NEW CAPITALISM

The coronavirus pandemic has changed the traditional development of the global economy, accelerating the reformatting of market mechanisms. Overcoming the consequences of the recession caused by the pandemic has significantly increased the role of the state and society in the economy. Moreover, it is not only about strengthening fiscal and monetary measures to support national economies or pumping it with money by increasing the national debt. Current trends show the decline of the era of neoliberalism, which has lasted for about 40 years, and herald the development of a new capital market that meets the ESG (Environment, Social development, and corporate Governance) criteria.

Contrary to beliefs

The pandemic crisis clearly revealed all the shortcomings of neoliberalism prevailing in recent decades and promoting the slogan “business is business”, and nothing more. All schemes based on free self-regulation of the market and minimal government intervention collapsed overnight after a series of lockdowns broke the transport, logistics and production chains that had been established for years. This was followed by the collapse of prices for almost all types of raw materials, indices of financial and stock exchanges, and such industries as passenger air transportation, tourism, hospitality, etc. The “free market” had to be pulled out of the swamp of the recession manually, and it was precisely the state, using fiscal and monetary methods to support national economies. In the homeland of neoliberalism, the United States, the government issued practically interest-free loans, keeping the refinancing rate of the Federal Reserve rate at a minimum, withdrew taxes, subsidized exports, supported the consumer market in every possible way. In other words, it did everything that until recently has been considered reprehensible for passionate market leaders.

Moreover, wealthy US chose to raise corporations, the financial sector and other segments of the economy by increasing the emission of dollars. Last year, the US printed a quarter of all existing dollars - $9 trillion and plans to continue emission this year as well. Similar processes are also observed in the EU, Japan and a number of other countries, but on a much smaller scale. Either way, these measures boosted the growth dynamics of the world's leading economies, raised the prices of oil and other raw materials, increasing the purchase of bonds and other securities by several times, which led to a sharp rise in the markets.

In fact, the Global Economic Prospects (GEP) report of the World Bank released in June also confirmed that the giant cash injections in several of the world's leading economies had the most favourable effect on the global economy: the World Bank increased world GDP forecast from 4 to 5.6% in 2021 - the fastest rate of recovery from a recession in 80 years. Forecasts of the Organization for Economic Cooperation and Development look even better, with the improved expectations of global GDP growth rates for 2021 from 4.2% to 5.8%.

Old imbalance

Reasonably, considering the effectiveness of monetary and other mechanisms of state assistance to the economies of the US and the EU, one should not forget about the costs of this path, which resulted in an unprecedented increase in the national debt in the US and a sharp rise in inflation around the world due to the uncontrolled emission of leading reserve currencies. These processes are most noticeable in the global food market, where prices are highest in the last decade.

All these facts are highly regrettable because, unlike the US and China, with their projected 5.8% and 8.5% GDP growth in 2021, respectively, approximately two-thirds of emerging and developing economies will not be able to compensate for the decline in per capita income until 2022. The vaccine gap amid the pandemic is undermining all the gains in poverty reduction and employment growth in recent years, exacerbating instability in low-income countries.

The pandemic crisis and the highly controversial ways to overcome its effects have intensified the long-standing imbalances in the global economy and widened the gap between rich and poor countries. But at the same time, there was a growing understanding that the global economy cannot be cured by a liberal model of a free market built on the principle of maximizing profits, or by cash injections available to only a few countries to support business.

Politicians increasingly mentioned state guarantees, basic income and fair proportional taxation. And most importantly, the well-known economist, founder of the Davos Forum, Klaus Schwab, believes that the pandemic has led to the idea that the ideology of modern capitalism needs to be rethought, since the state, business and society cannot separately resist the crises. Neoliberal ideology with its priority of the free market leads to the limitation of workers' rights, reduces economic security, increases the threat of transnational monopolies and provokes destructive tax competition through offshores and other free zones. Therefore, Schwab believes, it is necessary to revise the principles of trade, taxation and competition rules.

Incidentally, one of the first steps in this direction was the recent decision by a number of countries to levy the so-called digital tax from multinational companies such as Amazon, Google and Facebook. This measure will severely limit the ability of IT giants to transfer revenues to jurisdictions with low taxes and will oblige them to pay additional taxes in the countries where they sell their products. The G7 members are close to reaching an agreement on the taxation of multinational companies, which will pave the way for the creation of new principles for the collection of taxes from the world's largest corporations.

ESG criteria

Furthermore, until recently, it was believed that the more dividends a company pays to its shareholders, the better. But today not only the interests of shareholders become more relevant, but also the issues of corporate and social responsibility, when companies contribute to public welfare and solve the problems of climate change. Such approaches, which emerged about a decade ago, mainly in the corporate sector of European countries, are now widely spread in various regions of the world under the name of ESG criteria: responsibility towards the environment, society, and corporate governance. Accordingly, these approaches have formed a stable concept - responsible investing, which provides for making a profit while unconditionally observing the ESG criteria.

One of the basic principles of Responsible Investing is that investors should include ESG criteria in their decision-making process. Thus, when assessing environmental indicators, attention is paid to whether the company seeks to reduce its negative impact on the environment. These activities may include, for example, the company's commitment to reducing waste, helping to conserve biodiversity, and tackling the effects of climate change. Social indicators are related to human capital management: creating favourable working conditions for employees, ensuring gender equality, protecting local communities. Management factors include tax strategy, anti-corruption, alignment of the company's goals with shareholders.

Remarkably, almost 15 years ago, investments in companies that meet ESG criteria were more of a tribute to fashion and were not considered a guarantee of high income, but today the increasing number of investors believe in the economic efficiency of such undertakings. Responsible investments become more profitable by identifying leaders and off-trackers in their respective industries, and according to experts from the JuliusBaer banking group, almost half of the world's wealthy clients say they already own ESG assets.

Green - new colour of economy

One of the most effective tools for responsible investment is considered to be green bonds. These are securities that companies issue to raise funds for projects in the field of renewable energy, waste management, biodiversity conservation, environmentally friendly transport, green construction, etc. In accordance with the principles of green investment, issuers of such securities must monitor the targeted spending of funds and ensure the transparency of all processes in the implementation of projects. The first green bond, Climate Awareness Bond, was issued in 2007 by the European Investment Bank (EIB). Since then, the EIB has issued about $37 billion in green bonds in 16 different currencies. Proceeds from the bond placement have been used to implement 266 projects in 57 countries. In general, the aggregate value of green bonds issued worldwide by the end of last year exceeded $830 billion. Low-carbon infrastructure, production of hydrogen fuel, construction of energy storage facilities, electric filling stations, generating capacities in the field of solar and wind energy are the classic areas for ESG investments. ...

China ranks second in the world after the US in terms of the volume of issued green bonds. In the coming years it will need about $16 trillion infrastructure investments. China, where state participation in the economy is traditionally high, is increasingly focusing on domestic consumer demand. The level of education in the country is growing, science is capitalizing and investments in research and development and innovative technologies, including in the field of ESG assets, are encouraged.

In the post-Soviet region, there is still a very small number of companies that fully meet ESG criteria, and the mechanisms of responsible investing are developed relatively weakly. Nevertheless, with overcoming the consequences of the pandemic and the transition to the green global economy expected by 2030, these global trends will gradually be introduced in Russia, Kazakhstan, and Azerbaijan. This is inevitable, especially amidst the EU's efforts to decarbonize the economy and introduce a cross-border carbon tax levied on exporters of industrial products to the EU.