COVID-19: Capitalism needs a revisit

The spread of the COVID-19 pandemic has forced a major portion of the global population to go under lockdown. It has shredded global equity markets by 25% in just a month, forced major central banks to offer negative real rates, and raised questions about the survival of innumerable industries, big and small.

Yet, one thing is clear: the extraordinary steps taken to combat the coronavirus pandemic highlight the significant dependence of businesses and investments on human beings and their survival, irrespective of their socio-economic class. 

Historically, major events of global distress — be they wars or economic depressions — have significantly changed the way businesses operate, while opening a new era of investment with different priorities and evaluation tools. 

This one should be no different.

The shift from purpose-driven to wealth-driven business activity

Capitalism, which finds its roots in the 17th century, has seen a significant change in its definition over the past few decades. 

It started with humans using their energy and effort to produce goods that fulfilled the needs of other people, and selling them to earn profits. However, over the past century, it gradually transformed into money (instead of human effort) being used as an input to make more money (instead of purposeful goods).

Now, humans with control of capital tend to invest it with the sole purpose of making more capital, which is then reinvested to create even more wealth. This is how the process perpetuates. Purpose-driven (based on human need) business activity has been transformed into a wealth creation enterprise, with the greed for 'more' as a primary motivator.

Take the example of Pakistan, where we see that agricultural cropped area (which is a national need and employs 40% of Pakistan’s workforce) has actually decreased by over a million hectares in the first 20 years of the 21st century. Likewise, expenditure on education and health, both critical needs, remains less than 3% of GDP. Investment in health in particular has not even matched the growth in population. There is right now one hospital bed for every 2,200 people in Pakistan, up from one bed for every 2,000 people in 1999. 

On the other hand, real-estate remains an area of attraction for investors since the past two decades; not as much driven by real demand for homes as by the purpose of multiplying money and accumulating wealth through short-term speculation.

Meanwhile, Pakistan’s domestic savings have decreased from 16% to 4% in the past 15 years. These savings, which ought to have been used to support the economy with investments in purposeful business activity, are primarily parked in unproductive real estate, which creates no employment or products. 

This new system of greed-driven business activity, which is a global phenomenon, has led to a tragic increase in poverty levels, with about half the world’s population living on less than $2.5 a day. The situation is even worse in Pakistan, where the economy generates only Rs600 per person per day (due to unproductive use of capital), while 60m people (30% of the population) lives on Rs100 per day.

Fundamental concept of sustainable growth is ignored

While global investors have religiously followed capitalist principles to create and accumulate wealth over the past decades, they have ignored one key concept of strategic management: the stakeholder approach.

According to business expert Edward Freeman, a business’s success lies in its ability to satisfy all of its stakeholders, not merely a few of them. 

For a business to grow sustainably and continue generating profits, therefore, it should be satisfying all stakeholders — and one of the key stakeholders for global businesses are human beings, who either work for them or who buy their products.

For businesses, if there are no people left to help it produce output and no people left able to spend money on its goods, fortunes quickly turn to dust. 

This is why, in the present day, all global financial institutions are sounding the alarm about 'a recession worse than the Great Depression' even though the only thing that has changed is that one economic input (or stakeholder) — human beings — have been rendered unproductive.  

Therefore, it is evident that global businesses (and hence economies) cannot sustainably grow or even survive if they are unable to satisfy the needs of society. The focus of a majority of global investors on wealth creation, instead of social development, is a recipe for destruction.

The situation could be even worse in a developing country like Pakistan, and the continuing inability of investors and businesses to serve the interests of the lowest socio-economic classes could have far ranging consequences.

Pakistan is a consumption-based economy, with the sector comprising 95% of the country’s GDP. Failure to uplift the lower economic classes (almost half of the population) threatens the very sustainability of economic and business growth.

Not only that, but striking hunger, absence of good healthcare, and limited access to quality education expose the country to the risk of a revolt, which would result in damage across businesses and industries.

People can only grow collectively, and not individually

The theory that all stakeholders need to be satisfied for sustainable growth has become more evident than ever in present times. COVID-19 has shown the world that human beings are not self-sustaining: we are still very dependent on other humans for survival, and the human race can only survive collectively, not by selection.

While countrywide lockdowns are arguably in the people’s best interests, it is also a stark reality that half of the world’s population, living under $2.5 a day, is struggling to make a choice between dying of hunger at home or exposing themselves to the virus by going out in search of food. Their choices could expose an even larger population to the threat and making the problem completely uncontrollable.

Likewise, a lack of health facilities and weak infrastructure are posing a threat to the ability of global economies to deal with the problem. They have significantly curtailed business activity around the globe and halted operations for many businesses. 

The idea of a pandemic persisting for a long period poses a threat to global businesses due to the immobility of suppliers, employees and consumers. This all points towards a need for investment in making healthcare accessible and affordable for all socio-economic classes, as well as reducing wealth disparity to ensure the continued survival of the global population.

Nature is hinting at reallocation of global capital

Nature has always demanded continuous and collective evolution towards perfection. Be it the journey from atom to a cell, from cell to an organ, an organ to animal, from animal to a being with cognitive capacity, and from there to ever increasing intellectual capacity — nature has brought mankind afar.

For the continuous growth and sustainable evolution of this world, it is, however, essential that we realise that we have to grow collectively, taking our entire society along. 

As we move on from the pandemic, it will be essential for global businesses and investors to consider reallocation of their capital, moving away from wealth-driven decisions to purpose-driven investments.

The author works at an MNC as a manager for high value projects, teaches finance and runs a venture which conducts investment analysis courses.