Inclusive development: invigorating the demand together with restructuring some supply-side segments (Avoiding unwanted impacts of a liquidity injection)

Injecting liquidity into the market at the level of popular sectors is, in principle, highly advisable as it increases their demand for goods and services. However, it is necessary to keep track of such injected liquidity to appreciate subsequent effects. If markets structures were such that they could facilitate the existence of strong value appropriation mechanisms by concentrated groups, that primary dynamics could get diluted and generate unwanted effects. In these cases, it will be necessary to adopt complementary measures to transform or restructure certain segments of the productive system.

The mechanisms to invigorate the internal demand of popular and middle-class sectors are varied and diverse, such as increases in wages and retirements, a universal allocation per child and maternity, credit at preferential rates for small productive and cultural ventures, for the acquisition or repair of housing, for popular consumption, low tariff levels in public utilities, free public education and health, sanitation, among others. These allocations help sustain the right of popular sectors to live in dignity and make for society’s responsibility to proceed with justice and fairness. Furthermore, from the perspective of the economic system, it happens that these allocations activate at the same time the demand of those who receive them.

A larger internal demand favors productive sectors, which can react in different ways. If there were idle capacity or if such would have been absorbed by the first increases in demand, very different options open up for the owner or manager of a productive unit: 1) he could invest in his business to increase production and, thus, receive additional benefits by making the most of a larger demand; 2) alternatively, he could decide not to invest and not to increase production and just take advantage of the bigger demand by speculatively raising prices for his products, obtaining higher benefits at the expense of extracting more value from his clients who are forced to surrender a larger part of their incomes; or 3) he could combine increases in production and prices. The viability of one or the other option depends on the market situation (its structure, functioning, and concentration level), the power that each actor detents in such market and the values that guide their conducts. This is the trail it is worth following to appreciate further effects of the original injection of liquidity.

Unwanted social impacts

In these lines, we will only consider some of the possible unwanted social impacts of the invigoration of the internal demand: the persistence of value appropriation mechanisms, the eventual diversion of surpluses towards financial speculation, the pressure on the external sector that might be generated by imports, and the likely sterilization of surpluses through capital flight. These unwanted effects (and others not analyzed here) by no means invalidate the strategic importance of energizing the internal demand; on the contrary, if we were to consider that they might occur, they could alert us about the need to adopt, at the same time, eventual corrective measures on the side of the productive supply.

(i) Persistence of value appropriation mechanisms

If the markets are oligopolistic (just a few powerful actors control them), there will be, to a greater or lesser degree, unwanted social effects derived from the increase in the internal demand. This is related with the persistence of a variety of value appropriation mechanisms through which leading companies of productive chains walk off with part of the value generated by their suppliers and consumers.

In oligopolistic markets an increase in demand amplifies the extraction and concentration of value. As stated before, a higher value appropriation can be obtained by adjusting prices without incurring in additional costs (purely speculative appropriation) or by increasing production to preserve or even expand the market share. It is clear that there are important differences between these ways of value appropriation: the speculative appropriation does not increase the productive supply while the appropriation through preservation or increase of market shares certainly does so: although the concentrated groups continue extracting value from their suppliers and consumers, they still need to employ more workers, acquire larger quantities of inputs and, if there were no idle capacity, even procure new equipment and other capital goods. In both cases, the concentrated sectors achieve their objectives abusing their power market.

(ii) Eventual diversion of surpluses towards financial speculation

Some concentrated groups that manage to appropriate larger quantities of value direct those surpluses towards financial investments not related with their productive activity. That detours resources from the real economy towards financial speculation, operations that tend to offer higher rates of return, contributing in that way to the dramatic unbalance that exists between financial businesses and productive activities. This tends to generate systemic instability that usually leads to recurrent economic crises that devastate the world punishing majorities while benefiting the strongest economic groups.

(iii) Pressures on the external sector

If the invigoration of the internal demand would directly or indirectly reach all productive sectors, diverse pressures might be generated on the external sector. This depends on the level and type of integration that the national productive system has with the rest of the world. A typical example is the case of the automotive industry, where most of its inputs, in particular some that are critical in the manufacturing process, are imported. Thus, a higher internal demand for vehicles will increase imports of auto parts, requiring further use of foreign currency, an almost always scare resource in emerging economies. Hence, the importance of making a careful evaluation of the type of internal market invigoration that is to be promoted as the demand profile of popular and lower income sectors is completely different as compared with upper and middle sectors as well as concentrated groups. It also shows the need to combine economic reactivation measures with solutions in the external sector to avoid recurrent bottlenecks (higher exports, import substitution, external financing, among others).

(iv) Probable sterilization of surpluses by capital flights

The accumulation of growing surpluses in concentrated groups together with the deregulation of financial movements that prevail in the world today, encourages the capital flight from the country that generates them towards speculative financial operations in any other country; especially if the regulatory framework in those countries is more lenient and lets them use fiscal havens to evade their tributary responsibilities. Capital flights sterilize good part of the surplus produced with the effort of all actors involved in its generation, having severe negative effects. As the capital that flights is made up of value extracted from workers it affects their quality of life, from value extracted from suppliers it reduces their capacity to reinvest strengthening their companies, and also from value extracted through abusive prices imposed to consumers reducing their available incomes. In addition, the surpluses that sneak away could have been used to invest in the real economy of the country that generated them, thus, preventing eventual multiplying effects of those investments. Likewise, tax collection suffers from the evasion of the richest that offload their responsibility on those taxpayers that actually pay their taxes, affecting public spending in social and productive infrastructure. Impacts of capital flights are extremely serious and diverse.

Need to restructure certain segments of the productive system

In this way, if the invigoration of the internal demand presents severe risks of generating one or several unwanted socioeconomic effects, public policies should at the same time include measures to avoid them. This includes establishing a better and firmer regulatory framework together with interventions to transform those segments of the productive system that keep extracting value generated by other economic actors. The ways of addressing those challenges on the productive supply side are multiple and, also, conditioned by the singularities of each situation. Thus, no recipes can be offered; at the most, some examples of possible measures could be presented as a way of illustrating what enhancing the regulatory framework and transforming or restructuring some segments of the productive system mean.

(i) The case of value appropriation in the food production chain

Abating the appropriation of value in productive chains requires diverse transformations. In the case of food production it will be necessary to address, on the one side, the provision of inputs and, on the other side, the prevailing commercialization chains. The supplies required by the food producer (equipment, enhanced seeds, fertilizers, fungicides, among others) have prices that depend on the oligopolistic position of those that produce them, usually, big corporations; in addition, there are surcharges added by those who distribute the supplies and the eventual payment of leasing, renting, and taxes. Moreover, the way in which they usually commercialize their products includes a variety of actors: local middlemen, freight operator, wholesalers, agro-industries, retailers, before reaching the final consumers. In this economic fabric, the capacity to negotiate prices will depend on the general situation of the local economy as well as the size, information, expertise and financial solvency of each actor.

Before an injection of liquidity to invigorate the demand, if it were desirable to secure the value generated by small and medium-size producers instead of being appropriated by other actors with larger market power, it could well be possible to intervene restructuring certain spaces of the productive chains. For example, facilitating local associations of producers to jointly gather and sell their products, promoting locomotive agro-industries that, being of cooperative or mixed ownership, could pay compensatory prices to the producers, supporting sustainable agreements of fair trade with existent supermarkets and establishing community-based supermarkets to act as referents. More complex but necessary to address is the oligopolistic provision of main agriculture and livestock supplies.

(ii) The case of the financial gobbling up of resources that are diverted from the real economy

This includes productive surpluses that are diverted towards local financial speculation as well as capital flights. Abating this is extremely difficult due to the porosity of the regulations that try to avoid the sterilization of national savings. Once the financial capital gets concentrated in highly powerful economic groups, the regulatory framework becomes ineffective due to the huge influence that is exercised over some critical sectors of the political system, the media, the Judiciary and over the same regulatory agents.

The capital drainage is enhanced by the free mobility of capitals that prevails since the financial markets were deregulated. Such deregulation imposed by the interests of the financial capital generated a boundless licentiousness that allows evading national regulations and their tributary responsibilities. It represents an enormous flow of resources that is left out of reach of national jurisdictions coming from illegal or illegitimate activities, including corruption and organized crime.

Since today there is no global authority that could transform the situation, there should be severe local restrictions for entry and exit of purely speculative capitals, which is hard to materialize due to the complicities that are mobilized to circumvent them. Though it is difficult to unmask them, it is clear that they all come from the same causal matrix which is the one we should target. We need to act on the reduction of the systemic porosity that allows for market power abuses and crimes; that is, on effective regulations and restructuring of the financial system together with a diverse battery of redistributive measures that include levying on extraordinary profits, higher taxes on surpluses not reinvested in the own company or in investment funds focused on the real economy, leveraginginclusive ventures with credit and other financing sources (capital markets and public investment). That is, promoting first and foremost the transforming productive investment.

(iii) The case of the foreign sector bottleneck

To address recurrent external sector bottlenecks, the medium-term focus should be placed on transforming the existent productive matrix. One of its most vulnerable points is the oligopolistic position that is held by big exporters, usually transnational corporations that appropriate a good part of the value generated by local producers, besides evading taxes by under-invoicing what they sell to subsidiaries based in other more lax jurisdictions or plain fiscal havens. In this regard, much can be done by the national fiscal authority controlling the transfer prices that are used.

Indeed, it is of strategic relevance the establishment of alternative export modalities as well as setting regional commercial agreements that prioritize balanced exchanges among neighboring countries.

A critical aspect is to advance phase by phase but firmly exploring all possible opportunities for import substitution, trying not to affect the country international competitiveness even though considering the diversity in maturity times that every new productive activity requires to consolidate and the critical role that science and technology play in its development.

Economy, politics, values

We can conclude that, as it almost always happens in the economy, an adequate public policy does not attain the desired objectives just by itself. Invigorating the internal market is an essential factor to support an organic growth, even more if it has a distributive focus in favor of popular sectors. However, we have seen that its initial positive impact can then generate unwanted effects if the prevailing market structure would ensure the persistence of value appropriation mechanisms, the diversion of surpluses towards financial speculation, and an unbearable tension over the external sector and an ominous capital flight. Thus, to avoid those and other unwanted effects it will also be necessary to act on the structure of the supply side.

Hitherto, a summary of what has been analyzed. What cannot be ignored is that the economy is part of a comprehensive reality where interests, needs, emotions and values of multiple actors with very different power shares coexist. Hence, social tensions as well as the most significant economic challenges have non-technocratic solutions but those resulting from the prevailing correlation of forces. That is the critical field of the political action and the cultural battle for values and ideologies; it is worth not to forget it.

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