The international crisis we are going through expresses serious systemic failures in the way central countries function. The very heart of the global system is failing and seeks protection in order not to be rolled over by the same forces it contributed to unleash. What happened compares to a financial tsunami created by the way in which we have decided to organize and function rather than by nature. Yet, there is no point in deceiving ourselves: there exist other structural causes in addition to the financial ones. Today the challenge lies in making the emergency measures facilitate the beginning of fundamental changes; bringing the systemic functioning back to exactly the same condition it was in before it short-circuited and crashed would be the worst of alternatives.
The international crisis we are going through expresses serious systemic failures in the way central countries function. The very heart of the global system is failing and seeks protection in order not to be rolled over by the same forces it contributed to unleash. What happened compares to a financial tsunami created by the way in which we have decided to organize and function rather than by nature. Yet, there is no point in deceiving ourselves: there exist other structural causes in addition to the financial ones.
We need to reflect upon, and review, certain concepts, even the most widely accepted ones, acknowledge the reality of the processes underway, and depart from dogmatic predicaments. It is time to review the “global contract” in depth, recognizing its underlying rationale and the unforeseen effects caused by the way it works. Even when there is much to transform and adjust, there also exist assets that are worth preserving; swinging from one end to the other of the pendulum will be of no use.
In order to fully understand what has happened, it is necessary to take into account the unwanted externalities of the current international economic system; to acknowledge how they have been generated, to consider how to abate them and to avoid their possible reproduction. Unwanted externalities are present in the systemic crisis and also in the eventual transition into a better systemic functioning; they will condition the new agreements necessary to redesign the financial architecture and reorient the real economy.
The financial leg of the crisis
It might seem that the crisis has a financial origin and if the financial system was reformed, the crisis would reverse until finally disappear. This is a half-truth. It is a fact that the financial system has run wild; it dangerously departed from the real economy to the extent that it thought it was the engine and pilot of the global economy. The movement of financial flows acquired a phenomenal magnitude. In real time, a computer click mobilizes entire seas of resources from one point to another of the globe. Financial dealers, who originally had one eye on their financial dealings and the other one on the real economy, later placed their two eyes, ears, nose and intuition on just reaping revenue from their ever more sophisticated financial moves. Thus, financial spaces grew apart from their anchors in the real economy. Greed and doing things the easy way, earning a thousandth that multiplied by billions created instant fortunes, added to the factors heading the process towards the abyss.
Regulators, for their part, did not know how to, or did not want to, fulfil their control and alert role; the prevailing belief was that the market could self-regulate and, if it happened to run out of control, corrective mechanisms would appear endogenously. But the market ran amok and corrective mechanisms only appeared by the hand of the political authority and at huge systemic costs.
The unbridled financial system happens to be one of the structural causes of the crisis; yet its genesis and implosion are associated to another critical structural characteristic of the way in which markets work: the extended processes of income and wealth concentration, both among countries and within each country.
That underestimated wealth concentration process
a. Among countries
The abysmal economic differences existing among countries generate all sorts of antagonisms, conflicts endured by those who compete at a disadvantageous position, impositions founded on imbalances of power, virulent reactions, repression, punishment, unwanted demographic flows, homogenization of ideas with an epicenter in the central countries which limits the capacity to appreciate differences and impoverishes responses.
The international wealth concentration process generates oversaturated markets of conspicuous consumption and impoverished markets with their population’s basic needs insufficiently met. Between those poles there are intermediate countries with disparate living standards and consumer demand levels. When serious bottlenecks occur within central countries as a result of a production supply that does not cease to grow and, in order to sustain that growth, depends upon a demand that does not accompany such supply increase because it is strongly concentrated, the systemic functioning searches for circumstantial solutions that may allow it to move ahead with an intact structure. That type of solutions that facilitate access to consumption but not to income (which would involve affecting the distributional structure) require a financial system that pushes to the greatest extent possible the concentration process viability limits; it operates as an ephemeral ditch attempting to contain the effects stemming from the systemic way of functioning.
While this happens in central countries, some of the large emerging economies implement structural adjustments that may enable them to attain robust growth rates. Countries such as China, India, Brazil, and the dynamic South Asian countries occupy preponderant global positions, accumulating bulky trade and financial surpluses. In that situation, by deferring the adoption of systemic adjustments that might resolve their structural imbalances, the central economies run the risk of being unable to maintain their global leadership roles and affect the rest of the countries in the short or mid-terms.
b. Within countries
Within emerging economies, the inequities resulting from a concentration process are expressed in widespread poverty, precarious institutionality, a weak productive apparatus, frequent external bottlenecks, and a fragile domestic market; all these factors act by destabilizing the systemic functioning and generating recurrent functional and structural crises.
As it was mentioned above, central economies have more resources, and they are in a position to contain, for some time, the negative effects of economic concentration within their own economies; yet, if that process is not reverted, the effects ultimately find a way to express themselves.
When there is sustained production growth and wealth gets concentrated, the economic logic causes structural imbalances to occur. What the productive apparatus produces is oriented, on the one hand, towards satisfying those sectors that benefit from such concentration. Yet, since such demand is insufficient to absorb supply in its totality, it also seeks to find markets in non-favoured sectors. The affluent consumer-oriented demand can only grow by fostering superfluous consumption; by contrast, the supply oriented to the rest of the population depends on the possibility of setting up mechanisms that may facilitate their consumption beyond their economic possibilities.
The financial system, which is an essential part of the economic system, develops according to those circumstances and grows explosively on the basis of “solutions” it manages to contribute to that systemic functioning of a concentrating nature: it recycles surplus resources in financial placements and provides financing for a consumption that would not be able to be expressed in the market based on its own resources. It is painful but enlightening to trace the effects of the concentration process that filter like lava through the economic system until they ultimately lead to an explosive systemic crisis.
A highly dangerous combination of phenomena
Superfluous consumption is one of the ways the affluent sectors have to allocate the resources that exceed the satisfaction of their basic needs. Yet they are not the only ones to fall in this type of consumption; the middle and low sectors –with access to financing- also participate. By means of aggressive advertising, the market tries to constantly expand the limit of what the different social groups consider as basic needs, artificially generating an almost constant dissatisfaction that derives in consumption as it is cunningly intertwined with complex aspects of existential anxiety. The huge mass of conspicuous consumption has perverse systemic effects as it supports a production level that is not consistent with the prevailing distributional structure (financial overheating resulting from over-indebtedness); besides, it leads a fair amount of the productive apparatus to produce those superfluous goods and services, consolidating a suboptimal structure of allocation of resources and adding parties interested in supporting the concentration process.
Surplus resources in the sectors that benefited from the concentration process are placed in financial investments or the real economy, which, as they mature, reinforce such concentration. The application of resources follows yield and risk criteria; in other words, either directly or through intermediary institutions, they seek placements that may ensure the best possible return given a certain accepted level of risk. These yield-risk criteria are not generally associated with other criteria relating the investment’s social and environmental impact,1 which evidences that there does not exist yet a systemic mechanism that is capable of ensuring a better global use of available savings. Since each resource placement option competes with others, a struggle to attract those resources occurs. Part of that struggle is legitimate and based on taking advantage of innovations and being more efficient than the competition; but another part is illegitimate and sustained on (a) maximizing returns on the basis of insider information, monopoly positions, profiting by corrupt means, criminal systems, exploited labor, environmental destruction, wars, etc. and (b) hiding risks and responsibilities through complex intermediation and bypass operations and chains.
As mentioned above, the concentration process also generates a gap between the actual demand from middle and low-income population levels and the supply of goods and services oriented to them. The most systemically adequate approach to closing that structural gap would be to dismantle the concentration process and foster the development of genuine demand relying on its own resources. When this does not happen and the growth in the productive apparatus requires a demand counterpart that is not able to accompany it at a similar rate, the conditions are created for the financial system to seek to expand such demand beyond its ability to pay. This situation and consumer over-borrowing are just one footstep away; the sub-prime mortgage bubble is perhaps the most dramatic but not the only example of this perverse process.
So the conjunction of a structural process of wealth concentration that reinforces itself, the subsequent expansion both of conspicuous consumption and of middle and low income consumer over-indebtedness, coupled with a segment of the financial system that –with sophisticated greed- artificially maintains the status quo beyond the severe limits imposed by the concentrating functioning, account for the rationale that leads to the crisis. Certainly, the specific trajectories leading to the crisis are mediated by historical and institutional circumstances that differ from one place to another.
The emergency and coming out of the crisis
Time and again it is said that when your house is on fire the first thing you need to do is put out the fire. This is a tricky allegory as it suggests that in an emergency there is no choice but to fight the destructive fire in the best possible manner; later on we will have time to find out its origin and reconstruct whatever needs to be reconstructed. Yet, when such havoc is created on a system, the indispensable emergency actions should be designed jointly with quick functional adjustments to such system. Otherwise we would be running the risk that no sooner is one fire spot put out, others will appear at unexpected places and times. In sum, the point is that the necessary emergency measures should carry within themselves the germ of systemic adjustments.
The thing is that there is not just a single way to address a systemic emergency, and that the worst one of all would be that which is capable of bringing the systemic functioning back to exactly the same condition it was in before it short-circuited and crashed. In coming issues of Opinion Sur, we will try to identify some of the characteristics of a way out of the crisis that might create the conditions for configuring a fairer and more effective systemic functioning.
Note: 1) Fortunately, there is a growing current of investors–a significant yet minor one if we compare it against the astronomical contemporary financial movements–that weigh their investment choices on the basis of social and environmental criteria.