Social Inclusion: Redistributing Income and Generating Wealth in a Decentralized Manner

There are very diverse strategies available to try to abate inequity and poverty. Some of them focus on measures regarding the redistribution of income (that is nowadays produced in a centralized manner) and others, on encouraging greater decentralization of wealth creation. Probably the most effective approach would be to combine both types of measures. What we are positive about is that, if we do not act firmly and effectively on those two fronts (creation of wealth and income distribution) the vigorous dynamics of concentrating growth will tend to aggravate situations of inequity, poverty and social exclusion.Concentrating economic system and income redistribution

A possibility to achieve social and economic inclusion is to redistribute part of the income the centralized economic system generates towards sectors that are excluded or left behind; for instance, to adopt a more progressive tax system and better orientation of public spending. Thus, the economic system keeps generating wealth in a centralized manner while the State participates through compensatory measures: it gets hold of income by means of the tributes it sets (taxes, rates and contributions) and channels it for funding productive and social infrastructure that may improve the standard of living of those who are not directly benefited by the centralized income generation. If this was achieved fully and without inconveniences, then it would not be urgent to transform the process of centralized wealth creation as its worst effects could be counterbalanced through measures geared at income redistribution.

However, various circumstances negatively influence the purpose of compensating and not transforming concentration. To begin with, the economic power exerts great influence on the definition of public policies; although it is true that it does not constitute a homogeneous universe and that at its core there are segments with the vision necessary to understand the benefits that aligning the various interests at stake entail, there are also groups that intend to impose their interests over those of the social ensemble to the letter, affecting therefore the efforts to promote socio-economic inclusion.

Also, in a highly competitive context, whoever may be delayed growth or innovation wise risks staying out of the market as other more dynamic players can remove him or her. This is, if the tax burden that collects income from businesses and entrepreneurs was such that it weakened the capacity of the latter to compete, and if this was not compensated by a State that improved the systemic conditions related to the viability and growth of those companies and entrepreneurs, then the

Nonetheless, what often occurs is that the tax burden does not affect everyone equally because some players operate in circumstances of privilege managing to avoid their share of distributive responsibility be it because they get a better income than the rest as a result of their oligopolic position, because they count on mechanisms to elude distributive burden, or because they have the political influence to gear regulations and public resources in their benefit. Besides, there are international players who obtain even better results because they can choose which countries to operate in and count on numerous mechanisms to use among subsidiaries so as to minimize tax payment, such as under or over charging for the products they exchange regardless of the market prices. They consequently manage to skip national regulations and compete with advantages by discharging a good deal of the income redistribution weight.

In other words, the logics of a centralized wealth generation process with ulterior income redistribution takes place in a context of hard conditionings and limitations. Were these ignored, they could affect the very base of sustenance of the process which is the capacity to generate income that is later object of redistribution. We have here a contradiction inherent to any process of centralized wealth creation; on the one hand, when the situation gets to a point where inequality and poverty have to be offset, to a certain extent, in order to contain social unrest and expand the domestic market, political authorities need to resort to income re-distribution measures; those same measures create tensions among dissimilar aims, such as financing unmet social needs and sustaining accumulation, profitability and, on extreme occasions, the very viability of the economic system.

Generating deconcentrated wealth to foster inclusion

Another possibility of a different nature is to add larger and larger population segments to the national productive effort so that, while contributing to generate wealth (GDP increase), they give way to societies with better income distribution. This is about aiding low income sectors that are at present left behind or excluded, so that they can participate in the process of wealth creation more effectively. Thus, income creation and distribution would integrate a single socio-economic act with an important additional systemic effect: the more the decentralized wealth creation manages to abate poverty and inequity, the more the redistribution measures weight would diminish.

The pursuit of a form of deconcentrated generation of wealth and income dates back a long time ago, and has been marked by valuable efforts resulting in successes, mistakes and lessons learned. Such experiences contributed to giving visibility to fundamental issues that had not been included in government agendas, mobilized very dissimilar wills, attempted at new approaches and solutions, widened the base of the production system. Their contribution was enlightening and, yet, achievements were often partial and solutions, incomplete.

(i) Some background

Decades ago, the microcredit mechanism was introduced amidst controversy over whether the poor were capable of taking loans, whether the higher operating costs of lending such small amounts of money would render such facility unviable, whether financial entities would be able to withstand that new credit risk without the backing of the collaterals they typically operated with. Meanwhile, from a different perspective, concerned voices questioned whether the new facility would only be broadening the economy so as to ensure market access of poverty- stricken majorities without transforming their needy condition, or affecting the pro-
Microcredit successfully addressed some situations of widespread poverty and inequality, although, as we will soon see, other critical challenges failed to be met.

a) Microcredit programs demonstrated that the poor are usually good payers, boosted their self-esteem, and helped them to avoid the usurious charges they were subjected to. Microcredits made it possible for many millions of people to access or strengthen subsistence-level income activities and, in certain cases, embark on capitalization processes.

b) In the beginning, particularly in lousily organized and managed programs, some microcredits ended up in failure, with high bad debt rates. However, with time and experience, many of those situations were overcome.

c) It was also possible to attain a significant reduction in the costs of managing an atomized, small-loan portfolio. Mainstream financial institutions were used to handling, and continue to handle, large to medium loans and, therefore, their work —as well as each transaction’s inherent costs— was adjusted to that type of clientele, as well as to the larger amounts of each particular loan. Innovating, changing perspectives and operating modalities were required to conform to the characteristics of the new clientele.

d) Microfinance entities adopted new methodologies and operating modalities to serve their new clientele and absorb the larger relative cost of each microloan. The cost gap was narrowed though not eliminated, and, therefore, interest rates imposed on microcredit borrowers remain significantly higher than those applied to other players.

f) A similar thing happened with loan guarantees. In the absence of actual collaterals, unconventional modalities were required to be designed, such as peer groups —where all borrowers are jointly liable for the repayment of the loan taken by all group members— as well as the more sophisticated guarantee funds which, in consideration for a small premium, back in full or in part each individual microcredit transaction.

However, microcredit was incapable of solving other aspects that have to do with the economic viability of micro and small producers as access to credit is a necessary yet insufficient condition to transform the adversarial circumstances in which they work: other critical factors need to be equally addressed, such as access to knowledge, information, contacts, effective management, and mainly, a larger scale enabling them to seize better opportunities.

Later on came entrepreneurship and entrepreneur development programs. Here, each small or micro-producer was no longer reduced to a mere loan-taker, but, instead, seen as an entrepreneur in need of acquiring knowledge, accessing market information, better management and trading systems. Strong emphasis was placed on education and training.

These programs produced entrepreneur cadres that joined the local production effort, deployed initiatives, and generated value in a deconcentrated manner, thus contributing to poverty mitigation. In very few cases, however, did they manage to overcome the small scale-inherent limitations.

The pursuit of associative production modalities dates back a long time in the history of modern economy. The modalities tried were many and diverse, some were very successful while others, although based on fair principles, were not always deployed with the efficacy required to compete in increasingly globalized economies. It is by venturing along those paths, however, that promising possibilities are encountered to access higher opportunity thresholds.

(ii) A huge political challenge

Stimulating deconcentrated generation of wealth and income implies a huge social and economic challenge, as well as a huge political challenge, as it calls for major strategic decision-making and actions at different fronts and levels, supplementing and leveraging one another. Hence, leading and implementing this transformation is the responsibility of not only the public sector but also the private sector, the scientific and technological community, social organizations and the civil society.

Such broad-based joint responsibility should cause no surprise, as generating wealth in a deconcentrated manner entails significant changes in our way of functioning. To begin with, it requires the adoption of a comprehensive strategy capable of introducing adjustments to macroeconomic policies, attitudinal changes at the mesoeconomic level (the production network and value chains space), and new small and micro-producer direct support mechanisms. Several Opinion Sur books [[Los hilos del desorden, 2006, Un país para todos, 2006, Negocios locales, oportunidades globales, 2007 and Adjusting the Course: Getting Out of the Crisis Towards Sustainable Development]] and articles have elaborated on this approach.

(iii) The new search coordinates

In the Southern Hemisphere, vast population majorities live on low-productivity activities; most of the times, those are merely subsistence-level activities. Since these population sectors lack all sorts of resources, the passage from this type of productive insertion to a more promising one is not easily accomplished; much less, if attempts at progressing are made in isolation. Expanding the scale of production solutions is a key element.

Neither is it a question of successfully bringing a few out of poverty; the magnitude of the problem is such that the aim should be placed on solutions that may have all case-specific singularities, but their scope should definitively be massive. This does not rule out demonstration projects and trials; yet, the acid test consists in the capacity of projecting the impact of each solution beyond the individual case towards the universe of poverty and inequality.
To face this transition with prospects of success, state-of-the art management tools and knowledge need to be available; not their residue or scrap, as marginalized or lagging populations often receive. The gap between affluence and poverty is not only of economic nature but, ever more, of knowledge, management, access to information and contacts.

Hence our claim that, to establish effective solutions capable of reducing inequality and poverty, the new search coordinates should aim at raising the economic scale of initiatives, ensuring that efforts have massive scope, and demanding levels of excellence in all policies, programs and initiatives implemented. Prior articles of Opinion Sur have followed those types of searches, and we intend to keep doing that during 2011.

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