A critical factor to boost economic development is the magnitude of national savings and its allocation. When those savings flight out of the country or turn to financial speculation, their capacity to propel national production gets sterilized. In addition, if the savings that remain in the country concentrate in financing powerful actors while deferring the rest, the result is a burdensome underutilization of the national productive potential. Solving this situation requires adjusting the approach strategy: it does not help to run behind concentrated savings but instead de-concentrate them, retain them within the country, and enhance its allocation.
More frequently than we might think, the domestic savings rate in relation with a country’s gross domestic product tends to be considerable; figures that go from 20%, 25%, up to 30% are not exceptions. There is no lack of savings; rather they are not applied where they are more needed; that is, financing ((the)) investments in activities of the real economy very much needed for a fair and sustainable development. As savings leak to other ends, they badly damage the general wellbeing. A considerable part flights abroad, mainly to central countries and tax havens. Other part goes towards financial speculation that does not generate general wellbeing but just extraordinary returns for concentrated groups that profit at the expense of the rest. Additionally, a proportion of the savings that reaches the real economy is allocated to financing leading companies which reinforce their dominance over the rest of the actors, frequently by extracting value from suppliers and customers.
Therefore, the problem is not reduced to the lack of savings but it refers to who controls their allocation sterilizing eventual positive effects. The following lines explore options to transform the savings structure and the improvement of its allocation.
The absurd of losing domestic savings and reaching out for external indebtedness
Losing or dilapidating domestic savings has severe consequences. A country’s savings is the more legitimate source of financing for its productive investment. Certainly, this does not mean denying external financing but only using it very selectively just as a complement to strengthening the national production capacity.
If indeed domestic savings were to go to financing productive investment, it would reduce the risks of incurring into a burdensome external over-indebtedness or indiscriminately accepting foreign investments. It would avoid dedicating ever more resources to the cancellation of an external debt that ends up being unmanageable, as well as discerning free of pressures which foreign investments are worth promoting and which are not. This bestows greater freedom to autonomously decide the best strategies for national development.
Avoiding the sterilization of good part of the national savings
Complex challenges should be faced to avoid the flight or improper use of good part of the national savings: it is essential to stop the capital flight, abate the huge tax evasion, redirect domestic savings that go to financial speculation towards the real economy, and de-concentrate internal credit. Facing this economic violence requires regulating the management of existent savings as well as promoting the generation of new savings at the level of small and medium size actors; all this directed to transforming the structure and allocation of domestic savings.
Regulating existent savings
The greatest capital flight comes from extraordinary returns that actors profit from oligopolistic positions or illegal activities. This flight is facilitated by large multinational banks1. It can be tackled with controls over financial movements and bank practices together with measures to promote the convenience of investing in priority areas. This will require new and better investment vehicles such as specialized trusts with public guarantees (communications, energy, tourism, communitarian health, among other sectors).
Close to the latter, there is the need for ending the prevailing huge tax evasion, particularly from big corporations with the complicity of the global network they belong. This requires the permanent enhancement of control systems using all the available modern resources that allow cross information and the adoption of transference prices to avoid tax evasion by under-invoicing or triangulations among connected companies.
Certainly, situations of severe over indebtedness should be avoided, but if they were already generated, there will not be a sustainable exit without negotiating a restructuration, while keeping later a prudent policy of new debts.
To discourage speculative financial operations it is needed to firmly levy financial income and establish entry and exit capital controls to prevent recurrent destabilizing movements.
New regulations are necessary to de-concentrate the credit allocation, as traditionally financial systems would rather finance large corporations. Commercial banks and investment funds look to maximize profits without considering the impacts of their decisions on the general wellbeing. Thus the need for regulating their performance together with strengthening development and cooperative banks.
Generating new savings in a de-concentrated way
A successful regulation of existent savings will leave resources available for financing small and medium size ventures and thus generating new savings in a de-concentrated way; savings that tend to be reinvested in their own ventures. Hence, the regulation of existent savings and the de-concentrated generation of new savings are part of the same strategy to transform the structure of savings and enhance their allocation.
Promoting new savings in a de-concentrated way requires measures at the macro, meso, and microeconomic levels.
Among other measures, it will be necessary (i) to transform the tributary structure to make it more progressive and not regressive as it currently is; (ii) to promote the reinvestment of profits by small and medium size companies; (iii) to align the allocation of public spending with the social, territorial, and environmental goals of inclusion, equity, and sustainability; (iv) to concentrate national credit on small and medium size enterprises; which does not mean to dry out credit to large companies but to force them to better use their own resources instead of flying them abroad while using large amounts of domestic credit that diminishes the resources available for those who do not incur flight nor have the same economic strength.
Meso economic level
The meso economic dimension, which refers to how value chains are structured and function, is a critical and neglected area of intervention. In relation to generating savings in a de-concentrated way, it is of special interest to know how profits get distributed (and thus the capacity for retaining value) inside the different value chains. Countries need to work on obtaining a fair distribution of profits among all the participants in a way that the whole value chain gets strengthen and not just the leading enterprises. It will require transforming those aspects of its structure and functioning that would allow the removal of the prevailing mechanisms of value appropriation. This implies modifying the correlation of forces inside each value chain generating spaces for the negotiation of the diverse existing interests, including the State presence as it happens with the collective bargaining of salaries. A fairer price structure will enable a balanced development of all the chain members. It is worth clarifying that absolutely every participant in a value chain generates value but with two serious differences: those who have available more capital, equipment, contacts, better management and positioning generate more value; and, because of their larger negotiation power in terms of imposing prices for their inputs and products, they have the capacity to retain the value they generated as well as to appropriate part of the value others generate. The result is a sustained process of concentration that reinforces itself, far beyond the conditionalities and singularities of each moment and situation.
Therefore, the proposed changes focus on strengthening the formation of capital in small and medium participants in value chains, reinforcing their negotiating capacity, eliminating the oligopolistic abuses, and thus enabling ever more de-concentrated savings.
Besides favorable macro and meso economic contexts, a full mobilization of the national productive capacity requires specific support measures directed to micro, small, and medium size productive ventures. What happens is that better context conditions by themselves may not be seized for lacking the small and micro producers the capacity to access them.
This other critical level of intervention has already been analyzed by Opinion Sur in several texts; hence, here we will only summarize some of their main conclusions.
The purpose is to address severe shortage situations suffered by small producers in almost every front of their productive process: management, equipment and technology, contacts, access to markets and financing, among others. Shortages all related with restrictions inherent to the small scale and the subordination they are subject to. Their vulnerability requires specialized sources of management assistance and financing as part of an effective support system for micro, small, and medium size productive ventures. Hence, it is proposed the establishment of inclusive venture developers, special tax and credit regimes, and trusts dedicated to investing in small and medium size emerging or growing ventures.
As it happens in so many other fields, some groups would like us to believe that the prevailing structure of domestic savings and, thus, its current allocation, are unchangeable traits of our economic systems that we need to accept and live, or better suffer with. This is not true. Despite the complexities that are involved and the opposition of those who profit with the current situation, it is possible to transform the structure of national savings, retaining most of it in our countries and significantly enhancing its allocation. It is well one of the most important challenges to assume if we aim at living in a country for all in a sustainable world.
1 . El ciclo de endeudamiento externo y fuga de capitales (The Cycle of External Indebtedness and Capital Flight), Pablo Manzanelli, Mariano Barrera, Andrés Wainer, Leandro Bona, Coordinator Eduardo Basualdo. Economy and Technology Area of FLACSO Argentina.