Can luxury lead us out of inequality?

Real LuxuryToday’s post is by Misha Pinkhasov, co-author of Real Luxury: How Luxury Brands Can Create Value for the Long Term, published by Palgrave Macmillan in 2014. He worked in OECD communications for nine years before founding NAIR-SAFIR, strategy consultants helping companies integrate shared-value thinking into their corporate culture and communications.

Inequality will figure high on government and media agendas in 2015. Kicked into the spotlight by Thomas Picketty’s best-selling Capital in the 21st Century and buoyed by findings of the OECD, Pew Research and others, inequality has even been dubbed the defining word of 2014 by the Financial Times.

It is about time. The Great Recession put people out of house and job, but bailed out big business with public money in the name of protecting the market economy and bringing a quick return to growth. Austerity on the one hand and corporate tax breaks on the other have only deepened the dangerous rift between the winners and losers in this game.

This growth-obsessed model looks more and more like a pyramid scheme, in rich countries in particular, with an eroding middle class, downward wage pressures from developing countries, narrowing population pyramids and now the effects of austerity. The semantic trick of calling it green growth, or sustainable growth, or inclusive growth does less to address the issue than to give it a more palatable flavor.

We need a major change in focus from wealth to well-being. From quantity to quality. From production to innovation. From profit maximization to value creation. From competition to collaboration. From ownership to stewardship. This change is not just a model for economic stability and sustainable prosperity. It also addresses the economic roots of international conflicts, which will only intensify with competition for resources. Like the founding intentions behind the European Community, it is a model for peace and security that has served that continent well.

This change will not originate from the top because it requires political will from the voting public. To spark that change, we must recognize that citizenship has been replaced by consumerism. We have put so much of the political process into protecting the market that the market has become the political process. Building political will now means changing consumer behavior by redirecting its ambitions. And if citizens follow their leaders in aspiring to a better society, consumers look up to the rich in aspiring to luxury.

Which points to an unexpected partner in all of this: Luxury brands, having ridden out the financial crisis almost unscathed, are now facing a contraction of their own, ironically just as the world economy recovers. Received wisdom says that luxury is immune to economic crisis because the rich can continue to afford their pleasures. Less discussed is luxury’s vulnerability to social crisis, when conspicuous consumption begins to look like vulgarity, if not depraved indifference. Barbara Hutton fled New York to Europe after a too-lavish debutante ball held amidst the Great Depression.

Today, luxury customers from New York to Shanghai are pulling back from ostentatious displays of wealth. Perhaps not the cossetted jet and yacht set, but certainly the broad customer base of well-to-do urban professionals who define the values and ambitions of the middle class. The brands that were most popular and visible until now are the ones suffering most as a result. And they are scrambling for solutions, be it in more discreet, higher-end products or new tactics in electronic retail and mobile commerce. But having established luxury as excess rather than excellence, they are focusing on the “What” and the “How” of sales but not on the “Why” of luxury, which is ultimately about leadership in evolving both product quality and cultural values.

So policy reformers need an attractive platform for their ideas and luxury firms need deep, new thinking to reconnect with their leadership potential. It is time for a dialog between citizen and consumer leaders. What is often shunned as an unholy alliance between makers of policy and marketers of luxury can – with sufficient sincerity – yield the keys to unlocking the public’s will for change. There is precedent for this, such as the fundraising collaborations between UNICEF and Gucci, or the tradition of Hollywood stars like George Clooney and Angelina Jolie serving as Goodwill Ambassadors. There are even more in the NGO world with names like amfAR, Louis Vuitton, Sharon Stone, Oxfam, Matt Damon and Bono.

But it must go beyond the pat PR rituals of charity events and celebrity figureheads. Luxury has more to offer than glitz. Throughout its history, luxury has been a spearhead for technological and social innovation. Luxury’s handling of rare and precious resources give firms extensive experience with sustainability. Luxury’s obsession with quality has protected fair labor practices. Luxury’s preservation of traditional skills and its engagement of the arts have promoted education, training, entrepreneurship, creativity and cultural preservation. Luxury’s global appeal, from European aristocrats, to Indian Maharajas, to Chinese industrialists, to Russian oligarchs, to City bankers, to Silicon Valley innovators, positions it as bridge for international dialog. And the visibility and influence of luxury punch far above its weight as an economic activity, making it an ideal platform for public advocacy and shaping values.

Inequality and today’s other global challenges, like sustainability, climate change, economic stability and peace are linked in a vicious web by the conflicting values of our individual need for well-being and our institutional promotion of consumption and growth. Solving them will mean addressing the gap between citizenship and consumerism. Luxury – the most emotional of industries – bridges that gap. And its aspirational pull bridges the gap between leaders and their constituencies. Having ridden out a wave of success, luxury brands are now scrambling for a purpose in the changing world context. Policy makers can give them a mandate that re-establishes their role as agents of change.

Useful links

Key role of cultural and creative industries in the economy by Hendrik van der Pol, Director, UNESCO Institute for Statistics, Canada at the OECD 2nd World Forum, Istanbul, 2007

Egyptian plan to evacuate cities

The primary concern for Egyptian firms is ...

As regular readers know, that headline was a cheap trick to get you to read this. It actually refers to the 2010 laureate of the International Transport Forum’s Young Researcher of the Year Award.

Hossam Abdelgawad, a 27-year-old Egyptian PhD-candidate from the University of Toronto, won the prize for a novel approach to the mass evacuation of major cities in case of a catastrophe.  

Whether you think what’s happening in Egypt just now is a catastrophe, a festival of the oppressed, or something else, depends on your personal point of view. What’s clear is that what started as protest movement inspired by people from similar backgrounds to Hossam Abdelgawad now has major economic and geopolitical repercussions.

It’s striking how many of those first protesters were fluent in English or French, in stark contrast to the situation in the 1970s and 80s I described in this post. Even back then, though, everybody in Egypt knew at least two English expressions: import-export and fat cats. Sadat’s “open door” policy had opened the country up to foreign trade and investment, but very few people benefited.

The OECD’s Business Climate Development Strategy for Egypt shows that although the overall economic situation has improved, many of the frustrations summed up in those two bits of English persist. The report assesses 12 key policy areas, ranging from investment and trade policy to tax, anti-corruption, infrastructure and human capital development.  

Presented in Cairo in November 2010, it concludes that: “the promised ‘trickle-down’ effect of positive growth into the poorer strata of the population has failed to materialise. At present, 20% of Egypt’s population remains below the World Bank’s poverty level.”

The unrest goes far beyond the poorest and a disaffected elite though. The Egyptian people’s legendary patience has finally snapped, even if they’ve kept their equally famous sense of humour. One sign seen in Tahrir Square said “Please go soon, my arms are getting sore holding this thing”. Another said “My name is Ahmad. I’d like to get married”.

In fact, Egyptians would read a lot into Ahmad’s sign. He may well be looking for a sweetheart, but even if he found one, it’s not sure they could get married. For that he’d need a job and a flat. Both are hard to come by. Officially, just over 9% of the workforce is unemployed, but as the OECD  report says, “the official rate of unemployment is likely to conceal considerable hidden unemployment and under-employment”.

In April 2009, Property Wire enthused that “The real estate sector in Egypt continues to perform well as there is a large gap between supply and demand”. Not everybody would agree with their definition of the prospect of continuing homelessness as a “positive outlook”, but some people at Moody’s might.

The ratings agency has just downgraded Egypt’s debt (and others will surely follow), because of the political instability of course, but also because of “concern that the policy response could undermine Egypt’s already weak public finances.” What that means is they’re afraid that as part of a deal, whatever government is in place maintains subsidies on energy and basic foodstuffs (5% and 2% of GDP, respectively), thereby making the budget deficit worse.

The OECD recommends moving away from subsidies too, and replacing them with direct income support. The main reason is clear – subsidies help even those who don’t need them, at the expense of the poor and other social programmes. But, “this requires a better performing population registry, a way to means test households and a more sophisticated payments system” and these are costly to create.

I’ll finish with some self-congratulation, followed by some self-criticism (self here being the OECD).

Don’t say we didn’t warn you. Page 50 of the report couldn’t be clearer: “Despite rising macroeconomic stability, the primary concern for Egyptian firms is – by far – political instability”.

Stop now if you don’t want to hear me whingeing.

I wish we wouldn’t use “trickle down”. It gives the impression that it’s OK for those at the top to stuff their faces as long as the poor can lick whatever dribbles down their chins. And another thing while I’m at it: nobody has ever been “lifted out of poverty” . They work damn hard to earn a bit more money.

Useful links

OECD work on Egypt