WASHINGTON - Policymakers must look past the strategies of the second half of the 20th century if they are to deal with the challenges of the 21st, Deputy Prime Minister Tharman Shanmugaratnam said on Wednesday (May 30).

He warned of an "ebbing of hope and optimism" and the loss of faith in market-based meritocracy in advanced economies.

And in developing economies, outside of East Asia, expectations of a catch-up in productivity and incomes with the advanced world have not been fulfilled, he said.

Mr Tharman was delivering the 18th Annual Stavros Niarchos Foundation Lecture on Strained Bedfellows: What We Can Do To Make Open Economies Inclusive at the Peterson Institute for International Economics in Washington.

He warned that a social culture of decline could result from the pessimism.

Socio-economic conditions could perpetuate themselves, and, without an intervention in the workings of the market, depressed areas tend to stay depressed for too long, he added.

"If today's world of productivity and wages is tomorrow's world, it's a terrible future," he said. "I don't see it as socially sustainable."

Even if "productivity optimists" are right, and there is a resurgence of productivity, the way the market works currently will see winners taking the most and many more people losing jobs, said Mr Tharman.

Such a situation would also not be socially or politically sustainable, he added. "And it will alter the quality of democracy," he warned.

Strategies to address these challenges must be more positive and progressive, and must improve the workings of markets, Mr Tharman said.

There is a closing window of opportunity, he warned.

Declining lifetime income - or wage stagnation - since the 1960s and 1970s was changing a former sense of togetherness into a sharp decline of trust in others - a sense of "them and us", Mr Tharman said.

In many multi-ethnic societies, especially, a surge in ethno-nationalism is being seen, he added.

The only sustainable alternative is to spur more creative destruction or innovation, said Mr Tharman.

But this would be disruptive, and firms and people would be displaced, he said.

So there must be more active intervention to help people and towns regenerate themselves so that new jobs are created when old ones are lost, and towns that go down can at least in part recover, he added.

But traditional approaches of both the right and the left are not the way to go, Mr Tharman said.

"If we leave things to the market, we will see more of the same - depressed areas remaining depressed, individuals who start out with a disadvantage living with the disadvantage by and large for the rest of their lives.

"And if we leave things to the market, we will continue to see a concentration of winners."

Mr Tharman said today's low productivity growth and low spread of innovations will not do.

"We have got to find ways of speeding up learning, speeding up the diffusion of new knowledge and practices."

Schools and colleges must reform to adequately prepare young people for the real job market, Mr Tharman said.

Some companies have also taken the lead to help their small- and medium-sized suppliers adopt new technologies - both as economic strategy and out of social responsibility, he added.

Investing in "the social foundations of economic dynamism" would increase the chances of mass prosperity for the vast majority, Mr Tharman said.

It is the only way to "restart social mobility".

And it is the only way to deal with the medical and social care needs of ageing populations without imposing an unsustainable burden on the next generation, or engaging in disastrous cuts in benefits for those who need it the most, Mr Tharman added.