changes in how business is done are already materializing, as demonstrated by the complex reorganization of manufacturing infrastructure associated with near- and re-shoring. Companies and governments alike are assessing their dependencies.
In such a challenging environment, building collective resilience is of the utmost importance. But it will require solidarity and political cooperation at all levels: global, supranational (particularly in Europe), national, and between businesses, public authorities, and civil society. Success will depend on our ability to achieve not just energy and food security but also equity and fairness in decision-making. After all, existing inequalities have continued to deepen, jeopardizing the capacity for collective action. We will need to put aside arguments about the pros and cons of globalization and start to work toward a more sustainable and inclusive economy.
In hindsight, it is clear that China’s entry into the World Trade Organization in 2001 amplified global imbalances, triggering a rush to delocalization (offshoring) and accelerating the deindustrialization of the West. Though the resulting price reductions were welcomed by consumers, they were not sufficient to offset or disguise the loss of middle-class purchasing power or the rising sense of insecurity in communities that had lost their industrial base – an outcome that has undermined social cohesion and fueled populism.
Western workers were left in the lurch by their employers’ scramble for cheap labor. While public spending and redistribution programs partly mitigated growing economic inequality, the issue has now become so pressing that we can no longer rely solely on state action. The private sector also will need to step forward to shore up the social contract. Some firms have training, inclusion, and diversity policies, and support and sponsor related civil-society efforts. But investors and managers need to view inequality as a matter of business sustainability.
Banks and financial institutions are particularly well positioned to help address inequality, which they can do in at least three ways. First, they can do more to reach socially, digitally, and financially excluded people. If banks are going to serve the millions of people who are struggling financially, they will need to offer more services specifically designed to address everyday difficulties. Too often, financial products are simply not relevant to people’s needs.
The COVID-19 crisis both exposed and exacerbated many forms of marginalization, from social isolation and the digital divide to food insecurity and a lack of access to affordable housing. These issues should concern us all. They are key social and political battlegrounds.
Second, banks and financial institutions should pay closer attention to local stakeholders, both public and private. Widespread prosperity is impossible if most economic activity and wealth is concentrated in just a few regions. Banks can help by offering better terms for investments and ventures in such areas. Social cohesion and shared prosperity over the long term depend on vibrant local communities, and local communities depend on high-quality social infrastructure and entrepreneurship.
Lastly, banks and financial institutions can support decarbonization. In many industries, the transition away from carbon-intensive practices will be rapid, potentially leading to job losses. The collective pursuit of net-zero emissions will remain politically tolerable only if the costs and benefits are shared fairly between companies, employees, shareholders, governments, and regions. To that end, banks can help clients monitor their business practices from an ecological and social perspective, so that they will have the information they need to shift investments and financing towards carbon neutrality. To ensure a “just transition,” these metrics will need to be factored directly into all decision-making.
At global gatherings, one hears repeatedly that inequalities are detrimental to economic development, and that supporting emerging markets and developing economies is both good for business and good for the soul. But if today’s business leaders really mean it, they need to go much further. That means recognizing that there can be no long-term value creation without redistribution, and that inequality must occupy a central place in our business models.
The stakes could not be higher: economic development and the basis of our democracies. None of us can afford to ignore the issue. Businesses that are not aligned with society’s values and expectations are running undue risks.
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