Forward Thinking on the social contract in a postpandemic world with Minouche Shafik and Andrew Sheng

| Podcast

In this episode of the McKinsey Global Institute’s Forward Thinking podcast, guest interviewer Lola Woetzel talks with two leading economists spanning Europe and Asia. Baroness Minouche Shafik is director of the London School of Economics and Political Science. Andrew Sheng is distinguished fellow at the Asia Global Institute at the University of Hong Kong.

The conversation centers on the state of the social contract that underpins society. They answer questions including:

  • What is the social contract, and why do we need one?
  • Is the social contract broken, and do we need a new one?
  • How does the social contract extend into issues of sustainability, and, if so, is this an opportunity to reimagine that contract?
  • Has the pandemic brought us closer to a different kind of social contract?

An edited transcript of this episode follows. Subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Podcast transcript

Janet Bush (co-host): In this episode of Forward Thinking, we are delighted to have our colleague Lola Woetzel as guest host. He chats with Dame Minouche Shafik and Andrew Sheng in a wide-ranging conversation about the state of the social contract, a topic dear to MGI’s heart. Minouche Shafik describes the social contract as “how we organize the provision of collective goods in our society.” The conversation took place in late December 2021. Michael, what struck you most about what they have to say?

Michael Chui (co-host): I think their tone was striking. They were both so passionate and bold in their view that the social contract is broken. And Andrew Sheng takes the notion of the social contract even further to include our contract with the planet.

Janet Bush: Yes, I agree. So let’s now hand over to Lola.

Lola Woetzel: I want to spend a moment to zero in on the notion of sustainability. We often use it to focus primarily on environmental issues, but for us, it’s actually about far more than that, notably about intergenerational fairness. This issue of how we are treating our society is one that needs to be considered in terms of its long-term economic and societal costs and benefits.

We are lucky to have two notable experts joining us. Allow me to introduce them.

We have Baroness Minouche Shafik. You are a leading economist, director of the London School of Economics and Political Science. You’ve served as the deputy governor of the Bank of England and vice president of the World Bank—I believe the youngest ever to hold that post, at age 36. You’re a leading voice on the topic of gender equity. And of course, you’re also the author of a cogent and important book, What We Owe Each Other: A New Social Contract for a Better Society. A topic of mutual interest to MGI. Minouche, thank you for joining us today from London.

And we also have with us today my friend Andrew Sheng. Andrew, I’ve heard someone describe you as a giant in two very important fields, which I think is excellent. First and foremost, you have extremely deep experience in the financial sector as a former central banker and financial regulator. You’ve advised financial leaders in several key Asian economies, including China, India, and Malaysia. But more than that, you’re also a thinker and analyst of the most rigorous theoretical and policy levels, currently serving as a distinguished fellow at the Asia Global Institute, University of Hong Kong. Andrew, thank you so much for joining us.

So let’s start with the basics, if you will. What is the social contract, and why do we need one? Minouche, can we start with you?

Minouche Shafik: The social contract is how we organize the provision of collective goods in our society. And that can range from how we organize education and work to how we raise children. Are families responsible or does society share in that responsibility? Is healthcare the responsibility of individuals or is there some socialization of that issue?

Similarly, what do we expect of employers? Are they expected to provide pensions and benefits to workers? Are they permitted to employ at will? All of those collective agreements around what we owe each other in society are what I would call the social contract.

And they can be provided by the family, the community, by the state, or by the market. And in every society, there’s a social contract that underpins all of the key stages of life—how we get educated, what happens when we get sick, what happens when we get old, how do we work? And what we owe future generations as well.

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Lola Woetzel: And how is it doing? Do we need a new one?

Minouche Shafik: I think our social contract is broken. And that is at the heart of why our politics is so divided and so many citizens around the world are disappointed and frustrated.

There are two big drivers that have broken our social contract. One, the changing role of women. Because our social contract was premised on the idea that women would look after the young and the old for free. And now women are educated and working and no longer able to provide those services. And the changing role of technology, which has changed the nature of work—McKinsey’s written a lot about that—as well as changed what we need from our educational systems. And those big powerful forces have made our old social contract premised on traditional families, getting educated from age six to 20, having very few employers—our old model was premised on those kind of assumptions, which are no longer relevant to our societies where women are working, people have flexible jobs, people’s jobs will become more flexible with technology. And people are living much longer and will need to retool and reskill later in life.

Lola Woetzel: And so that’s putting pressure on those promises that were being made, or the belief that people had when they started their working lives?

Minouche Shafik: Absolutely. And I think a lot of the frustration you see in many countries is around disappointed expectations. Promises unfulfilled.

Lola Woetzel: Andrew, over to you. How does that definition strike you? And are those the places where you would see the stresses in the contract today?

Andrew Sheng: Yes. I would just add that the social contract is a contract not just between members of society but with this overpowering concept of the state. And I would just add this aspect: it’s not just women, it’s not just technologies, but the state.

What is the state now? What is the state when a multinational tech platform can be larger than a nation? Facebook has two billion users, all right? Facebook’s market valuation is just under $1 trillion. That’s, what, six, seven times Malaysia? And the market size is certainly bigger than India or China. How do you define that? What’s the contract between the individual, the social media giants, and the state? And who rules?

We live in this very rapidly changing, exactly as Minouche says, society. I mean, the whole social contract is broken. I totally agree with Minouche on that because the old concept of the state, the old concept of the family—what does it mean to community when a lot of it was supposed to be provided by the state?

You don’t need the family if every time you need something, the state is providing for it. Or is not providing for it. Or you thought it was being provided but it’s not provided. So there’s a massive distrust now—you can see this across generations, across borders, and within the same border—with the establishment.

We have this huge disconnect in the world. Now we don’t know how to get this new social contract going. And how do we define it? That’s where we are right now. We see this in a smaller country like Malaysia. It’s a rich country, lots of natural resources, smaller population. But the politics is dysfunctional. And when that happens, we’re broken down into tribes along racial, religious lines, and there’s a lot of built-up anger.

People are asking every day, “Who’s going to take care of my job, my health, my children’s education, and my future, and if the state is not going to do it, who’s going to do it?” Individually? You know, individually we can’t handle it, right?

Lola Woetzel: Let’s delve on that. We’re identifying these issues that are affecting the individuals. How does this ultimately feed back to the broader society? And you call it the state, or call it the folks who are not yet being affected by the social contract. Is there a feedback loop that ultimately results in change? How do we get to that point of change? I’m curious. Minouche, where do you see that happening at this point? Or are we close to that?

Minouche Shafik: I think change comes historically at moments of crisis, at critical junctures. And it comes as a product of social movements putting pressure on society to change. And we’re certainly in a crisis. We’re certainly at a critical juncture.

At those moments, things can get better. They can also get worse. And I think that’s the kind of point we are reaching. I do see pressures in many societies around demanding a better social contract. In my book, What We Owe Each Other, I outline what a better social contract would look like and how it’s starting to emerge in different countries.

Look at things like healthcare. In the wake of this crisis, the pressure on governments and society to do more to deal with public health concerns will be formidable. In this crisis, in the advanced economies, countries have spent 20 percent of GDP to keep the economy afloat. And it’s kind of worked. Think of how many families would have been destitute, how many businesses would have gone bust had that support not been available. People have seen that it is possible to share risks more effectively. And I think people will demand that more risks are being shared.

Part of the failure of our current social contract is that too many risks are being borne by individuals, as Andrew said. The risks around healthcare, the risks around employment. Flexible working means I don’t know how much I’m going to earn every week, and I don’t get any benefits or sick leave or training investment in my skills.

There needs to be a rebalance, not just for equity reasons but for efficiency reasons. It doesn’t make sense to not pool risks around healthcare, around skills, because all of us benefit from having fellow citizens who are healthier and more productive because they are then able to earn more, pay more tax, and contribute more to the social contract.

I think that shift in risk sharing is certainly, I hope, on the cusp of happening, as well as a willingness to invest more in each other. And I think that’s the other big tension we’re at. There are some parts of the world who are thinking, “We have accumulated so much debt in this crisis. It’s time for austerity and consolidation.”

But there are other parts of the world that are saying, “You know what? We tried that in 2008 after the financial crisis. It didn’t go that well.” And maybe this is a moment for investment: investment in education, new skills, and in greening the economy. And interest rates are low, and maybe at this critical juncture that’s the path we should take.

Lola Woetzel: I wanted to turn to you, Andrew, on that moment about where Minouche just brought in, about greening the economy. You talk a bit about the relationship of all of this to sustainability and the broader environment.

What are your thoughts on whether this social contract essentially extends to issues of sustainability, and if so, is that another opportunity that we have now to reimagine that contract? And what would that look like?

Andrew Sheng: Yes. This is very fundamental. I just contributed to a book called Buying Time for Climate Action. And the bottom line is as follows: technically, technologically, we can solve anything if we just can get our political will to solving it.

I used to think as a former central banker that there’s never enough money. After last year, when central banks printed $7 trillion, and government together with central banks spent $14 trillion out of $90 trillion or up to $100 trillion of global GDP, money’s not a problem.

I think the whole concept of money, we need to rethink this. Money, if it is used to generate long-term global public goods, money will come back and you will slowly get yourself out of the problem.

If money is just for speculative purposes, it will have other issues. But to come back to the sustainability issue, climate change is actually system change. And system change is one—starting to use this word—big, wicked problem.

Do we solve this at the individual level? Do we solve it at the family level? Do we solve at the community level? Do we solve at the provincial level? At the national level? At the global level? And where do you start?

I think climate change has forced us now to realize it’s all entangled. Everything is interrelated. And the economists basically have ignored natural capital to be factored into GDP since the first system of national accounting was designed in 1953.

We didn’t take balance sheet in, stocks in, until 2008. And so we didn’t build national balance sheets effectively amongst the G-7, or now today G-20, since 2008. And then the United Nations only brought in natural capital valuation this year, April [2021].

We’re looking at the world with very bad lenses. My expression is, we’re looking at the 21st century with 19th-century lenses. Maybe even earlier if you’re looking at Descartes and Newton.

Whereas since 1905, we’ve gone relativity, quantum, and a more biological, organic way of looking at the world. That’s why older cultures are beginning to understand that man and nature are one. They see that everything we do affects Mother Nature, but actually modern society is killing Mother Nature. And if you kill Mother Nature, you kill ourselves.

We really need to achieve a social contract between us and other humanity and also Mother Nature. And this conversation is only beginning.

The old model of top-down, “on a piece of paper a few elites will design how to handle the problems of the world” is gone. It’s gone.

We really now need to build this bottom-up. The devil is in the details. God is perfect. The devil is in the details. And McKinsey partners will know this very well, it’s the granular data, it’s the last-mile problem. And what is happening is at the last mile in every community, things don’t work.

You see this already. Government is writing the check, and when you use the check, the guy who’s sleeping on the streets is lucky to get 90 percent of that check because he’s going to cash it with the local store. And they will take a cut. So the corruption, incompetence, lack of design is such that there’s anger building up in the streets. Not just the streets, but also in communities which are feeling very, very helpless. And we’re going to see that the pandemic is kind of related.

Lola Woetzel: What I’m taking away is, first of all, that this is systemic. And that we start with a transparency around the impacts on the climate and the impacts on the community of the climate. I think you just led us to another question, around how the pandemic has been an accelerant, potentially, of this.

Is that how you see the impact of the pandemic, is that it’s bringing that day closer, to a different kind of social contract?

And if so, what kinds of things do you think we might see? What kinds of changes to this contract could we imagine over the next—let’s not keep it too far—next two or three years? I’ll put that to you, Minouche, to start, if I could?

Minouche Shafik: I think the pandemic amplified preexisting problems. Inequality got worse, women went back to having to look after children because they were not able to go to school. We actually didn’t see that much—you would have thought we would have had better reductions in carbon emissions, at least, during the pandemic, but not so much actually.

And many of the existing tensions in our society, the obsolescence of certain skills, the disruptions in the labor market, were laid bare. And the groups that tended to suffer the most were the ones who were already disadvantaged.

And this was all made particularly ironic, of course, because many of those groups were actually deemed essential workers. The world couldn’t run without our drivers, and security guards, and grocery workers, and care workers. But it was perfectly fine to have all the bankers and lawyers and accountants stay at home.

I think that made it particularly ironic where the burden fell of this crisis. And I’d like to think that that will result in some real soul-searching about our current social contract. For me, what I’d like to see is a social contract in which we provide people with better security.

And by security, I mean a minimum level of income for all. I’m not a supporter of universal basic income. I think it’s inefficient and I think it’s against the spirit of the social contract, which asks everyone to contribute as much as they can in exchange for being looked after when they can’t.

But I think almost all societies now can provide earned income tax credit, direct cash transfers to the poorest households so that there’s a level below which no one should go. And I think part of the offer of security has to include requiring benefits for all workers, regardless of the nature of their contract.

When I started working in international development, we talked about the informal sector as something that happened in very poor countries. But the gig economy is just the informal sector with a cool name. And workers in those sectors have no guarantees around sick leave, around pensions, around investment in their skills.

And just as we developed portable pensions in response to people changing jobs more often, we need to develop a system of portable benefits. And so as people move from one job to another or work for multiple employers, they have a pot in which all the people who they work for contribute a bit, so that they can have greater security in their lives.

The other key piece of a better social contract is more opportunity. And that opportunity has a lot to do with education, investing much earlier. Everybody knows, the evidence is so compelling, the early years, the first 1,000 days of life is when all the brain development happens.

And if children don’t get good nutrition and mental stimulation in those first 1,000 days, no matter how good a school you send them to, they’ll never catch up. So early years is key, but also an educational system that works throughout life.

And so the shape of our educational investment needs to change—more early, more later—in order to provide opportunity for people throughout their lives. And for me, that’s not just about generating more equality. It’s about what we call “predistribution” policies that change the structure of opportunities for people.

Our societies are so much poorer because of all of the talent that’s not being used. One of the studies I cite in my book which I really like is called Lost Einsteins. And it looks at children who in year four of school have the same math and science skills. And looks many years later, how many of those children have patents and were inventors and increased productivity. And what it finds is that if you’re a child born into a poor family, you’re ten times less likely to be an inventor than someone born into a rich family.

And if you’re born in a poor community, you’re ten times less likely to be an inventor, even though you have the same math and science skills as those kids who were born into wealthier places or wealthier families.

That lost talent is a loss to all of us. And I think that a social contract that invests more in opportunity would, I think, as Andrew alluded to, those investments pay off in terms of higher productivity, higher inventiveness, and higher incomes for everyone.

Lola Woetzel: On that note, we’re going to close here. But I just want to say that I found it striking that the both of you phrased the discussion in terms of the opportunity that we have. While there is risk, of not executing on it, there is a bottom-line opportunity for the individual, for the firms, and for the states that are willing to reimagine the contract. And I personally feel that’s a very hopeful outcome. So thank you very much, Minouche, Andrew, for your time.

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