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Social Prejudice Slowing Economic Recovery: Report

Thursday, 30 Jun 2011 | 7:02 AM ET

Prejudice in society undermines the development of human capital and could set back the recovery of economies hit by the financial crisis, according to a new report by UBS.

The report "Does Prejudice Prejudice Growth?" by UBS economist Paul Donovan compared data on competitiveness from the World Economic Forum and survey evidence of prejudice from the World Values Study Group.

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The report found that there was a strong correlation between social inclusion, competitiveness and economic development, and argued that "prejudice, in whatever form – including racism, sexism, homophobia, religious intolerance – irrationally destroys the value of human capital."

While prejudice is something that rarely features in investment decisions, the destruction of human capital through social prejudice in the 21st Century is at least as significant as that the destruction of physical capital wrought by the Luddites, the anti-technology groups who sabotaged machinery during the industrial revolution, Donovan wrote.

Politics and resource constraints are likely to play a bigger role than ever in economic growth in the 21st century, Donovan said, and issues of prejudice play into both.

"The environmental credit crunch that we're now running into means we are becoming a resource-poor planet, and we need to do more with less. For the first time, just throwing resources at an economy isn't the answer for growth," Donovan said.

"We now need to do a lot more with human capital, human ingenuity in order to be able to maintain, never mind raise our standards of living. This is important, because prejudice is a huge waste of human potential," he added. "A prejudicial society is likely to deny its labor, its workforce, the potential to develop – access to education, access to jobs."

Two-Way Relationship

The relationship between prejudice and development is two-way, the UBS report said. Societies that are poorer are more likely to exhibit prejudice.

"A more advanced society is less likely to be prejudiced and a less prejudiced society is likely to be more advanced," Donovan said.

Extreme examples, such as the Apartheid regime in South Africa and the expulsion of South Asians from Uganda in the 1970s serve to highlight the negative effects of extreme prejudice, Donovan said.

The UK, which accepted many of those forced migrants, benefited from the influx of professional skills, he added.

With countries still struggling to pull themselves out of an economic downturn, investors should take a much stronger view on discrimination, according to Donovan.

"As the consequence of the financial credit crunch, many people are becoming a lot more nervous about their standard of living, a lot more nervous about future growth, and of course are becoming more aware of income inequality, which has actually existed for some time, but the existence of which was hidden behind the availability of credit," he said

"As that credit has been lost to them, they become more aware of income inequality and with that, perhaps, more inclined to prejudicial behavior," he added.

Resource Scarcity

Additionally, Donovan said, resource scarcity is only going to become more acute, leading to a greater need for innovation.

"This century is when we need to be a lot cleverer about how we achieve our growth. Human ingenuity is going to be the main driver of economic productivity in the 21st Century. We need to enhance productivity through human capital," he explained.

"Hypothetically, what would happen if the secret of energy efficiency, or to greater food productivity is locked up in the mind of somebody who is denied the ability to develop because of their race or their religious beliefs or their sexual orientation? That's the sort challenge that we now face," Donovan said.

As a micro-level effect of prejudice of this type, Donovan cited the example of Alan Turing, the mathematician and code breaker whose work on algorithms in the first half of the 20th Century were the foundation of modern computer science.

After the Second World War, during which Turing worked on breaking German military codes, he was hounded and eventually prosecuted for his homosexuality. He committed suicide in 1954, "effectively denying the world of his intellect, his undoubted experience and potential achievements, and doing considerable damage to the development computing in the 1950s," according to Donovan.

"We believe that this is a very critical issue, it's one that markets absolutely need to pay attention to and as far as investing is concerned, any society, or indeed any company, that exhibits prejudicial behavior is essentially sending out a major sell signal, as far as we're concerned," he said.

Contact Europe: Economy

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