Structural Adjustment in Central Countries: Implications for the South

Structural adjustments in central countries are beginning to be perceived. One of them is that the United States ─and perhaps other central countries─ emerge from the crisis with an even less labor-intensive economy than in 2007. How will this phenomenon impact on the US post-crisis social and economic structure? Whether the economic concentration process is sped up or reverted will depend not only on the domestic dynamics but, to a considerable extent, on the evolution of the foreign context and, quite especially, on how the enormous amount of resources that have been committed to tackle the crisis and facilitate a way out of it are ultimately allocated. What does all this entail for the Southern countries?Recent news from the United States show that the loss of jobs generated by the crisis since December 2007 has outpaced economic contraction: the US unemployment rate grew five percentage points while the economy shrank about two-and-a-half points. From this it can be inferred that (i) businesses have confronted the crisis by abating costs but, in particular, by laying off personnel and/or (ii) the more labor-intensive firms (generally small and medium size businesses) have succumbed more than the other ones. In any case, what might be taking place is a reduction in the wage bill in relation to GDP as well as in the relative weight of small and medium size businesses in the production system. Both causes lead to a greater degree of economic concentration.

With these new trends, how will the US post-crisis economy emerge? And what does this entail for the Southern countries?

Impact on the US Economy

From a business perspective, it means that firms are capable of producing with a relatively smaller staff; that is, they manage to increase labor productivity. The effect of the reduction in this cost item might translate into an improved earning rate although, in fact, the results that are ultimately reached will also depend on the income they are able to obtain while they are coming out of the crisis.

In systemic terms, the hike in labor productivity might determine a significant structural change: that the United States ─and perhaps other central countries─ may emerge from the crisis with an economy that is even less labor-intensive than in 2007.

If this did happen, the impact would radiate in several directions: on the one hand, with the economy recovering at a greater rate than employment, the unemployed population would reduce wage pressure, making it possible to consolidate the greater corporate rate of return. This might contribute to corporate capitalization and economic revitalization based on the renewed concentration of results of the production process.

On the other hand, however, a relatively slow labor market expansion rate would imply an even slower recovery of domestic demand, as wage containment would translate into less consumption. This, in turn, has a two-fold effect: it reduces inflationary pressure (which secures greater price stability and diminishes the likelihood of an increase in interest rates) but, at the same time, it compromises the placement of the growing production supply. It is difficult to estimate the net result of these opposing forces.

Considering the few variables analyzed, we might venture that the structural adjustment underway might, in the short-term, help businesses to restore their earning rate on the basis of enhanced labor productivity; this would be attained at the expense of sacrificing consumers’ needs and increasing mid-term risk as the domestic market’s vigor is reduced. This type of way out of the crisis would lead to reproducing or increasing the economic concentration process.

It would now be worth adding two other critical variables to the analysis: what happens in the rest of the world (foreign context), and how central country governments respond and what systemic impact the measures adopted to tackle the crisis end up having.

The Foreign Context

In the other central countries, though with certain variations, the situation tends to be similar. In them, the crisis favors labor productivity growth, and recovery policies lead to a context of enhanced competitiveness and concentration.

Conversely, the large emerging countries (Brazil, Russia, India, and China) and Southeast Asia, via more energetic domestic measures, seek to preserve the level of employment, the wage bill and their domestic market. Thus they address potential social tensions and create the conditions for a swifter economic recovery. The growth in their domestic markets further implies the absorption of exports originating in central countries and, in this sense, emerging economies might facilitate structural adjustment in the US, European and Japanese economies: the less intense use of labor might, to a certain extent, be offset with a higher level of production activity driven by the enhanced dynamism in the developing world.

As time goes by, this situation might benefit central economies even more. In fact, on the one hand, and as it was pointed out above, central countries, by increasing labor productivity and containing wage expansion, manage to obtain a greater earning rate, i.e., an increase in capital productivity. In emerging countries, instead, since labor productivity does not grow at the same rate (labor accompanies better the production cycle), and nor does the reduction in wage pressure (underpinned by a less bruised production dynamics and a more vigorous defense of employment by their governments), the result is that capital productivity is hardly altered. Thus the productivity gap between central and emerging countries might tend to narrow and, hence, investment flows could eventually be re-oriented.

The Impact of Counter Crisis Measures

This analysis, however, has not yet included the impact, the enormous impact, of the measures that central country governments are taking, and everything leads us to assume that they will keep taking, to face the crisis and facilitate a way out of it.

The Obama administration and most European governments devote a wealth of resources to revive production through public work financing, and reestablish credit flow. Thus they contribute to mobilizing the production system in an effort to mitigate the fall and initiate recovery. Domestic consumption also accompanies the process though, due to that labor productivity adjustment, at more reduced rates.

What results from this type of measures? As popular wisdom has it, the trick is always in the details. In this case, in determining what public work is financed because, even though any public work tends to revitalize the economy, not all of them have the same impact on employment or the same multiplying effects. This will depend on the type of public work being financed, the more or less labor-intensive technology being employed, and who are the contractors and suppliers engaged for their execution. Each public work meets different objectives, serves different population segments, and promotes different accumulation nodes (who accumulate and, hence, are best suited to grow).

If public work managed to absorb the labor left redundant by the now less labor-intensive production structure, and if credit flew again to the extent required by production activity, then, during the process of recovery both a greater corporate earning rate and a fuller employment level would be ensured. Obviously, if the prevailing type of government-boosted public work were unable to absorb the required magnitude of labor that the private initiative no longer uses and if, in turn, credit flows could not be restored to the extent required to fully mobilize the production system, the results would then be negative in terms of employment as well as of greater economic concentration.

Implications for Emerging Economies

The international economic system is headed towards a systemic restructuring whose definition remains open, as the struggle between the parties has not fully been defined.

(i) Such restructuring might deepen economic concentration by reproducing the worst effects of the present way of functioning: international and within-country instability, growing environmental destruction, inequality in terms of standards of living and opportunities, poor representation and governance problems, unwanted migration currents.

This would happen because between and within-country differences would persist or worsen. In this path, businesses in central countries adjust labor costs, hence improving their productivity and competitiveness. Likewise, since they would also cause unemployment to grow, central countries would be forced to deploy greater foreign trade aggressiveness. This involves greater competition to the Southern production and tougher international negotiations.

On the other hand, in the event that production is revived without affecting the prevailing consumerist pattern, the opportunity to shift towards responsible consumption would be wasted. This shift in the nature of demand would make it possible to offer new signs to the production system, orienting it towards socially and environmentally responsible production, which, in turn, would foster a scientific and technological development geared towards common good rather than mere profit maximization. Since the consumption pattern and, hence, the composition of the production supply are not transformed, resource squandering and environmental destruction would keep escalating, affecting the planet as a whole.

(ii) But the crisis is also an opportunity to adjust the course and improve the systemic way of functioning in central countries. If the measures to tackle the crisis not only managed aggregate magnitudes but also paid special attention to the type of public work that is to be financed with public funds, it would be possible to pick those works that were oriented to satisfying people’s needs and, at the same time, used relatively more labor-intensive technologies and ensured the greatest possible involvement of small and medium-sized contractors. Also, with the financial system recovered and credit flows restored, it would be possible to place much more emphasis on tending to the base of the production system.

Thus, accumulation nodes would become diversified and enable a more balanced, non-concentrated, economic growth, generating greater synergy among small, medium and large-sized businesses. The employment level and the distribution of income in central countries would be improved, the domestic market would be energized more swiftly, and a greater contribution to international recovery would be made. This would make it possible to speed up the development of emerging economies and their long-suffering populations.

One aspect of critical importance would be fostering social and environmental responsibility among emerging or consolidating small-sized businesses, which might be encouraged when facilitating the financial, technological and commercial conditions they need in order to be able to operate. We would be doing a little favor to sustainable development by launching to the market millions of new companies imbued with values of irresponsibility to others and the planet sustaining us.

It is very unlikely that the dichotomous choices we have analyzed occur as such in today’s reality. The ultimately prevailing situations will feature a blend of circumstances and characteristics from both options. The challenge at this crucial crossroads that the global crisis presents lies in striving to contribute to the greatest possible extent to the attainment of a sustainable way of functioning, which entails not only fueling growth but also choosing a better course. And that political decision will be grounded on the present correlation of social and economic forces, weighed and adjusted by the efficacy and resolution with which each one of them is mobilized.

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