G-20: Facing Collapse but few transformations

The G-20 countries fear that if the stimulus policies are abandoned too soon, it might be hard to ensure a sustainable recovery. But, in fact, sustainability will not be secured by merely extending the economic recovery measures a little bit longer but by preventing the reproduction of the circumstances that led to the crisis. The choice the G-20 and the rest of the countries are faced with is not between maintaining the same recovery strategies or wasting the effort already made, but between maintaining an effort that may end up recreating circumstances that are very similar to the ones that originated the crisis or having the effort reoriented in order to transform the current economic dynamics. The short and mid-term effort no longer can only be reactivation-oriented; it should also be transformative.The world economy is showing signs of “recovery”. In many countries production, consumption and investment are starting to grow; in others, the retraction is diminishing. It is not that there is one linear, smooth way out of the global crisis, but the signs are more encouraging than one year ago. Everything seems to indicate that the dreaded collapse was avoided, though without the course and the systemic way of functioning having been significantly transformed yet.

The G-20 countries fear that if the stimulus policies are abandoned too soon, it might be hard to ensure a sustainable recovery. But, in fact, sustainability will not be secured by merely extending the economic recovery measures a little bit longer but by preventing the reproduction of the circumstances that led to the crisis. The choice the G-20 and the rest of the countries are faced with is not between maintaining the same recovery strategies or wasting the effort already made, but between maintaining an effort that may end up recreating circumstances that are very similar to the ones that originated the crisis or having the effort reoriented in order to transform the current economic dynamics. The short and mid-term effort no longer can only be reactivation-oriented; it should also be transformative.

The global strategy needs to focus on fully mobilizing the creative and productive capacity of the whole set of countries and, within each one of them, of their entire society. This entails new rules of global and national functioning: (i) regarding the international arena, to effectively back every country but particularly those who lag behind and (ii) within each economy, to support the ensemble of businesses, the big ones that play important roles and, with special emphasis, micro, small and medium size entrepreneurs, the huge segments of the unemployed and the new generations that are struggling to become a part of the workforce. It’s about transforming the structure of the economic system and its way of functioning towards a sustainable organic development.

It is fair to admit that having avoided a pervasive collapse is no minor accomplishment as, had it actually occurred, the destruction of businesses, jobs and assets would have been much greater. The cost of that bailout has been huge, and it is being borne by communities who see their education, health and safety plans affected, by workers who have lost their jobs, by entrepreneurs who have suffered tough setbacks or the closing of their units. Only a few, instead, will come out of the financial tsunami in good shape.

Surprisingly enough, the economic groups and individuals that, out of greed or negligence, put the financial system on the verge of ruin, begin to regain preeminence and, with it, the capacity to weigh on the macro-economic and financial decisions that are taken to bring the economy back to health.

Reorienting the Way Out of the Crisis

The information that begins to surface indicates that, far from reducing inequality and eradicating poverty, the crisis increased economic concentration and decision-making power. The dynamics of the process caused an extremely severe loss of jobs and the reduction of incomes of wage earners and most micro, small and medium-sized producers.

There is no doubt that coming out of the crisis calls for a resolute attitude and the coordination of policies and strategies at the global level. But it is risky and, ultimately, ineffective to just seek to “reactivate” the very economic system whose way of functioning led to the crisis; it is necessary to change the course and the systemic functioning in order not to reproduce the same circumstances.(1)

To secure sustainability, it is necessary to end the huge imbalances existing between affluent countries and the rest of the international community; and in each country, between high-income sectors and the vast majorities of impoverished families. The challenge lies in attaining such a goal without affecting but rather encouraging the vigorous development of society as a whole. Global imbalances are not eliminated with partial aids that end up being cosmetic and hardly significant solutions, but by reorienting trade arrangements and the flow of resources and knowledge in that direction. In turn, intra-country imbalances are not worked out via “special programs” but by redirecting macro-economic policies, coupled with the involvement of value chain leaders and effective direct support to the base of the production system.

Adjusting the course implies the adoption of new strategies to get out of the crisis that not only encompass economic but also educational, political and governance changes. In the following lines we stress two of those critical strategic changes that need to be addressed at once: (i) imposing new regulations on the financial system, and (ii) deploying a huge capital formation effort at the bottom of the social pyramid.

(i) New Regulations for the Financial System

A twofold effort is called for in this field: better regulating the existing financial system and promoting solid financial players capable of mobilizing the immense energy that nests at the bottom of the social pyramid. Some essential components of a new financial system include:

_ – Establishing strict solvency and liquidity criteria for financial institutions, demanding a higher level of capitalization, that such capital be backed with high-quality assets, that in times of prosperity reserves be increased in order to be better prepared to withstand periods of hardship; that financial institutions have sufficient readily available liquidity, and that the bank asset accounting criterion be adjusted to reflect market value.

_ – Introducing changes to the government structure of financial institutions so as to improve supervision and have early alerts in place about possible deviations from a sustainable course.
_ – Introducing changes to, and regulating, marketed financial products in order to preclude the speculation associated with destabilizing risks.
_ – Stipulating that executive compensations in the financial system be calculated in terms of long-term results rather than non-sustainable returns, one of the factors that contributed to trigger the crisis.
_ – With a portion of the resources devoted to stimulating global recovery, strengthening the capital and management of micro-financial entities, as well as those that provide funding to small and medium-sized producers, in order to ensure their enhanced efficiency, coverage, and short and mid-term sustainability.

(ii) A Sound Initiative for Capital Formation at the Bottom of the Social Pyramid

Capital formation at the bottom of the social pyramid is a critical element to ensure sustainable development and avoid the reproduction of the same circumstances that led to the crisis: it is a key factor in the effort to eradicate inequality and poverty; it enables the full mobilization of any society’s realizing potential, channels saving towards productive, non-speculative activities, widens the domestic market, changes the profile of effective demand, contributes to the resolution of serious social conflicts, helps contain insecurity, and reinforces democratic governance.

It involves the generation of both social capital in education, social organization and underprivileged families’ support institutions, and economic capital in small and micro production units. To attain the latter, a variety of suitable tools are available such as microfinance programs, inclusive ventures developers, small local funds to support productive investment, technical and managerial support systems for small producers, including the cooperation of the scientific and technological community, new socially and environmentally responsible angel investor networks. Also available is state-of-the-art business engineering that can be efficiently used to bring together today scattered small production into medium-sized economic organizations capable of accessing better market opportunities, including franchise systems, trading and export consortia, service providers that lend support to small manufacturers, modern production cooperatives, agribusiness drivers integrated to small farmers or peasants. There are no few channels or tools to facilitate the formation of capital at the bottom of the social pyramid; what is missing is the political will to advance on a large scale in that direction.

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notes:
i) For an analysis of these subjects, see Opinion Sur Collection e-books: “The Storm of the Century: the Economic Crisis and its Consequences”, “Adjusting the Course and Improving the Systemic Functioning”, and Getting out of the Crisis Towards a Sustainable Development. Also from the same Collection, the book “Adjusting the Course”, recently published in Argentina.

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