In their growth, non-central countries suffer recurrent situations of foreign-currency shortage that ruin their development. This occurs as their disarticulated economic structure generates dynamics that produce bottlenecks. How can they solve this persistent threat?
The productive structure that tends to prevail in non-central countries generates a dynamic full of contradictions, among many others: when they grow what happens is that the need for foreign currency to sustain growth is larger than their availability, being those dollars, euros, yens or any other currency required for having transactions with external actors. It is dramatic to see countries that try very hard to overcome inequalities, improve income distribution, strengthen the internal market, accelerate their growth and, “suddenly,” comes a time when they no longer have enough foreign currency to pay for imports or cancel indebtedness. Dreaded external-sector bottlenecks appear that hinder their development, cause severe economic hardships, particularly for middle and popular sectors, destabilize governments, and harshly curtail decisional sovereignty.
Is this situation unavoidable? By no means, but it happens when economies present structures and dynamics formatted by forces more responsive to their own interests than those of countries.
Several factors generate tensions demanding foreign currency, such as foreign takeover and concentration of the economic system, the strong assembler profile of non-central economies, sovereign over indebtedness, deregulation of capital flows, which facilitates preying action of “swallow” capitals, tax evasion and elusion practiced by large enterprises and wealthy families that turn to foreign-currency flight. In what follows, we will analyze these critical factors; however, many others exist but we cannot include them all in such sort text as the present one. Among others, foreign-currency outflow due to tourism, hiring of international freight services, tendency to buy foreign currency as a protection against devaluations. In fact, the list is even longer but more than pretending to be exhaustive, it is important to explicit the diversity of forces that converge demanding foreign currency in front of an offer that runs behind it. Thus, we can recognize the structural roots of bottlenecks and the systemic dynamic that reproduces and sustains them in time.
Foreign takeover and concentration of the economic system
Non-central countries could not (or did not want to) prevent that parts of their productive apparatus have been appropriated by international corporations, especially enterprises that lead value chains. Those enterprises that suffered foreign takeovers subordinate their investment and productive decisions to the interests of the conglomerates they belong. Their headquarters, which are outside the country, establish global strategies where their subsidiaries, as their name indicates, influence only subsidiarity. In case the subsidiary’s interest confronted with those of its headquarters, the former will have to cede and adapt to the strategy of maximizing profits for the conglomerate. Even worse, should a crisis burst compromising its headquarters, subsidiary is forced to contribute to save it by remitting any surpluses it might have or, if necessary, liquidate the business to produce the requested cash.
Al estar integradas en redes que controlan la mayor parte del comercio internacional, las subsidiarias tienen la capacidad de evadir impuestos, reducir su aporte de divisas y fugar capitales, utilizando subfacturación a empresas asociadas en jurisdicciones con baja tributación, o simulando consultorías de asistencia de casas matrices. Cuando esto también afecta a países centrales (caso de las confrontaciones de la Unión Europea con grandes tecnológicas), comienzan a aparecer regulaciones y precios de referencia para limitar ese latrocinio.
As being integrated in networks that control most of international trade, subsidiaries have the ability to evade taxes, reduce their contributions in foreign currency, and make capital flights, using under invoicing to associated enterprises in jurisdictions with low taxes, or simulating advisory services with headquarters. When this also affects central countries (such as the confrontations between the European Union and large technological firms), regulations and reference prices start to appear to limit such larceny.
On the other hand, subsidiaries make a segment of the national productive apparatus, themselves and their suppliers, integrated into large international value chains, opening markets and generating jobs. In accordance with those interests, they decide when to invest or disinvest, which commercialization channels and financing sources to use, with whom to relate in the world. For their weight, they are also able to influence public policies and, through the allocation of advertising budget, main mass media. In this way, foreign takeover of spaces in the productive system produces changes in the correlation of local forces; reduces decisional sovereignty introducing positive and negative factors generated outside the reach of interests and politics of the country.
We need to add that all the countries operate in a global context of unbridled economic and decisional concentration, process that is materialized through financial, commercial, cultural and geopolitical relations. Majorities are subdued by colonizing their minds and formatting their subjectivities, while financial and commercial flows extract surpluses that are remitted to global centers. The result is that investment potential of the countries is sterilized, while seeing the outflow of substantive quantities of foreign currency that are, legal or illegally, flight outside the country. The impact of such drainage is even larger as by affecting the investment capacity of the country; it also reduces its tributary base compromising funding for State services and the critical role that public investment plays.
Some large national enterprises do not escape from this dynamic, which also evade or elude their full fiscal responsibility contributing to capital flight. Some enterprises do so because they are guided by an unlimited craving for profit, endless greed; others, to subsist in markets where the State is incapable of preventing inequalities and financial crimes that favor those who make them and punish those who responsibly abide to existing laws and regulations.
Assembler profile and its impact on the external sector
Non-central countries tend to form productive apparatuses with assembler profile, that is, numerous enterprises that assemble products based on imported supplies and technologies. The idea is that in time more parts could be locally produced to substitute imports, something that rarely happens. Instead, what occurs more frequently is that, when assemblers’ production grows, imports also increase adding pressure to the availability of foreign currency. This negative impact could have been mitigated if assemblers compensated their imports with an increase in exports and an active participation in promotion programs for local suppliers relying on the national scientific and technological system. However, what happens is that the balance on foreign currency generally tends to run on deficit.
Typical cases of assemblers are automotive and household-appliances industries lead by international corporations that, as stated before, condition their investment decisions to maximize profits for the conglomerate. They prefer to concentrate in certain places most of the parts for their products, generally those technologically more intensive, than to disperse them into many countries. In this way, assemblers are forced to buy supplies outside the country and, thus, exercise permanent pressure on the provision of foreign currency.
Another paradigmatic case is the generation of local energy, essential component of any productive process. If the country did not have energy offer to meet the requirements of its industrial development, then, it would be critical to prioritize a policy of production of conventional energy or, if values such as protection of the planet and non-contamination prevailed, clean energy, as hydro, wind, solar, tides, and others. If both policies, industrial and energy, were not programmed in coordination, the inevitable result would be the increase in requirements of imported energy with the consequent impact on the provision of foreign currency.
Impacts of sovereign over indebtedness and swallow capital
When a country faces an external-sector bottleneck, it needs to find a way of stocking up on foreign currency to prevent the gridlock of important sectors of its economy. An exit is to choose to get into debt with hopes that afterwards the expected growth will allow for cancelling such debt or, at least, paying the interests to refinance it. However, if debt is contracted without changing the productive structure and functioning, external restrictions will follow one after the other. What was once considered an occasional deficiency becomes permanent, giving way to very dangerous situations of sovereign over indebtedness. This compromises a country’s decisional sovereignty even further, as it ends up subjected to conditions imposed by creditors to secure the repayment of their credits. Development paralyzes and creditor’s rigor prevails.
In these circumstances, the weight of amortizations and interest payments increases continuously, affecting even more the availability of foreign currency. A perverse dynamic is settled. It begins with the disarticulated productive nature of a country, leads to periodic external-sector bottlenecks, imposed adjustment policies follow, as well as large payments in foreign currency to cancel debts, new loans and larger interests to refinance what was not able to be cancelled at due date, more adjustment and the country always mortgaged with its majorities permanently punished.
If the State is controlled by a neoliberal government, loyal to its economic conceptions and interests, capital flows are almost completely deregulated. They assume that they can attract international investors in this way (the so-called “investment rain”). None of this happens, capitals that dare to enter in structurally unstable countries, they do so only if they can profit from short-term speculative schemes. An example is the so-called carry trade (“financial bicycle” in Spanish). It consists on bringing foreign currencies to the country, exchanging them for local currency to obtain high rates of return and when such swallow capital smells the end of its speculative excursion (devaluation risk that might liquefy profits in local currency), they buy again foreign currency with a juicy profit and fly out, continuing their adventures in other latitudes. When short-term foreign currency enters a country, it gives a temporary breathing space, but when exiting abruptly, it generates tremendous impacts; among others, destabilization of forex market, production of new inflationary pressures, adding uncertainty to productive activity and punishing purchasing power of majorities. On top of that, the abrupt departure of swallow capital forces the country to procure other sources of foreign currency but with such urgency that its vulnerability to impositions of whom dare to lend them increases. Furthermore, although it is often concealed, profit made by swallow capital is paid by the peoples with their effort. Such profit is nothing more than part of the domestic savings that is subtracted from consumption and social or productive investment. That is one of multiple concealments that economics jargon (technical language difficult to understand) scamps from popular comprehension.
In this way, when external sector bottlenecks become recurrent, it is clear that they are not the result of an unfortunate occasional situation. Its occurrence is linked to the structure and functioning dynamic of the national productive system and the mistaken policies that have been promoted. It will be impossible to solve the problem they generate without addressing deep transformations. Partial or simplistic approaches are not useful. Comprehensive strategies are needed, which orientate the course and way of functioning of the economic system, together with solving political, cultural, media and judicial constraints that sustain it.
There are no magical or unique recipes to orientate development towards general wellbeing and protection of the environment, even though fundamentalisms of diverse nature proclaim that. It will be pernicious to ignore the inherent singularity of each country, with its history, culture, aspirations and trajectories. Each moment, each situation, takes place in the context of changing geopolitical circumstances, of different levels of clarification, organization, responsibility or popular rage.
From such perspective, we mention some statements that might help as reflections or reference when it is needed to tackle serious external sector bottlenecks. What is critical is to recover decisional sovereignty, governments with enough political support to decide based on general wellbeing of their peoples and the respectful protection of their territory.
A strategically important aspect is to stop the constant foreign takeover of the productive system, particularly of enterprises that lead the most significant value chains. It will be necessary to discuss and adopt norms that regulate which investments are welcomed and which ones are not, without falling into any fundamentalism but rather making explicit the criteria to respect. Among others, that the investments entering the country export products with high added value favoring the balance of foreign currency, that they have to be functional to the development of local science and technology, not be involved in financial speculation, that their operation does not affect strategic activities reserved to the State or enterprises of national capital.
Another strategic aspect to consider is the firmly support of national enterprises, being those large, medium, or small, what implies a double challenge. On the one side, establish a capital market and financial system that accompany such development but, at the same time, securing equity and appropriate complementarities among all the participants of the productive activity. Value chains whose leading enterprises abuse their oligopolistic power to benefit themselves at the expense of their suppliers and consumers cannot remain unchanged. There is no lack of proposals to secure appropriate equity within productive chains. However, there are other reasons that justify transforming the distribution of results in favor of small and medium enterprises. Not only they generate most of the local employment, they are important actors in every process of import substitution and their propensity to reinvest locally their profits instead of flying them abroad is larger than what happens with bigger productive units. Thus, it can be argued that a better redistribution of investment towards the base of the productive apparatus has a positive impact on the external sector.
It is impossible to ignore how flawed control systems of tax evasion and elusion tend to be. This tremendously affects the position of the external sector of a country that suffers the flight of surpluses illegally, or at least illegitimately, obtained. Those who do not understand this opprobrious mechanism of ill-gotten-capital flight, or are not informed about its magnitude, cannot or do not know how to link it with the recurrent deficit in foreign currency. It will be hard to avoid external bottlenecks without solving this drainage, practiced mainly by large corporations and wealthy families.
In oligopolistic markets, as those that prevail in non-central countries, when due to strengthening the internal market demand increases, leading enterprises tend to profit from their dominant position by raising prices instead of increasing their productive offer. In this way, they profit without investing. What happens then? Without investments, they do not contribute to reinforcing the dynamic of economic growth: there is no generation of new jobs, income, or promotion of their suppliers with multiplier effects along their productive chains. The other option, to be promoted, is that the productive apparatus take advantage of the impulse of an increased demand by augmenting the offer of their products. This larger offer can be achieved using the idle capacity, if there is, or making investments; in any of these situations, the economy will be revitalized. The difference between these two corporate behaviors is great. By raising prices, those who benefit are only the enterprises that adopt this strategy extracting value from consumers and suppliers who do not have the power to resist. Instead, if production were to increase, benefits would irradiate more widely. This is another critical dividing line between very different country models: one that reinforces concentration process of wealth and the consequent decisional power, and the other that advances towards general wellbeing and social sustainability. Impacts on external sector are diametrically different.
Ultimately, it is not simple but possible to understand and solve the factors that generate recurrent foreign-currency deficits. We need to cut through the fog generated by swindlers that conceal indefensible interests and work hard for hiding the roots of the problems that overwhelm our peoples, difficulties that are neither simple nor disconnected. Powerful minorities impose sordid dynamics and aim at colonizing the larger quantity of minds as possible to stun popular determination. As has long happened, a crucial challenge, much more important than the foreign-currency deficits, is to clearly know what is happening, understand why it happens in such way, in which field of circumstances and restrictions we are operating and, based on that, exercise sovereignty by redefining courses and elaborating solutions that care for the planet and its inhabitants. With a double caveat: not falling into voluntarisms and not allowing to be frighten by fatalist laments.
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