Addressing external sector bottlenecks

As non-central countries grow, they suffer recurrent bottlenecks in the external sector (more foreign currency is required than it is available). Causes are diverse as diverse are the economic, social, and political structures of each country. How and why do those bottlenecks happen? Is it possible to solve them? There is a range of public policy options to address them: there are emergency measures that, depending on their profile, can lessen or enlarge their negative effects; however, the most important are transforming measures of the dynamics that generate the bottlenecks.

Not a few countries while growing suffer external sector bottlenecks. However, the diversity of causes that generate them varies according to how their economic systems have been structured, which is the functioning dynamic of their productive matrix and value chains, the oligopolistic nature of their markets, wealth concentration, capital flight, the level of sovereign indebtedness, the role of their financial system, consumption profile (who, where, and what they consume), composition of exports and imports, among others. This vector of characteristics does not come out of nowhere, rather it is the result of the course and way of functioning that the successive correlations of social and political forces implanted in those countries. Can those correlation of forces change? Though complex and subject to a diversity of actions and circumstances, it is possible to transform the power of certain minorities to impose their interests above the general wellbeing and environmental protection. Joining other authors, we have addressed this issue in previous texts. These lines are centered on analyzing diverse ways of intervention, emergency or transforming public policy options, in tackling external sector bottlenecks.

In general, when the economy of emergent countries grows, also grows the need of having more foreign currency, either in dollars, euros, yens, or other currencies. External sector bottleneck happens when there is not enough foreign currency to attend their internal demand. If such deficit is circumstantial, it is covered with debt that is repaid with the foreign currency that the country is able to generate over the following years. However, if the deficit is permanent and increases as time goes by, the provision of foreign currency with loans pushes countries or enterprises to over indebtedness. If repayment ability is exceeded, onerous submissions are imposed on our countries: constraints on public policies that punish the vulnerable ones and higher amortizations and interests that drain large part of domestic savings; social and economic instability is generated with the consequent loss in decisional sovereignty.

This problem area, as well as many others in the social and economic order, cannot be resolved at the same time that their disastrous effects are produced. Once the external sector bottleneck is generated, it is only possible to adopt emergency measures: some will lessen the social and economic impacts, others will enlarge them. A definite solution is preventing its occurrence with measures that transform the dynamic that produces the recurrent crises of the external sector.

Impacts of external sector bottlenecks

The first shock of an external sector crisis is expressed in the exchange rate level, with strong pressures for devaluating that are hard to revert in the immediacy of events. The result tends to be a strong or moderate devaluation that shoots effects over the economy and society as a whole. However, the worst effects devolve upon vulnerable actors that lack the capability to adjust to the rapid change in circumstances.

Devaluation impacts on internal prices: almost all prices rise (inflationary blow). From the outset, prices of imported goods drive up; if they are consumption goods it is expressed in the display rack of sellers, while the increase in price of imported inputs has impacts on the cost structure of enterprises that use them, thus, and as long as each producer can transfer those higher prices of inputs to the products they make, the inflationary impact slips towards almost the entire productive system. That is, producers that use imported inputs suffer a direct impact and other producers and marketers of the economic system that try to adjust to the sudden price movement suffer indirect impacts.

However, the impact of devaluation does not stop here as those who export and thus receive larger quantities of local currency per exported dollar with devaluation, try to obtain the same prices for selling the units in the domestic market. If they were able to sell larger production volumes abroad (something uncertain as it is influenced by variables that prevail in the international markets upon which they have no control), that could affect the domestic market supply. This is serious, but even worse if it were affecting the prices of popular consumption goods (flour, oil, others). In these cases, there will be neoliberal governments that will not intervene and others that will try to lessen these impacts establishing withholding taxes to export for the differential between internal and external prices of the same product or, alternatively, exportable quotas to secure the internal market supply. Both types of interventions are of the emergency and do not solve the structural base of the external bottleneck although they have very different socioeconomic impacts. Without the mediating intervention of the State, majorities would suffer the worst consequences.

On the other hand and in the absence of appropriate regulations, as not all economic actors have the same market power, the powerful adjust more and faster their prices than the rest. Therefore, a new cycle of distributive struggles is installed where those who can abuse the rest, they do. Relative prices are disrupted producing a variety of effects within the economic system, including a violent redistribution of income in favor of most powerful actors to the detriment of consumers, small enterprises, and, especially, workers that cannot adjust their salaries to the inflationary process. It is worth saying that inflationary processes are not born out of devaluations but they grow with them; distributive struggles are multiplied boosting further the inflationary expectations.

Where there is a strong labor-union power with social movements capable of vigorously expressing themselves in the streets, it will be possible to preserve the purchasing power of salaries. Otherwise, a regressive redistribution of income will prevail in favor of those sectors that are able to profit from the change in situation, such as large exporters, financial capital, and rentiers that can adjust the price in foreign currency of their assets. They close the external gap without tackling its causes, rather through recession, wage punishment, and unaffordable utilities’ prices.

Structural roots of the external sector bottleneck

A ground for external sector bottlenecks is the unbalanced type of productive matrix of the country. There is a sort of dualism where, on the one side, a minority segment of powerful actors export low value-added goods (exporters of cereals, mining products, and other commodities, which are almost always subsidiary enterprises of international holdings) and, on the other side, large segments of national producers turned mainly to the domestic market who require imported inputs to function (such as industrial sectors, commerce, services, medium agriculture, family agriculture, small and micro non-registered producers). The problem is that even some exporting sectors (automobiles, chemical and communication industries, among others) are highly intensive in imported inputs and with their growth they produce an ever more increasing importing pressure.

With that productive matrix profile, the situations of recurrent bottlenecks of the external sector are almost inevitable unless, as it is presented below, we act to transform the structure and functioning of the national productive matrix.

Other grounds that indirectly influence the generation of external sector bottlenecks is the oligopolistic nature of almost every value chain. The larger power that leading enterprises of value chains have, allows them to concentrate for their own gain the results generated by all the actors that participate in each value chain, harming both their productive linkage and consumers. Therefore, the concentration process of wealth, income, and decisional power is reinforced cycle after cycle. This concentration of national savings generally makes that a large part gets drained outside the country (capital flight with the complicity of financial entities) and, also, that tax elusion or evasion is practiced with impunity (sterilization of domestic savings as a source of genuine financing for private and public activities).

The concentrating process prevents developing balanced productive systems: investments are not allocated along the entire value chain (capitalizing small and medium enterprises that do not flight their capitals) but rather they basically serve for expanding and reinforcing even more those leading enterprises. Discretionary actions and lack of systemic rationality prevails in the investment flow. Leading enterprises invest or flight the capitals they accumulate without considering the ((unintended)) spillover effects on the country. If these capitals instead of being flight or evading paying taxes were to be invested inside the country following criteria and regulations to lower importing intensity and increasing the exporter one of the national production, the risk of falling into external sector bottlenecks would drop.

On its part, financial system that intermediates in the allocation of national savings tends to favor speculative allocations than investments in the real economy, thus, contributing to the unbalancing of the productive matrix with a financial macrocephaly. Having been reduced almost all regulations that limited capital flows, financial accumulation turns into a dangerous destabilizing factor because in days (or seconds) it can make large amount of capital disappear, driving the external sector to despair.

Another element that influences on the external bottleneck is the consumption profile that prevails in medium income sectors, which based on a misleading and biased publicity are turned to insubstantial consumption. This type of consumption tends to include imported components that, without regulations to protect national production, exacerbate foreign currency shortage.

We already mentioned that these and other structural roots of external sector bottlenecks do not exist by chance and are not inevitable. On the contrary, they are the result of political decisions (to act or not to act) imposed by powerful actors both national and global in scope. Therefore, to overcome external problems, besides new social and economic measures that could be adopted, a necessary political support will be required to reinforce the orientating and mediator role of the State.

In pursuit of overcoming external bottlenecks

The acting fronts to overcome recurrent bottlenecks of the external sector are multiple and diverse; transforming forces will chose those that circumstances of each situation and their own ability and understanding would thus suggest. There is not one measure that on its own is able to prevent external bottlenecks. It also does not work to pile up uncoordinated measures. Neither is about enhancing the management of a system, whose functioning keeps on reproducing external disequilibrium.

To transform the dynamic that generates external sector bottlenecks, it is necessary to tackle broader challenges, among which, the following:

Stop the drainage and sterilization of domestic savings. That is (i) retaining it in the country by cutting back on evasion, (ii) that savings cease to be appropriated in large part by a minority that deviates it apart from development, (iii) that the allocation of domestic savings is oriented based on a systemic perspective and not in function just of individual profit ignoring negative spillover effects it produces, (iv) financial system cannot at its own discretion decide about the expansion of credit and investment financing as if it were the owner of deposits it manages (they belong to the depositors). The main role of financial system is to channelize the entrusted domestic savings towards the real non-speculative economy. Ultimately, resources managed by the State and financial system should secure the allocation of domestic savings so as to help dismounting the dynamic generator of bottlenecks.

This implies addressing the transformation of the productive matrix prevailing in our countries. That is, promoting a productive matrix that decreases the incidence of activities intensive in imports and favor those capable of generating foreign currency maximizing the use of national labor and inputs. Thus, it will be necessary to direct investments towards value added exports and to produce in the country what is unnecessarily imported, reserving foreign currency to cover what it is not worth or cannot be produced internally. In this perspective it is critical to develop science and technology within the own country to exercise knowledge sovereignty adjusted to the national needs and interests.

Concentration of wealth should be stopped, democratizing the economic system. Economies that pretend to determine the future of their peoples and function excluding large majorities from their benefits are useless. Economy cannot advance defending the interests that control it today, thus, in full democracies, it must subordinate to the achievement of the general wellbeing and environmental protection. Those deceptive siren calls that propose that only the large majorities are the ones that always have to sacrifice for a better future cannot be tolerated anymore; huge fortunes are those who should be called the most to solve what they caused by their own way of operating.

To transform the concentrating reality it will be necessary to dismantle one by one all the engines that promote concentration and distribute with equity the value generated in value chains among those who participate, leading enterprises, small, and medium, including a base of associative ventures that can be promoted with specialized developers and trust funds.

The democratization of the economic system cannot be achieved without democratizing decisional power. This refers to deep transformations in the media, judiciary, educational and health systems, politics financing that prevents that the powerful are in fact those that control candidates and representatives. In some countries, this effort to free their captured democracies can be done within the existent institutional context and, in others, it will be necessary to adjust institutions to new social, economic, and environmental rights. The democratization of the decisional power depends on the organization and relative force that different actors have to control resources, public policies, initiatives and the regulatory capability of the State. With an addition: correlation of forces are not transformed in base of occasional efforts but rather by deepening them in time to avoid onerous setbacks.

It is fundamental to have a State that presents a new course and way of functioning for the country; which, without asphyxiating social creativity or resigning effectiveness, strategically orientates every actors’ efforts towards general wellbeing and protection of the environment. A State that regulates what affects the course of the social body, the unbridle financial speculation, destabilizing movements of swallow capitals; that reduces tax burden inasmuch as evasion and capital flight are stopped, equally expanding the tax base; establishes progressive tax structures; uses prudence with indebtedness; allocates public spending with social equity and economic effectiveness eliminating perks and privileges for affluent sectors; prioritizes small and medium enterprises, mainly those with associative base; promotes inclusive educational and health systems open to a permanent search for enhancement.

Which conclusions do we extract?

As of now, recurrent bottlenecks of the external sector that asphyxiate development are not an unavoidable ill; they happen because there is an economic dynamic that generates them and such dynamic, that implies aspects both from the own external sector and also others that seem to be farther away, can be altered. If done, powerful interests will be affected, therefore, we should assure that transforming forces have the necessary talent and force to successfully confront them.

In present times, where misleading and lies form the mortar that neoliberalism uses to colonize minds and mold subjectivities, it is not redundant to reiterate certain truths. The existent economy, that almost inevitably generates recurrent bottlenecks of the external sector, is barely a type of economy amongst the multiple that can be conceived; it developed under the influx of prominent actors that wanted to preserve their interests. The rest, that is, large population majorities have little influence over strategic decisions, unless they can advance in clarification and organization to transform.

Finally, something historically non contrastable. An external sector bottleneck cannot be resolved with the neoliberal arsenal of devaluations, sovereign indebtedness, brutal interest rates, deregulation of capital flows, import openness, closing enterprises, loss of jobs, hard drop in salaries and pensions, recession. In that path, there is no solution but rather painful setbacks and a larger economic concentration, likely result from the type of functioning that prevails. With that knowledge, it is necessary to unveil what is concealed by those veils with which we have been and frequently still are subdued. This is what these lines are about.

If you like this text, by filling out the form that appears in this page you can subscribe to receive once a month a brief summary of Opinion Sur English edition.

Edit

Leave a comment