Shared prosperity and economic growth

February 9, 2021, Managing for Society, The Manila Times

With 26 business organizations, including the Management Association of the Philippines and the Shareholders Association of the Philippines, endorsing the Covenant for Shared Prosperity when it was launched in early November, the serious work of getting individual companies to commit to the Covenant now begins.  Readers will recall that the Covenant calls on committed businesses to ensure that business growth equitably benefits employees, customers, input and finance providers, the community, the environment, and, of course, shareholders.

De La Salle University’s Ramon V. del Rosario’s College of Business has followed the leadership of the business organizations by deciding to teach the Covenant to all its business students.  The leaders of Lasallian business education believe that the next generation of business students need to be completely weaned away from stockholder capitalism and fully educated on how a stakeholder economy functions and the role of businesses in it.  Stockholder capitalism focuses on profit maximization for equity owners while leaving the majority behind.  It results in the creation of more billionaires while income inequality becomes ever worse.  Stakeholder capitalism, on the other hand, ensures that increases in individual wealth among business equity owners also lead to the improvement of welfare of vulnerable members of society.

I expect some to be skeptical about pushing stakeholder capitalism for fear of endangering economic growth.  But there is recent evidence that the opposite is the case.  In their book Confronting Inequality: How Societies Can Choose Inclusive Growth, economists Jonathan Ostry, Prakash Loungani, and Andrew Berg of the International Monetary Fund make the basic point that inequality undercuts the sustainability of economic growth.   This means that if we seriously want continuing growth for the private sector and the economy as a whole, we cannot afford to ignore the problem of inequality. 

The authors attribute this partly to the fact that “poor people do not have the means to finance a good education or afford quality health care [and], hence, … are unable to build up their human capital and this makes it difficult to sustain the economy’s growth.”  They also explained that “the ability of unequal societies to respond effectively to adversity may be lower because it may be more difficult to rally everyone to a common cause”.  Thus, as our country prepares to recover from the economic damage caused by the pandemic, the majority who had been left behind during the good times may see little point in supporting the painful adjustments needed moving forward.

Interestingly, Ostry’s team found that more equal income distribution is among the more influential factors affecting sustained growth.  They found that a 10-percentage-point decrease in inequality led to nearly 50% increase in the duration of expected economic growth.  Other factors had lesser positive effects on economic growth duration, such as, in descending order of impact, trade openness, political institutions, foreign direct investments, exchange rate competitiveness, and moderate external debt. This is a remarkable finding because most conventional economists harp on all the other factors, except for inequality, as the main thing that we need to focus on to achieve economic growth.  

The authors explained that certain policies have a particularly bad effect on inequality, and, therefore, on sustainable economic growth.   Firstly, they looked at financial integration policies.  They found that countries that open up their financial systems end up weakening the bargaining power of workers, which show in the persistent lowering of labor’s share in business income. Secondly, they found that income redistribution policies tended to either increase the duration of growth or simply did not hurt growth.

In summary, businesses who will commit to the Covenant for Shared Prosperity can assure themselves that sustainable growth for the economy will be the reward for taking care of all their stakeholders.

Dr. Benito Teehankee is the Jose E. Cuisia Professor of Business Ethics at De La Salle University and Head of the Business for Human Development Network.  He is a member of the Social Justice Committee of the Management Association of the Philippines. Email: benito.teehankee@dlsu.edu.ph.