Making Capitalism Better

Capitalism may be victorious, but it is far from being perfect. It tends toward boom and bust, and it tends toward increasing inequalities between rich and poor.

The specter of bust is well covered these days. But perhaps Americans need reminding about the growing rich-poor gap, the fact that the net worth of the wealthiest 1 percent of the United States population is larger than that of the bottom 90 percent. The problem is also global: In 1996, the assets of the world's three richest people exceeded the combined GDP of the 48 poorest nations.

Leaving aside the morality of such a situation, I am convinced that a system which leads to such inequalities is unworkable for long; it will collapse. In the words of the recent UN Human Development Report: "Development that perpetuates today's inequalities is neither sustainable nor worth sustaining."

What to do while preserving the best of the capitalist system?

Jeffrey Gates's recent book, "The Ownership Solution" (Addison Wesley) is awash with practical ideas toward that end. It argues that capitalism is good at producing capital and, usually, good at maximizing returns on this capital.

But it is very bad at producing capitalists. Thus, most people are connected to their economic systems not through any ownership but through the very weak and tenuous connection of a job and a salary.

This is important because accompanying the triumph of capitalism has been the almost global triumph of democracy. If capitalism cannot deliver the goods to the national majorities, it will be voted out and antibusiness populists voted in.

Jeff Gates spent 10 years as a lawyer with the US Senate Finance Committee. There he helped refine and spread the concept of Employee Stock Ownership Plans (ESOPs). Companies receive tax incentives to get stocks into the hands of their employees, and today about 9 million people in 10,000 companies own stock through this system. It is a way to make capitalists of those with little capital.

Mr. Gates, who during the 1990s has been acting as a consultant to various governments and international organizations, has spun the basic ESOP idea into a number of new approaches which could be particularly helpful in countries just beginning to shape their styles of capitalism. But they can also be helpful in the US.

There is the RESOP (Related Enterprise Share Ownership Plans) concept, by which large companies offer shares to employees of longterm related companies such as suppliers and distributors. Jamaica has drafted this into law.

The GSOC (General Share Ownership Corporation) plan contains a geographic focus - community, state, region. It allows people to obtain shares in resources such as oil or gas discoveries. Gates also proposes schemes by which people who use phones, electricity, or water can own shares in the companies which provide them, thus having greater stakes in the efficiency and environmental effects of these companies.

Gates suggests that China could move toward a sort of employee-owned capitalism by ceasing to finance deficits through the sale of traditional bonds and instead selling bonds which workers could swap for shares in the companies employing them. These would be more attractive to workers and thus would bring into play more of the vast savings of the Chinese people.

One radical Gates scheme is to restructure foreign direct investment so that for the first five to seven years the foreign investors would get full returns. This is roughly the time frame investors hope for on most deals. But after that period, citizens of the nation invested in are allowed to take over the asset. So the investor gets his or her returns; the investee nation gets new technology and experience; and the nation also eventually gets an asset for further development.

Gates's ideas are a necessary and practical stimulus. They are also ideologically "opaque." That means they are neither "left"

nor "right." Or perhaps they are both. They spread the wealth in ways that do not smack of old-fashioned redistribution, and in ways that create a larger constituency for capitalism.

"The Ownership Solution" brings together the two biggest trends the world is now experiencing - movements toward global capitalism and global democracy - by democratizing capitalism. When capitalism was opposed by communism, we in the West were loathe to admit our system had flaws. Now that it has won, we can improve it to save it - not from communism but from chaos.

* Stephan Schmidheiny, a Swiss international industrialist, is founder of the Business Council for Sustainable Development. He is the author of 'Changing Course: A Global Business Perspective on Development and the Environment.'