Differentiating generation, redistribution and extraction of value

Generating value is a critical process to accomplish economic growth and, with other conditions in place, it becomes one of the pillars for a sustainable development. But the way in which value is usually produced also causes unwanted effects that seriously harm social, economic and environmental order; public intervention is indispensable as to regulate, redistribute, reassign the generated value according to the collective interest, which is done with high, moderate, low or no effectiveness at all. On their part, some actors evade regulations through strength or slyness; they prevent redistributive action and extract for their exclusive benefit a disproportionate portion of a value generated not by themselves alone but as a whole with the rest of the economic system; they sterilize to that extent a country or locality’s development potential. Adopting ways of generating value that are inclusive and environmentally responsible, ensuring an effective redistribution of part of the value generated for the common wellbeing and firmly abolishing the pillaging extraction of value, are necessary and complementary conditions for building a fair and sustainable development trajectory. 1. Generating value

Generating value [[Value is generated by producing goods or services (products) that satisfy needs or provide wellbeing for which economic or other forms of compensation are recognized in order to have access to them. So there is a dimension of producing something that can satisfy needs or provide wellbeing and, another dimension, of demanding those goods or services sustained both by the will to acquire them and in the resource availability to materialize that purchase.]] is a critical process to accomplish economic growth and, others conditions met, it constitutes one of the pillars for a sustainable development. Those other conditions refer to the following aspects.

Those who generate value

In order to generate value it is necessary to have suitable means: among others, social capital, knowledge, management, technology, financial resources, contacts, access to those who demand. In contemporary society, ownership and access to the means that make generating value possible are strongly concentrated. Those who lack the means (due to not possessing them or because the cost of accessing them is unreachable or gets in the way of their competitiveness) cannot participate in the productive process. This implies a nation’s full productive potential is not mobilized, but only that of the fraction that has the means to generate value; the rest remains underused or unused.

When this situation perpetuates itself and becomes inherent to an economy’s way of functioning, it ends up establishing a concentrating dynamic that in time does nothing but reproduce the concentration process in a larger scale: those who have better means to generate value receive greater returns. The other side of the concentrating dynamic is a growing social inequity whose most serious expression is widespread poverty and destitution.

The generation of value is a process that public, private and civil society action can mold to fully mobilize the productive potential of all social sectors. This implies democratizing access to means that enable generating value so that no people are excluded nor left behind against their will. To do so it will be necessary to find a way to assign means to every actor that wishes to include himself in the productive process. This means allowing the wide base of the socioeconomic pyramid to increase its value generating capacity in order to complement with its own effort what is provided by public services. It is about redistributing incomes with a strong emphasis in creating capacity to generate value in medium and low income sectors; not only redistributing to maintain poor subsistence levels that do not represent a sustainable solution and that, moreover, end up affecting public accounts and productive effort. The utmost respect and solidarity to those who suffer deprivations and social and economic exclusion is ensuring they are full citizens in democracies much less flawed than the current.

The value that is generated

In principle, the value generated should be a product that satisfies needs or provides wellbeing [[This implies that the purchaser assigns significance to that product and counts with incomes for that purpose, that the producer performs a sales effort (advertising, pricing, quality standards, payments and access facilities) and transactions are influenced by the availability of alternative products.]] . This is closely related to subjective preferences [[Subjective preferences are conditioned or even generated by the dominant culture through values and motivations imposed by social referents, the educational system, the media and commercial advertising.]] but also with the need to safeguard the sake of society as a whole. Therefore the production of environmental polluters, arms, human and drug trafficking, as well as other products that go against peace, human rights, coexistence or the environment, need to be eradicated despite the existence of purchasers that demand those products. This can be accomplished not only with prohibitions (and the corresponding verifications) but also by cutting oxygen to the existing demand through massive prevention efforts and awareness of eventual consumers.

Furthermore, there are products that favor irresponsible consumerism: they aim to create and then satisfy superfluous, conspicuous needs; they reinforce social differentiation. The way to face them is strengthening redistributive mechanisms (such as strong tax burdens on luxury goods and cigarettes) and firmly promoting responsible consumption values.

It is also relevant to differentiate minimally processed products from others with greater aggregate value generated through successive production or distribution stages. These more processed products have the capacity to locally retain a greater proportion of the multiplying effects facilitating technological development and a greater use of the local workforce.

The value that is generated can be economic, social, political, environmental and even spiritual or psychological [[For example, the action of contributing to develop resilience or fortitude to face the challenges life in society presents without being frightened by intimidations, dangers or harassments.]] . Therefore, all actors making an effort to produce those goods or services generate value, being companies, social organizations, public sector, civil society organization, scientific and technologic community, or others.

How value is generated

The generation of value also affects society according to how the productive process is faced. This means that the way and modalities how value is generated deeply matters.

First and foremost, whether value is generated in a more or less open market context [[An absolutely perfect market open to free and egalitarian competitiveness does not exist but as a referential utopia (it is important to have one). However, there are markets that are more, less or not at all close to that ideal reference.]] in which acceptable degrees of free and fair competitiveness prevail or, on the contrary, whether one operates in an oligopolistic (very few producers) or monopolistic (a single supplier) market carries a lot of weight. Differences resulting from operating in one type of market or another are huge and requirements and challenges with which the State’s regulatory action is faced are not the same either. In extremely concentrated markets, the possibility of a handful of actors getting extraordinary profits at the expense of the rest is very high and, therefore, a well-founded public intervention becomes imperative. Regulation must be well-founded since it is also a fact that certain activities require a great scale to develop and compete in global markets.

So, on one hand, the profiting of a few at the expense of the rest using privileges, influences, tax evasion, unilateral pricing or terms of sale, deliberate destruction of competitors or bribing politicians and regulators, cannot be allowed. But, at the same time, it would be dangerous not to understand that global competitiveness demands the presence of mayor actors with enough management and financial capacity in order to access markets’ thresholds where good commercial opportunities are found. The synthesis that is necessary to achieve comes from conceiving that, in today’s reality, entire economic systems are competing and not only individual companies and, in order to do so effectively, every actor involved, not only those exporting or leading chains of value, must participate with the greatest possible equity in the returns of that collective effort: among many other, small and medium suppliers, distributors, civil society organizations, public sector that provides social and productive infrastructure, the educational system, the scientific and technological community, local governments.

It is equally important how economic returns are distributed within each company, particularly in the larger ones, between workers, investors, managers, lenders and public sector’s redistributive mechanisms. The social and economic impact of one or another type of distribution is very different, as each actor’s income is then applied differently. So, for example, incomes coming from taxations, worker salaries and to a lesser extent from managers’ compensations, are channeled mostly into the domestic market, whilst investors and lenders’ incomes allocation is guided by other criteria: they consider other markets’ options and, if they were part of international conglomerates, their decisions will not be autonomous but framed by and subject to strategies beyond national borders generally defined in the corporate headquarters.

A crucial issue in corporate development is investment, which can come from fresh capital contributions or profit reinvestment. Investment can happen in response to market prospects and other non economic considerations; but it can also be promoted by tax and credit measures and certain operational privileges. These promotional measures have costs and eventual benefits that should be carefully assessed and not only in economic terms but also regarding which actors with what behaviors are being favored. This does not mean going against certain types of companies in terms of size or nationality of origin, but it calls for evaluating trajectories of social, environmental and economical responsibility.

In particular, when it comes to promoting reinvestment of profits, other critical factors emerge. Of course it may well be a good decision to allocate part of the operational returns to reinforce a company’s installed capacity. Presumably, companies operating in a country have already been through the taxation gaze of national and local authorities and, in that respect, their corporate responsibility trajectory may have been evaluated. If so, they could receive promotional benefits the country or locality grant and whose costs, that are not insignificant, are financed by all members of society. However, there are cases of conducts that have deserved judiciary and administrative punishments that cannot be ignored let alone condoned.

Investment promotion systems should not discriminate nor be subject to the discretion of administrators in office, not only because of the injustice and discouragement that entails but also because they would generate large spaces for corruption and bribery. Of course this does not authorize governing without considering development goals, wrongly allocating the limited promotional resources or ignoring unwanted effects.

Profit reinvestment also has distributive effects within each company. Reinvesting profits implies there have been good returns and that, instead of distributing them, the ones entitled to receiving them postpone that right hoping for greater future benefits. But, who are entitled to that right? To begin with, it should be everyone who had participated in the profit generation; this means not only investors but also management, workers and the whole society whose interests are taken care of with taxes imposed by the public sector. When good operational results are obtained, investors seek to get dividends or to obtain capital gains selling stocks or shares at a higher price; managers claim prizes or bonuses and workers wage increases or improvements in their working conditions; public sector collects more tax revenues. The extent to which the different actors’ expectations are materialized depends on the amount of available returns and the bargaining power of each of them. What matters is that, if there were a positive decision towards reinvesting, it would be necessary to evaluate what each actor is today giving up since it would be unfair that some would give up a lot and others nothing or very little [[Investors give up present withdraws in exchange for having a greater corporate net value and the expectation of better future withdraws. Management could postpone bonuses in case they could ensure greater future compensations for themselves which is not always possible because of eventual retirements and rotations. Workers could postpone part of the wage increases they expect if there were mechanisms in place that allow them to participate in the returns; if there were not, they will require sharing the returns with increases every year. The State could give up a greater or lesser share of the taxes it collects if by doing so it could generate multiplying effects to expand the economic activity or if it could fulfill other development goals (social, environmental, territorial).]] .

Another critical aspect is the type of technology used to generate value. Here the challenges of enhancing productivities sometimes converge and in other cases are conflicted with environmental goals, employment generation and improvements in income distribution. In places and times where strong underemployment or straightforward unemployment prevails, it is necessary to promote labor intensive technologies although without ignoring the limits local and global competitiveness impose. Instead and beyond any economic calculation, technologies harmful to the environment or threatening people’s health and safety should be eradicated.

The amount of value generated

A transcendental aspect refers to the scale of value generated. The production scale influences access to economic opportunities and management capacity, although this differs depending on the kind of activities and also encounters limits that, if trespassed, could result in diseconomies of scale.

It has already been mentioned the need to count with large companies that, as part of the national economic system and using its economic and social infrastructure, compete internationally and, in that context, that the profits obtained need to be rightfully distributed. What has to be added is that this scale aspect also affects viability and incomes of the immense segment of small and micro producers operating with extreme scarcity of all sorts of resources (financial and non financial). A country or locality could not pretend to go through a sustainable development course without solving this tremendous restriction that, while it condemns vast majorities to an unmerciful poverty and destitution backwardness, it absurdly sterilizes a great part of the national development potential. Building a sustainable development trajectory also needs to contemplate the effective economic, social and cultural inclusion of the entire base of the socioeconomic pyramid [[This assuming political inclusion was already considered as a right in the democratic legislation although, as it is well known, it frequently suffers from orchestrated manipulations.]] .

In order to face the challenges that tie the hands of small and micro production, modern business engineering which is available can be used although that engineering demands being adjusted to small production circumstances. Among other instruments, it includes franchise systems, export consortia, marketing associations, second and third degree cooperatives and locomotive agro-industries. Since markets do not spontaneously provide these solutions, it is necessary to establish organizations that can identify and structure this new type of ventures. An example is the inclusive ventures developers promoted by Opinión Sur.

Where value is generated

The generation of value in Southern Hemisphere countries is usually also concentrated in terms of territory, so populations in areas of less relative weight are affected and another share of the national development potential is lost. This can be corrected through promotional policies that compensate disadvantages of distance, access, transport, economic and social infrastructure availability, among others. The purpose is to put a hold on the drainage of people and migrations towards the large and already congested metropolitan areas creating job opportunities and a better social environment in the different regions. To that end, the value of natural resources can be enhanced with activities that add value to local raw materials, even if they need to use inputs from other latitudes. When outlining promotional policies it is necessary to evaluate the sustainability of the dynamics that are intended to be generated with them and doing so not only in economic but also in social and geopolitical terms.

2. Redistributing value

Redistributing value implies distributing incomes so that not only a few economic actors involved in its generation benefit from them. This redistributive action is based in social justice and cohesion criteria as well as in order to fully promote national or local development potential. However, value redistribution may end up being a progressive or a regressive one. The issue is that the State’s redistributive capacity can be used to promote a fair and sustainable development but, as history has shown, also to establish privileges and concentrate incomes. This will depend on the political leadership and the prevailing social forces correlation which define the capacity to set priorities and imposing redistributive policies.

Redistributive policies can be implemented through several mechanisms among which public income and expenditure stand out. As to public income, matters size and composition (federal and local taxes, indebtedness, income from public companies) and how its weight is distributed among the different contributors. As to public expenditure, it is crucial how the always limited available resources are allocated between a great number and diversity of options (social and economic infrastructure, health, education, public safety, promotional programs and public debt payments, to name a few). But what also carry a lot of weight are other redistributive mechanisms, such as credit orientation and the nature of the regulatory context that can differentially impact economic actors.

In all cases it needs to become explicit who ends up winning and who loosing with redistributive actions and, in this perspective, what their impact is regarding the construction of a fair and sustainable development course.

3. Extraction of value

Some actors use strength or slyness to evade regulations, they prevent redistributive action and extract for their exclusive benefit a disproportionate portion of a value generated not by them alone but as a whole with the rest of the economic system; they sterilize to that extent a country or locality’s development potential.

There are several ways of extracting value, among others the following:

(i) Extraction of value by an unbridled financial speculation that does not add value and gets profits from an irresponsible risk management, access to privileged information, taking advantage of naive and vulnerable actors, illegitimately influencing policies and regulations;

(ii) extraction of value through imposing upon weak nations and/or corrupt governments extortive conditions in natural resources’ exploitation (mining, forests, fishing, aquifers);

(iii) extraction of value that unscrupulous speculators obtain by appropriating assets in a stress situation or through illegal means;

(iv) extraction of value through evading paying taxes which favors capital flight and limits the State’s capacity to provide social and productive infrastructure [[See articles by José Nun and other authors regarding tax havens (ill-named tax heavens) published in previous issues of Opinión Sur]] ;

(v) extraction of value by capitalizing to someone own benefit the returns of a public investment without paying improvement contribution;

(vi) extraction of value through imposing abusive prices for having a dominant position in imperfect markets (monopolies, oligopolies) [[As an example see the research State and corporate behavior: the case of the cement industry cartel by Alejandro Gaggero. Its summary can be found in Realidad Económica (Economic Reality) #224, Argentina]] ;

(vii) extraction of value taking advantage of discriminatory regulation favoritism;

(viii) extraction of value through drugs, arms and people trafficking;

(ix) Other ways of value extraction the readers will know to point out.

Each form of value extraction presents singular modalities according to the institutional, economic and political reality in which it is performed.

4. Three dimensions of a single reality

Generation, redistribution and extraction of value are dimensions of a single reality and its genesis and dynamic are closely related. Who generates value, what value is being generated, how, how much and where it is generated, are aspects of the value generation process that condition redistributive capacity and its orientation. At the same time, redistributive policies have an impact on all aspects of value generation. On their part, the impressive resource drainage performed by those who extract value way beyond the amount they help generate, sterilizes a great part of the local and national development potential, restricting by doing so the same capacity to generate value and to redistribute a more significant share in the interest and wellbeing of society as a whole.

We can conclude that adopting ways of generating value that are inclusive and environmentally responsible, ensuring an effective redistribution of part of the value generated for the common wellbeing and firmly abolishing the pillaging extraction of value, are necessary and complementary conditions to build a fair and sustainable development trajectory.

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