Opinion Sur
The global crisis is a crude struggle of interests among powerful players to determine how the economy and the society we live in get reorganized. As interests cannot be shown openly, they are disguised and, hence, the struggle turns sordid; in this context emotions swirl. Perhaps, the watershed is not the one proclaimed by the struggling parties, and the range of available strategies does not boil down to increasing or decreasing public spending and indebtedness.It started in the US, and now its epicenter is in Europe: the so-called “global crisis” is a crude struggle of interests among powerful players to determine how the economy and the society we live in get reorganized. As interests cannot be shown openly, they are disguised and, hence, the struggle turns sordid; and since emotions are combustible fluids, as they accelerate, they burst explosively. Unraveling this tangle is not easy because interests acquire temporal and territorial singularities, giving way to an enormous variety of situations. Interests and emotions are key factors [[The claim that interests and emotions are key elements of the global reorganization process implies the existence of a diversity of other elements and factors that weighed in.]] in what is happening today, not only in the streets of Europe –and the entire world as well– but, very specially, behind the scenes at world, national and local decision-making centers.
It might seem as though the central struggle was being waged between those who deem it essential to cut public spending drastically and reduce the unbridled indebtedness that is growing burdensome and untenable and those who, conversely, claim that, in the middle of the crisis, this strategy is nonsensical, as what is needed is to sustain demand and preserve corporate and social assets through vigorous government spending expansion, even if this causes indebtedness to grow in the immediate future. Each position becomes entrenched in its own reasons, while vast majorities watch, some of them alarmed, the other ones in awe, how a new global distribution of wealth and power gestates speedily.
Perhaps, the watershed is not the one proclaimed by the struggling parties, and the range of available strategies does not boil down to increasing or decreasing public spending and indebtedness.
Restoring fiscal discipline and its effects
Those who propose coming out of the crisis by cutting down public deficit and borrowing aim at bringing government finances back to health, as they point out that its alarming deterioration is already untenable. Unless corrected, the explosion and impact will be even greater than the present sacrifices. The underlying rationale is that, by reducing fiscal deficit, it will be possible to restore the pre-crisis state of affairs on more solid and sustainable grounds, i.e., we will recover the vigor of the way of functioning as we know it.
This restorative approach longs for the pre-crises economic and social order that, undoubtedly, generated spectacular achievements in terms of growth, scientific and technological development, high consumption levels for elites and middle-income sectors in wealthy countries and, to a lesser extent, other countries. The high social, environmental and economic costs that accompanied this process are deemed inevitable, “frictional”; they would not have sufficient substance to question the path taken because, sooner or later, according to the chosen theory, they would tend to disappear.
sectors in wealthy countries and, to a lesser extent, other countries. The high social, environmental and economic costs that accompanied this process are deemed inevitable, “frictional”; they would not have sufficient substance to question the path taken because, sooner or later, according to the chosen theory, they would tend to disappear.
This strategy is then guided by the idea that what got derailed should be put back on track (particularly, fiscal deficit) and we should stick to that systemic course of vigorous yet concentrated and exorbitant economic growth. Once finances and stimuli are in order, it is believed that resource allocation will improve; micro, meso and macro- economic productivity will increase; yet –what a pity, it is the law of the market– the least efficient ones will collapse and disappear.
Now, what if the crisis-triggered chaos was not the result of poor, and hence, avoidable, public management but the natural consequence of a way of functioning that threatens the proportions and conditions required to achieve and sustain the economic growth of the global economy? At the same time, will a concentration-prone systemic growth that favors certain sectors in certain countries be capable of, eventually, leading to the sustainable development of the entire planet?
For those who question the restorative approach, the type of growth intended to be reestablished not only does not lead towards sustainable development but was also responsible for the crisis. This growth brought about an economic dynamic that resulted in the concentration of assets and income and, even though certain efforts on fiscal and public spending were made in an attempt to counteract this trend, the concentration process moved ahead with devastating effects in almost all fronts: [[For a more detailed analysis, see article Europe: [Transformation-Oriented Rather Than Restoration-Oriented Adjustment->http://opinionsur.org.ar/Europe-Transformation-Oriented].]]
(i) In the social sphere, growing and irritating inequality undermined social cohesion and caused violent reactions, affected democratic governance, and created the conditions for increased insecurity and aggravated criminal systems. The concentration process irresponsibly wasted the huge productive and social potential of large population majorities.
(ii) As for the environment, it produced an alarming deterioration of non-renewable resources resulting from the combination of a frantic corporate rent-seeking and an ever more widespread irresponsible consumerism. This has undermined the foundations on which mid and long-term sustainable global development relies.
(iii) In the economic sphere, inequality segmented effective demand, which lagged relative to an ever more dynamic production supply based on a phenomenal scientific and technological development. The way found to close that gap was to resort to consumer finance instead of striving to improve the level of genuine income of the vast majorities, deviating resources from the real economy toward aggressive financial speculation, which sped up the concentration process and ended up creating huge financial bubbles waiting for the spark that would cause them to explode.
Expansion of public spending and its effects
Those who support an increase in public spending hold that the crisis, having caused demand to shrink dramatically, adversely impacted on world supply, which is unable to place its production, generating bankruptcies and a reduced level of activity, which, in turn, deepens unemployment and a greater drop in wages: a recessive vicious cycle whose inherent dynamic, unless reverted, will keep destroying corporate assets and increase the already terrible social, institutional and political cost many countries are facing.
The intended effect is to strengthen a weakened demand by financing it initially with government funds, which would support an increased level of economic activity and, as a result of that, employment and income as well. The cost, indeed, would manifest itself in greater fiscal deficit and public indebtedness. That burden would be laid on those social sectors capable of contributing the resources needed to finance increased public spending. In a context of crisis, the distribution of the tax burden is frequently inequitable, as it impacts unequally on the most vulnerable ones in terms of payment of taxes, rates and contributions. This strategy assumes that, as the economy recovers, the tax base will be expanded, and so will the public funds available, which will be devoted to closing the accumulated deficit and reducing indebtedness.
The risks of financing demand recovery and corporate bailouts via public spending are multiple. On the one hand, production may recover slowly, and employment might do that even more slowly, as it is the case today in the United States, which implies that the painful social cost might expand in the mid-term. On the other hand, the production system may emerge even more concentrated from the crisis as, most likely, small producers are the ones who will take the toughest blows and see more of their assets disappear. On top of that, those who are responsible for having caused the crisis would be alive and kicking, having shifted their share of sacrifice to the rest of society.
In other words, even though it is indispensable to reinforce the level of demand, avoiding the destruction of corporate assets, and to put the process of capital formation back on its feet, this in no way implies that the pre-crisis demand structure should be reestablished, or that it is advisable to restore1 the same process of capital formation whose dynamic led to the crisis and, much less, that this rescue should be financed by the most vulnerable ones.
No only increasing or decreasing public spending; its structure should also be improved.
Merely justifying the benefits and risks of increasing or decreasing public spending and indebtedness neither sheds sufficient light, nor does it yield results. Other, different, strategies should consist in adjusting what has gone overboard, of course, but transforming, during the course of the effort, the factors that sustained the pre-crisis dynamic and led to the edge of the abyss. To put it very clearly: public spending must be adjusted, but not in the sense of reducing its magnitude by cutting budget line items that are strategic to achieve sustainable development. What it is necessary, instead, is to restructure it with a view to replacing, to the greatest possible extent, ineffective spending with sustainable development-oriented spending. Likewise, the problem of huge over-indebtedness should be resolved, yet without affecting production financing or neglecting capital formation, mainly at the bottom of the social pyramid. A strategy of this type, with specific characteristics for each situation, would tend to reduce the debt-to-GDP ratio in a sustainable, non-traumatic manner, while abating extremely costly inequality.
In other words, transformation-oriented adjustment should seek to increase the social and economic productivity of public spending and indebtedness. To achieve this within the framework of a crisis, work cannot be done only at the level of aggregate variables but within them, restructuring, improving but not just knocking down the level of public spending. The challenge lies in reorienting these variables with a view to strengthening the production system, particularly those segments making sustainable development-aligned investments; bring down irresponsible consumerism; help those that have been left behind and the most vulnerable ones; and, as growth is attained through transformation, manage to have variables converge progressively but firmly toward healthy proportions.
The backbone of this transformation-oriented adjustment is the mobilization of the production system, with emphasis being placed on its base, and democratizing effective demand so that the economy may grow as an organic whole; that is, improve the genuine income of the majorities and increase the productivity of small production units, adjusting their articulation with medium and large-sized units. This involves improving, much more than during the pre-crisis time, the distribution of income in favor of workers, and placing the emphasis on the formation of capital (financial and non-financial) of the very extensive base of the production system.
How can this be attained? via the combination of complementary efforts by players operating at different levels. The specificity of each particular situation will always require unique solutions, yet certain general guidelines might work as common denominators, such as, for instance:
– At the macroeconomic level, it will be of the essence, among other measures, (i) to reorient government spending in order to provide majority sectors with enhanced productive and social infrastructure, so as to ensure their fullest mobilization; (ii) to eliminate the regressive structure prevailing in almost all tax systems; (iii) to ensure monetary stability, as well as a credit policy capable of channeling a greater portion of national savings toward small and medium-sized entrepreneurs; (iv) to encourage wage negotiations that accompany without delays any productivity increase; and (v) orient scientific and technological development to also meet the needs and potentialities of small and micro-production.
– At the mesoeconomic level (the space of value chains and production networks), it will be necessary to give way to a two-fold public and private intervention: the former, to establish rules securing mutually beneficial situations between economic players having dissimilar negotiation power; and the latter, by practicing mesoeconomic responsibility so that the impact of their corporate decisions on other social players is taken into consideration, with a view to optimizing multiplying effects.
– At the microeconomic level, it is necessary to reinforce or create, as the case may be, effective support systems designed to promote capital formation at all levels of the production system but, most particularly, in small and medium-sized units; that is, (i) economic capital formation through financing the acquisition of equipment, facilities, as well as technological and management innovation, and (ii) formation of non-financial capital through bridging the knowledge and modern business engineering gaps, facilitating access to strategic partners, contacts, markets, and information. In this area, there may, and should, converge the efforts of the public sector, the private sector, social organizations, and civil society entities, each in the field of their respective competitive advantages, all well coordinated and based on national and local political agreements.
Scale being a difficult constraint for the development of small units (it prevents them from accessing higher opportunity thresholds), efforts should be focused on its enhancement. For this purpose, there exist several modern business engineering tools capable of bringing together today scattered small producers into medium-sized organizations. The challenge consists in how they can be used best as, so far, markets do not venture into these new directions.
Transformation-oriented adjustment should imagine and establish a new generation of venture promotion tools capable of achieving scale via partnering small producers with carefully selected strategic partners, new players who can successfully attain in their entrepreneurial practice the so-called “triple bottom line”, i.e., the integration of economic, social and environmental results. One of those new instruments that we have been promoting for quite some time is the [inclusives ventures developer->http://www.opinionsur.org.ar/Inclusive-Venture-Developers?var_recherche=%2FInclusives-Ventures-Developer.].
One final reflection
Upon reflecting on the subjects discussed above, there emerges one conclusion that several countries in the Southern Hemisphere have already appropriated: we should not get trapped in discussions that seemingly cover the whole array of possible strategic options when, actually, even as they offer contributions, they are always incomplete and perfectible. Our own agendas, our viewpoints, our pursuits are equally valuable and, without haughtiness or arrogance, because ours are also perfectible, we have the right and the obligation with our people to work and develop them seriously and responsibly. It is then that, on the face of this global crisis, we say that it is not only a question of fighting for expanding or cutting back on public spending, defending one theoretical position or another, but of taking from each one of them its contribution (recovery promotion; public account discipline) and putting it at the service of a sustainable development capable of ensuring the organic growth, not of a segment of our societies and a handful of countries, but of the population of the whole planet. A valid, needed, longed for referential utopia that may be used to set a new systemic course against which the multiple day-to-day decisions that are required to be made can be verified.
