INDIVIDUAL ASSIGNMENT 1

CAPITALIST ECONOMY; THE ROOT OF

INEQUALITY?

POH GUAN JIE

(PBS20201179)

ECO7101 BUSINESS ECONOMICS

PROF. DR. IDA YASSIN

PUTRA BUSINESS SCHOOL

04 FEBRUARY 2021

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 CONTENT

DO WE NEED CAPITALISM?

1. INEQUALITY; BY-PRODUCT OF CAPITALISM

2. CAPITALISM; THE FUEL OF HUMAN PROGRESSION

HOW TO BUILD A MORE INCLUSIVE WORLD FOR

ALL?

3. SUCCESS AND LIMITATION OF ZAKAT SYSTEM

4. EMPOWERING UNITED NATIONS IN REDUCTION OF

GLOBAL INEQUALITY

5. CONCLUSION; A HOPEFUL FUTURE FOR NEXT

GENERATION

6. REFERENCES

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 Do We Need Capitalism?

Inequality: By-product of Capitalism

Modern capitalism started in the mid 18th century and coupled with globalisation, it

began to connect a series of loosely linked markets into an integrated global economy.

By the 20th century, most countries started to adopt the capitalist economy when the

flaws of centrally planned economies such as socialism and communism began to

surface. Today, most countries practice mixed capitalist economy with some degree

of government intervention.

Capitalist economy is characterized by private ownership of the factor of production

and its profit. The decision making process is determined collectively by every wealth

owner (buyer and seller), coordinated by the information from the free market. Private

ownership of wealth also provides resources and incentives for individuals to

maximise the value of their properties. Another distinctive feature of capitalism is the

accumulation of capital which is something we can closely correlate in our everyday

lives. Most of us, especially in the secular world, are taught to accumulate money so

that we are prepared for our retirement. Those with ample resources will be able to

grow their capital by investment and the profit will then be reinvested further in a

continuous process of wealth accumulation. On the other hand, the poor are living at

the mercy of the system with no money to afford the basic necessity; missing the boat

of wealth accumulation entirely. This very nature of this capital accumulation process

is causing the widening gap between the haves and have-nots.

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In order to comprehend the extent of the present inequality, we will have to take a

look at the statistics provided by the World Bank and Oxfam report. Inequality is

measured by GINI coefficient; 0 being perfect equality while 1 being perfect

inequality. South Africa has the world’s highest income disparity with a GINI of 0.64

and surprisingly, the global population’s income inequality also suffers as badly

(World Bank Estimate, 2014; ​Hillebrand & Evan, June 2009)​! Furthermore, the

wealth accumulated by the world’s top 8 billionaires is more than the combined

wealth of the 3.6 billion capita in the bottom half of the world's population (Ratcliff &

Anna, 2017). This situation of extreme inequality is likely to worsen due to the recent

COVID-19 pandemic, which is also argued as the ‘Inequality Virus’ by Oxfam. One

major concern of this pandemic is the unequal distribution of the COVID-19 vaccine

where developed countries can achieve mass immunisation by late 2021 but poorer

nations may have to wait until 2024 (Michael Safi, 2021). This is set to cause the

poorer countries to be left out by the world capitalist economy and they may require

decades to recover from the damages.

Capitalism; Fuel of Human Progression

Shall we then abandon this self-centered ideology and replace it entirely with an

alternative economy system? Before we make such a harsh judgement, let's be

reminded that capitalism is not without its virtues. In fact, capitalism is the main

driving force behind the rapid economic growth and the improvement of standard of

living since the late-19th century. As capitalism gave businesses and people

incentives to innovate and be efficient, more and better quality goods became

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accessible at a cheaper price to a wider population thus raising the standard of living

in unprecedented ways. Free trade also makes everyone better off compared to

zero-sum gain economies in the past.

One notable example is the recent development of COVID-19 vaccine. Vaccine

development has been inherently a risky business as it would generally take up to 10

years and $500 million to develop; not to mention often 93% of the potential vaccines

fail to pass stringent medical testing (Dougla Broom, 2020). However, with the strong

pull from the market demand and strong push from investors, multiple vaccines have

been made available to the world by 2021 instead of 2030 (based on average

development speed). The United States of America alone has invested a whopping

$18 billion (36 times the usual vaccine development cost) in making this feat possible

(​Stephanie & Cynthia, 2020)​. It is clear, at least in this case, that the profit oriented

economy system has made the world better off as a whole.

Does this mean that we have to choose to give up the slow-and-even growth in favour

of fast but uneven growth? Definitely not. In fact, we are able to harvest the best of

both worlds to achieve rapid and equitable growth. The key to this seemingly utopia

world is the transfer and redistribution of the wealth gained through the capitalist way.

In order to avoid the loss of incentive that is the heart of capitalism, it is crucial that

the wealth transfer should be done voluntarily by individuals rather than forcefully

imposed by legislation or law.

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 How to Build a More Inclusive World for all?

Success story and limitation of zakat system

There is no shortage of philanthropies in Malaysia that are willing to contribute their

wealth as well as energy in promoting the welfare of the society. In fact, Malaysia is

ranked as the 10th most charitable country according to the World Giving Index

report (​Charities Aid Foundation, 2015)​. However, there are still many donors holding

back due to the lack of proper channel, transparency and central planning of charity

organizations. In order to increase individual and corporation funding towards social

welfare, we can learn from Malaysia's effort in reforming the Zakat system and

explore how Islamic Religious Council of States addresses the concerns highlighted

earlier.

Zakat is an obligation in Islam to make contribution towards the less fortunate.

Although Zakat contribution is mandatory for Muslim in Malaysia, it is rarely

enforced by respective institutions. Zakat collection is considerably low prior to the

1990's, but a series of transformations to the system have increased the collection

significantly. To be exact, the Zakat contribution has increased 4754% from RM61

million in 1991 to RM2.9 billion in 2017 (PPZ MAIWP, 1992-2019; JAHWAR

2019). This is made possible by setting up a corporate working system, expanding

collection channels, utilizing IT technology to organize and deliver funds to the needy

efficiently and proactively. Education and promotion through various channels have

also increased the public awareness, thus contributing to the success of the Zakat

system.

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However, the Zakat system will be difficult to implement in the secular world due to

its religious origin. The religious principles behind Zakat also limits the usage of the

funds, causing its distribution to be more consumption-based rather than sustainable

spending. Although there are some inherent limitations of the Zakat system, Malaysia

can leverage on the expertise and experience gained to establish a separate

philanthropic initiative that can be participated by the entire nation. The new

philanthropic initiative shall utilize the funds collected in sustainable ways such as

setting up social businesses which will allow the fund to have a compounded effect in

uplifting the poor. In order to reduce possible corruption and political influence, the

initiative shall be managed by the public with participation from various NGO to

ensure the soundness of its governance.

Empowering United Nations in Reduction of Global Inequality

In the global context, the United Nations Economic and Social Council is already in

the motion to tackle issues regarding the vast difference in wealth and living standards

among the nations. World Bank Group (WBG) and World Health Organization

(WHO) are a few notable agencies under the UN that have long been working to

provide necessary expertise and funding for the development of poorer nations.

However, much more needs to be done to empower the United Nations as its funding

is merely USD3.2 billion for year 2021, which is only equivalent to 0.0038% of the

world’s GDP for the same year. In my opinion, the funding needs to be at least 2% of

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the world’s GDP before significant progress in inequality reduction can be achieved

(UN Affair, 2020; World Bank Data, 2020 ).

More support should be given to economists, sociologists and environmentalists to

study the consequences of the current unsustainable development and to come up with

possible solutions for it. Although it may take years to get the wealthy population to

take part in the action, eventually the effort will be paid off. Afterall, many scientists

with great determination have already managed to rally the collective effort of the

world in battling global warming. A recent report commissioned by the Bill &

Melinda Gates Foundation finds that the economic benefits of a global equitable

vaccine solution would be at least USD466 billion by 2025 (World Health

Organisation, 2020). It shows that a fair distribution of vaccines is not only the right

thing to do, but also a good investment that will pay dividends by reviving the global

economy; therefore is beneficial to all.

Apart from donations across countries, there are many individuals who have plenty of

resources at their disposal to contribute to the mission of inequality eradication.

Philanthrocapitalism is the new trend where the capitalist, market-based and social

profit maximising approach is used to resolve the pressing social issues. In fact, the

multibillionaires such as Bill Gates and Mark Zuckerberg have already contributed a

large portion of their wealth (even larger than the contribution of some wealthy

nations) to support various social business initiatives. The United Nations should take

the ride of the current trend, to educate and raise public awareness on the gravity of

the world's inequality problem in order to convince more people and countries to join

the philanthrocapitalism initiative.

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 CONCLUSION

A HOPEFUL FUTURE FOR NEXT GENERATION

Capitalism brings about income inequality because the wealthy are able to access

more resources to generate more and invest more; resulting in continuous wealth

accumulation. On the other hand, the poor have no access to resources and are trapped

in the vicious cycle of poverty. Nevertheless, capitalism is not a zero sum game as it

does indeed increase the total wealth of the world. Therefore, we should continue to

utilise capitalism to promote innovation and efficient usage of our scarce resources,

while on the other hand to encourage voluntary redistribution of wealth to solve

income inequality. The key of this system is that the wealth transfer must be done

voluntarily in order to preserve the incentive of capitalism.

At the national level, we have learned that Zakat system offers a solution to

redistribute wealth among the Muslim. A similar philanthropic system can be

established by the public and NGOs as a wealth redistribution initiative with a more

sustainable business model to generate long term support for the poor. At the global

level, more international support in terms of research and funding should be given to

empower the United Nations to lead the wealth redistribution among countries. The

UN may also promote philanthrocapitalism so that more individuals, organizations

and countries can play a part in social business initiatives to support the needy.

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I believe that through continuous edification of the public, the world will eventually

embrace social and environmental profit in their economic decision. Only then, we

may achieve a world of equal opportunity which strives for continuous prosperity.

References

1) ‘’GINI index (World Bank estimate). World Bank.

Retrieved 27 January 2021

2) ​Hillebrand, Evan (June 2009). ‘’Poverty, Growth and Inequality over the Next 50
Years’’. FAO, United Nation - Economic and Social Development Department.
Retrieved 27 January 2021

3) Ratcliff, Anna (16 January 2017). ‘’Just 8 men own same wealth as half the
world’’. Oxfam.
Retrieved 27 January 2021

4) Michael Safi (27 January 2021). ‘’Most poor nations will take until 2024 to achieve
mass Covid-19 immunisation’’. The Guardian International Edition.
Retrieved 30 January 2021.

5) Dougla Broom (02 June 2020). ‘’​5 charts that tell the story of vaccines today’’.
World Economic Forum.
Retrieved 30 January 2021

6) Stephanie Baker, Cynthia Koons (29 October 2020). ‘’Inside Operation Warp
Speed’s $18 Billion Sprint for a Vaccine’’. Bloomberg Businessweek.
Retrieved 30 January 2021

7) ‘’World Giving Index 2015’’ November 2015. Charities Aid Foundation

Retrieved 31 January

8) ​Abdalrahman Migdad (Nov 2019) ‘’Managing Zakat through Institutions: Case of

Malaysia’’. International Journal of Islamic Economics and Finance Studies

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Retrieved 31 January 2021

9) ‘’Statistik Kutipan Zakat Seluruh Malaysia’’. SPMJ JAHWAR

Retrieved 31 January 2021

10) UN Affair (31 December 2020). ‘’​General Assembly approves $3.2 billion UN
budget for 2021’’. UN News.
Retrieved 31 January 2021

11) ‘’GDP (current US$)’’. The World Bank Data.

Retrieved 31 January 2021

12) ‘’​Global equitable access to COVID-19 vaccines estimated to generate economic

benefits of at least US$ 153 billion in 2020–21, and US$ 466 billion by 2025, in 10
major economies, according to new report by the Eurasia Group’’ (03 December
2020). World Health Organisation.
Retrieved 31 January 2021

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