Trade-Off Between Intergenerational Equity and Economic Growth: Social and Financial Stability Puzzle

Trade-Off Between Intergenerational Equity and Economic Growth: Social and Financial Stability Puzzle

Nataliya Sergeevna Makarova (Russian State University Named After A. N. Kosygin, Russia)
DOI: 10.4018/978-1-7998-1033-9.ch010

Abstract

The global financial crisis of 2007-2008 posed the problems of the slowing world economy growth rates that predetermined the necessity to investigate a national economy's structural characteristics associated not so much with the objective, easily modeled factors of its development as with the subjective ones, difficult to be understood but increasing in importance. The latter is connected with inequity in the simultaneously living generations' perception, which is fueled by the trends of accelerated income polarization of the population, the middle-class reduction, and decreasing possibilities of achieving higher living standards for the socially vulnerable groups. All the above predetermines the behavior of economic agents in society and ultimately the prospects for the long-run economic growth in the country. The author conducted a model experiment with the dynamics of intergenerational equity and economic growth on the basis of the sub-martingale. The results show the growing importance of the human factor in ensuring the stable growth of the global economy.
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1. Introduction

Society has always faced the problem of social choice between priorities related to ensuring equality of generations or economic growth (Okun, 2015). However, in modern conditions, it has become particularly acute with the slowdown in economic growth throughout the global space, increasing the life expectancy of people of retirement age, as well as increasing polarization of society due to faster growth of incomes of a few very rich members of society, on the one hand, and reducing the share both of the poor and the middle class in gross domestic product (GDP), on the other hand. Theoretically, there are three possible solutions to this problem: (1) an orientation towards stimulating economic growth by ignoring the “costs” of social justice, including intergenerational equity; (2) emphasis on ensuring intergenerational equity to the detriment of accelerated economic growth; and (3) the simultaneous combination of these priorities in varying proportions (Musgrave, 1998). However, in such dilemmas there can be no simple choice, since the main driver of economic acceleration in the future definitely becomes human capital represented by individuals. This means that without taking into account the motivational component of the latter, society cannot count on macroeconomic success. At the same time, the main factors determining the economic behavior of a person in society should include his individual assessment of social justice, related to the participation of society in the provision of older people pensions, in the upbringing and education of children, in social security of poor members of society, in the provision of health services, in helping the unemployed, and etc. And the importance of this social aspect in the context of forming a driver for future economic growth cannot be overestimated, since modern labor force feels the need to serve or not serve society through the prism of the prospects for its future old age and the ability to plan for the birth and upbringing of children in current conditions. So, in order to achieve stable economic growth and financial stability, it is necessary that all generations feel like a fair attitude of society (and the state) to themselves from birth to pension provision.

However, in the modern world, the number of problems in the relationship between society and individuals is increasing. Unemployment rates have declined in many parts of the world from post-financial crisis highs. But this macro improvement hides a worrying trend of persistent youth unemployment and underemployment in many parts of the world (WEF, 2018). Many of the opportunities that do exist lie in the “gig economy,” offering flexible, short-term but largely unstable employment. Youth unemployment differs structurally from unemployment at more advanced ages. “Lost wages, lost savings, can be extremely difficult to recover later in life,” said Christine Lagarde, Managing Director of the International Monetary Fund (WEF, 2018).

In any case, the understanding of justice from viewspoint of different generations is changing. However, the fact that current retirement benefits of old people is an example of the future for working youth remains unchanged. This predetermines the motivation of the behavior of the generations “Y” and “Z”, the specifics of their social contract with the state, and, consequently, social, economic and financial stability or instability. It turns out that inequalities are different, and it is necessary to exclude their forms that destroy the economic and financial stability of society.

Unfortunately, in the modern world, there becomes evident such negative manifestation of injustice as polarization of income between the very rich and the very poor as well as the squeezed middle class (OECD, 2019). And the last is felt and interpreted the same way by all simultaneously living generations. Сurrent findings reveal that the top 10% in the income distribution holds almost half of the total wealth. While the bottom 40% accounts for only 3%. The OECD (2019) has also documented that the natural result of such an “unfair” income polarization is the fact that economic insecurity concerns a large group of population: more than one in three people are economically vulnerable, meaning that they lack the liquid financial assets needed to maintain a living standard at the poverty level for at least three months.

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