In contemporary crossroads, no more adjustment rather transformation

Adjustments imposed onto so many countries do not solve but rather magnify the extremely serious problems generated by the unbridled process of concentration of wealth and decisional power that prevails in the world. On the contrary, efforts should be oriented towards dismounting that process. What options exist?

 

Majority of countries is immersed in trajectories marked by an unbridled process of concentration of wealth and decisional power whose social and environmental consequences are calamitous. In that path, crisis over crisis succeed that strengthen prevailing tendencies. They seem to be deliberately created.

One of the pillars of the concentrating process is imposing the notion that there is just one possible course, one unique way of functioning and exiting from the recurrent crises, one of the many deceits used to mold subjectivities and avoid or attenuate resistances.  However, reality shows that options are varied and diverse.

The watershed between existent options marks two clear, antagonistic strands which are differentiated precisely in terms of course and way of functioning and, especially, about those who bear the costs of the selected option (that is, those who are favored and those who are harmed by each election). One type of option is centered in what is called “adjustment” which is no more than the reorganized reproduction of the concentrating order; the other strand implies diverse degrees of transformation of such order.

  1. Adjustment to preserve the process of concentration of wealth and decisional power

Adjustment does not transform what is essential in the prevailing dynamics; on the contrary, it tries to free itself from restrictions that limit its devastating consequences. With that, they are able to reinforce and accelerate concentrating tendencies, by favoring the full functioning of the engines that generate concentration.

Therefore, policies implemented by the adjustment do not promote development or assure equity, sustainability, and justice. On the contrary, they focus on ordering the macroeconomic unbalances that such same process generates or increases. One of them is fiscal deficit (the difference between public income and spending) but, as shown below, neither removes the factors that produce it nor the external sector bottlenecks (foreign currencies) outflows larger than inflows), one of the main limitations that infringe upon a national, sustainable, and sovereign development.

How does a fiscal deficit appear? Different actors that have access to State decisions fight in two different levels: influencing on public spending and on how such spending is financed. Actors that are more powerful impose their interests to obtain spending that favors them while majoritarian sectors try to sustain acquired rights and coverage of their basic needs. That fight tends to add up spending; illegitimate some legitimate others, without securing its funding.

(i) Public spending

Adjustment addresses fiscal deficit cropping public spending. As larger items are retirement and pension benefits, spending in health, education, and State employees’ salaries, is where cuts are orientated. This affects living standards of popular majorities and little or almost nothing the wellbeing of high and medium-high incomes. Allocations for attending amortizations and interests of sovereign debt are not affected despite being an item that weighs more and more heavily on fiscal deficit. The situation is concealed focusing the political discussion on the “primary” deficit (all income and spending items except for precisely amortizations and interests of debt) but not on total tax deficit as it would disclose the true composition of the deficit that the State has to tackle.

Public spending that should care for the fundamental needs of society usually also includes perquisites in favor of affluent sectors that capitalize those resources for themselves. In this way, allocations for education, health, social security, energy, science and technology, environmental sanitation, communication and many other items that sustain social needs coexist with allocations to build roads, ports, irrigation and flood contention systems, among other productive infrastructures some of which favor concentrated groups that profit from them without any impact on their costs. In truth, every public spending should be evaluated considering whom they favor because, if those being favored were high-income sectors, it would be appropriate to make them pay for the improvement contributions contemplated in almost every law. However, by the power they have they frequently receive public works and services free of charge or only partially paying for their costs. This is inadmissible in full democracies.

It will also be appropriate to analyze any inefficient use of public spending, including allocations to cover social needs. Because, in addition to eliminating perquisites that favor the powerful, there are important margins to enhance the application of social programs that, by their nature, require permanent actualization as knowledge, technology, and application methodologies are developed.

In any case, fiscal deficit analysis does not end with the revision of public spending identifying whom it favors, its magnitude, structure, and effectiveness in its application. It is necessary to consider other variables that are part of a fiscal deficit: State incomes and also how the actual deficit is financed.

(ii) Public incomes

Regarding public incomes, the fight between actors with very different decision power is replicated. Powerful groups always try to minimize their contribution to public income; directly by forcing tax legislation to be as less progressive as possible: fewer taxes on profits and wealth and larger taxes on consumption and high tariffs for public utilities (electricity, gas, water, and transportation) that are easier to collect and levy equally on every consumer either rich or poor. Thus, the contributions end up being burdensome and unequal against those with lower incomes who devote most of their patrimony to cover their consumption and access to basic services.

However, powerful groups avoid most of their contributions through tax evasion and capital flight. For that, they can count on teams of specialists on tax evasion or elusion, facing very weak collecting systems that are generally centered on persecuting small and medium taxpayers, leaving unpunished large taxpayers who are the main responsible for State underfinance.

A clear expression of the flight and concealment of capitals done by the richest becomes evident when we verify that two thirds of the resources deposited in sinister fiscal heavens—better called tax havens—belong to concentrated capitals, including very rich individuals from Latin American and Africa. On the other hand, resources from organized crime add up to another 30% of what are laundered in fiscal havens, while resources originated in corruption represent 3% of the capital flow concealed in such jurisdictions.

When those who have larger tax responsibility do not pay taxes, the rest of the actors must bear the entire tax burden caused by evaders, another injustice that is unloaded on majoritarian sectors. To make matters worse, these large flight resources are a critical part of domestic savings generated by the entire society, extracted from the rest by the economic power, which prevents it from being allocated to financing genuine sustainable development. It is a serious fact that is concealed from public scrutiny, needed for understanding why we need to tackle such huge social and economic problems while entire communities and countries bleed out. How many solutions could be addressed if we could eradicate tax evasion of the richest and the consequent capital flight!

In addition to the income from taxes, duties, and improvement levies, the State can turn to indebtedness to cover certain expenses whose results have a longer maturity than one fiscal year. Here, it is important to choose investments in works or services that direct or indirectly allow the State to tackle in due time and manner the repayment of such indebtedness. If that were not the case and if indebtedness were destined for finance expenses that do not promote social and economic development, then we would only be generating a dangerous time bomb.

(iii) Financing public deficit

The third strategic variable in relation with fiscal deficit is how is financed. Once public spending had been compressed and further levies to large evaders were not possible or wanted (in both cases, the consequence as usual is to punish majoritarian sectors), and if tax deficit were still present, it would be necessary to decide how to finance it.

Once again, it is worth making explicit that there is not just one way of financing tax deficit, as some would have us believe. One option is to increase monetary issue to pay for expenses that exceed available income. Another option could be to postpone payment of certain expenses already made. A third mechanism would be to increase public indebtedness in domestic or foreign currency, each modality with its very different consequences.

Larger money issue has different effects according to its scope and the state of the economy. In terms of the scope of the monetary issue, orthodox policies applied in adjustments reject any type of issue that exceeds real economic growth as it might feed inflationary pressures. Instead, heterodox economists accept prudent issue margins that might go ahead of productive growth to incentive the domestic demand, as a way of contributing to such desired growth. In truth, the impact of a monetary issue will depend on which is the prevailing productive structure in the country.

If oligopolistic conditions prevailed, increases in demand not necessary would induce an increase in production as oligopolistic enterprises could maximize their profits through prices without increasing their production. In this case, monetary issue will add inflationary pressures to the deeper structural causes. By contrast, if the economic system presented reduced oligopolistic levels, then a moderate monetary issue to reinforce internal demand could promote increases in productive offer (and thus growth) without major impacts on prices.

On the other hand, if fiscal deficit is financed by postponing payments to State suppliers (services as education and health and public works contractors), this will affect both the economic dynamic for the delays and obstacles in payment chains (multiplier effects) and the general wellbeing served by schools, universities, hospitals, health centers, among many other suppliers of basic services.

Lastly, if we chose to increase sovereign indebtedness to cover fiscal deficit, especially if done in foreign currency, it would generate a very serious factor of national submission before impious international creditors. This is a risk to avoid at all costs because inasmuch as the country relies on over-indebtedness, financial conditions imposed by its creditors get tougher and more usurious.

In summary, fiscal deficit is not a technocratic fact; rather it emerges from fights between actors of very different power and interests. Its genesis relates with the correlation of social forces that are occurring over time; and the way of addressing their existence, and its eventual resolution varies greatly according to the prevailing political coalitions and who accesses State control.

  1. Transformations

Faced with negative structural characteristics of our countries exacerbated by adjustments, we need to explore other perspectives for dealing with the contemporary crossroads that has been imposed on us. The first step is to free ourselves from the deceit that states that there is only one single option, the one that reproduces prevailing order, and to recognize that it is possible and desirable to choose solutions that target the transformation of the concentrating process. With a warning: we should also admit at this point that there is not just one transforming solution, rather various and diverse according to the circumstances and possibilities of each situation. However, and prudently, we can describe some general criteria that make transforming solutions different from adjustment recipes.

Transforming options would try firmly to increase the progressiveness of the tax structure, would end ways of evasion and elusion of great taxpayers, would reduce sovereign indebtedness limiting eventual new contracts to finance carefully-selected strategic sectors, would eliminate expense items that favor medium-high and high income sectors or, at least, finance those expenses with improvement levies. Furthermore, transforming options would permanently evaluate the effectiveness of expenses directed to majoritarian groups of population, as well as eliminate nucleus of corruption and inadmissible cronyisms.  These and other transforming measures should be taken in a context of promotion of the domestic market, strengthening real salaries, the defense of national industry, elimination of every type or cartelization of enterprises, support to small and medium enterprises, good management of available foreign currencies and main export-import items. Each country, according to its particular situation, must bear the responsibility of choosing the best possible group of specific measures to materialize advances in the transforming course.

Transforming options tend to produce significant changes in the course and way of functioning, prioritizing fairness for majoritarian sectors and assuring that each one assumes his/her quota of responsibility for society according to his/her patrimony and income.

A critical aspect of these options is transforming the structure and functioning of the productive matrix, developing new actors and spaces for capital accumulation, which in turn increase equity and enable the lift of recurrent external restriction that greatly affects our countries. For that, it is needed to promote sectors and value chains that from own production help improve the distribution of wealth and income while being less intensive in the use of imported services and inputs, and support exporting activities intensive in the use of local labor, knowledge, and inputs.

Thus, transforming effort demands adopting policies of industrial promotion and services that not only strengthen existent enterprises but also support the establishment of a diversity of associative ventures, such as first and second-degree cooperatives, popular franchises, community traders, stockpiling centers, and transportation, locomotive agro-industries that process products from family-based agriculture, small and medium export consortiums, community supermarkets.

There should also be innovation in terms of the promotion instruments of these initiatives; for example, creating developers of ventures born out of popular economy, as well as trusts specialized in providing capital to those productive units and financial entities that can provide credits for working capital.

Usually, main value chains are structured so that its leading enterprises abuse their market power to concentrate most of the results generated by all the participants of each chain. This must be changed to assure a better distribution of results and, in this way, reinforce the viability and sustainability of the entire productive fabric. The State can play a mediator role similar to the one it plays (or should play) in the wage bargaining by supervising those negotiations.

Different modalities can be tested to assure equity and organic growth in value chains. One of them is establishing spaces for negotiation of prices and commercial conditions among different participants of each chain. Another modality could be to create trusts geared to supporting small and medium participants of a chain, funded by a part of the profits leading enterprises get. This contribution could be in cash or, if this could affect better corporate operation, in shares that would channel future dividends.

In terms of sovereign indebtedness, we have already alerted about the risks it carries because it can end up being extremely burdensome for public finances and become one of the hardest subduing mechanisms for the nation and loss of decisional sovereignty. However, a prudent indebtedness to finance investments that could help national development and that, when mature, enable cancelling the principal and interests on such debt, would appropriately complement domestic savings.

Foreign investment orientated towards real economy is always welcome when framed into the effort of transforming the productive matrix and way of functioning of main value chains. The denationalization of enterprises should not be encouraged. Instead, countries could promote participation agreements that bring unavailable technologies into the country, access to new markets, and strengthening of the integration with neighbor countries or those of the same region.

It is not worth to attract swallow capitals geared towards financial speculation because as well as they arrive they leave carrying in their backpacks values extracted from the entire national society. The deregulation of capital flows and the renouncement to influence on the allocation of the always-scarce availability of foreign currency generates systemic instability that severely affects the course of any country who is not the issuer of such currencies. It would be much better to regulate appropriately those factors that influence the performance of the external sector while, at the same time, promoting a capital market funded with resources from social security and insurance systems that require medium and long-term investments.

In a similar way, it is necessary to orientate the financial system to the fulfillment of channelizing domestic savings they manage towards financing real economy, clearly removed from speculative financial applications. Moreover, their credit portfolios should reflect the diversity of prevailing economic actors and not centering just on serving wealthiest corporations and enterprises.

Final remarks

We mentioned the great fights between actors for the control of the State and the manipulation of economic policies to dispose of the wealth that the entire society generates. Fights are concealed because their results in terms of inequity, poverty, and loss of decisional sovereignty are indefensible in the open.

One question that we all ought to answer refers to who should decide if the economy is at the service of capital or the people and the protection of the environment, over culture, values, type of information that is transmitted, interpretations that are prioritized. Will those be the citizens or the markets lead by dominant minorities? Can we hope to live in full democracies or are we going to fight permanently in captured democracies? Large part of the answers relate with promoting greater social clarification and organization orientated towards transforming the prevailing correlation of forces. These are not technocratic but rather political facts (multiple relations between peoples, groups, and countries); the critical issue is that they condition our living and the future of our beloved and punished planet.

 

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