International Crisis: Adjusting the Course

Among the factors that generated the present international crisis some are evident–such as the crisis-triggering debacle of the financial system–and some are less evident but equally important. Without the presence of these other factors this crisis is quite unlikely to have occurred, or its impacts would have been infinitely lesser. Which are those other factors? They are many, varied and not restricted to the economic world but also related to governance and prevailing social attitudes.Among the factors that generated the present international crisis some are evident–such as the crisis-triggering debacle of the financial system–and some are less evident but equally important. Without the presence of these other factors this crisis is quite unlikely to have occurred, or its impacts would have been infinitely lesser.

Which are those other factors? They are many, varied and not restricted to the economic world but also related to governance and prevailing social attitudes. In the following lines some of the most important factors involved are analyzed, trying to offer a wider vision of the nature of the crisis, its dynamics and the measures that could help overcome it.

Economic functioning blocked by inequality

A critical factor blocking economic functioning is the increasing inequality existing among countries and, within each country, among social sectors. This is a well-known, documented phenomenon.

Inequality is generated by a particular process of accumulation slanted towards the concentration of wealth. By this we imply that there are different types of accumulation processes: some of them generate an aggressive concentration of wealth, and others lead to a lesser or very limited concentration.

It might seem that all accumulation processes are almost naturally concentration-prone, unless decisions that are exogenous to the economic system intervene to offset such propensity. Those decisions –opposing concentration- are taken by different players.

The most significant ones are those made at government level to redistribute the flow of income, such as–among others–those related to the extent and distribution of the tax burden, the allocation of government spending, monetary and credit access policies, the ways in which national saving is channelled to different types of investment, and the adoption of social and environmental regulations.

Decisions made by companies, particularly by production chain leaders, in terms of wages, prices, technology, supply sources and destination of their products, also have a bearing on the prevailing type of accumulation. These strategic decisions produce primary effects impacting on the company itself but also secondary effects on other economic players in the communities where they operate. Assessing these secondary effects and adjusting strategic decisions to maximize their positive impact are the pillars of what we call mesoeconomic responsibility of production chain leading firms.

For different reasons, as well as political and economic circumstances, the prevailing accumulation process has been, and still is, strongly concentrated. Income concentration conditions the functioning of the economic system; it is a major factor impacting on the economic dynamics leading to a crisis.

The impact of concentration on the crisis

* To begin with, concentration leads to a segmentation of effective demand

The affluent sectors favoured by concentration, their bare necessities being fully met, develop a conspicuous demand for often superfluous goods that deepen social differences. This demand sends signals to the productive apparatus to produce this type of goods and services, generating a sub-optimal allocation of the national saving and creating, at the same time, corporate interests determined to sustain that consumption pattern and, indirectly, the concentration process underpinning it.

Low-income sectors that only partially manage to satisfy their basic needs coexist next to conspicuous consumption; thus they are only slightly expressed as effective demand. Middle-income groups, for their part, meet their basic needs and, when they have some balance left, generally reproduce–induced by advertising–a good portion of the superfluous consumption pattern.

* At the same time, those sectors that have benefited from the concentration process accumulate huge financial surpluses that need to be recycled. During normal times, people do not immobilize their surpluses; instead, they seek to place them in financial investments or the real economy in order to, given certain risk levels, obtain the greatest yield possible. Yet, the concentration process and its impacts on effective demand reduce the potential for opportunities in the real economy, and placements are shifted towards financial transactions that are ever more distant or mediated from the real economy.

The financial system creates sophisticated products to absorb the surpluses in need of recycling, obtaining high returns in the process. But this modality establishes a dangerous vicious circle that, if not altered, ends up collapsing. To attract surplus resources, financial operators compete in terms of rates of return weighted according to each transaction risk. The greatest yields are obtained through bold financial engineering strategies and a certain concealment of implicit risks, as happened with sub-prime mortgages and other forms of consumer credit. With a non-expanding base of support, this process becomes inherently unsustainable.

*How does the economic system react to the imbalances resulting from the concentration process? One organic solution to ensure that production growth is maintained and does not become strangled is to reduce or revert income concentration. This causes the consumer market to expand on the basis of genuine income while new opportunities are simultaneously generated in the real economy to productively absorb the existing financial resources.

Unfortunately, this is not the course that is being taken. Instead, and in the absence of an exogenous corrective intervention, the economic system seeks to extend its way of functioning without transforming the propensity towards concentration: rather than expanding the genuine income of middle and low-income sectors, it provides them with finance. Hence, after some credit cycles where consumers’ debt grows at rates that exceed their income, we almost inevitably end up in a pervasive situation of over-indebtedness.

The permanent recycling of surplus resources into financial transactions that are far removed from the real economy ends up generating explosive speculative bubbles that burst unexpectedly. In fact, rather than fighting or dismantling the concentration process and its effects, the economic dynamics ends up priming the pump, resulting in a destructive and painful explosion.

Futility of bailouts that fail to transform the way we function

The implication of this analysis about measures to overcome the crisis is very clear: it refers to the futility, or at least the insufficiency, of those measures that are not capable of transforming the concentrating pattern that characterizes the way in which our economies operate. It is true that by pumping in huge quantities of resources problems may be mitigated for some time regardless of the insufficiency of the adopted strategy. But problems will surface if those resources are not capable of changing the dynamics leading to the crisis; when that happens the crisis will sooner or later reappear. Thus efforts end up being fruitless… perhaps not for all but, undoubtedly, for those who are forced to ultimately endure costly bailouts.

* Which could be those corrective measures that might really contribute to overcoming the current crisis? Those measures that help produce the transition towards a non-concentrating accumulation. Among others (discussed in previous issues of Opinion Sur), the following ones:

_ – Macro policies to eliminate inequality and sustain growth in terms of fiscal policy, government spending, monetary stability, channelling saving towards real investment.
_ – Mesoeconomic initiatives from leading firms in production networks intended to strengthen their value chains, ensuring a fair distribution of results among their members, and optimizing the secondary effects of their strategic decisions on other players.
_ – Direct support to the bottom of the social and production pyramid by channeling knowledge of excellence, financing capital formation, assisting in the development of business management and sound structuring, and facilitating market access.

Imbalance between global economic forces and national political governance

The outburst of the international crisis encountered a world where economic forces are of global magnitude, while political governance remains restricted to national boundaries. There was a gap between international economic development and international governance. This became absolutely evident at the onset of the global crisis: the initial reaction was uncoordinated and each country sought to save individually. Soon they became aware that it was not a single national economy but the central economies as a whole that were falling into the crisis, and with very probable repercussions on the rest of the developing world.

In the absence of a global government and in the face of the phenomenal uncontrolled proliferation of impacts, it became necessary to coordinate responses among countries, led by the United States and the European Union, with the less noticeable but absolutely critical involvement of China, India and the remaining Asian economic drivers.

This variable, the fact that there are global problems yet not global governance, adds a harsh restriction when it comes to facing the crisis and correcting the dynamics that generates it. It leads us to reflect upon institutional changes that should be tackled.

It will be necessary to attempt a transition towards a new international order that leaves extreme inequalities behind and is equipped with institutional governance that is properly articulated with national administrations. It would be something similar to what happened when, a long time ago in history, national governments were created and the city-states and other local jurisdictions were forced to adapt to the new circumstances.

Certainly, this transition is not easy as it requires a great number of diverse interests to be reconciled. There are extremely complex subjects, such as those referred to identities and nationalities -preserving the differences and diversities with the greatest of respects-, and the allocation of functions among local, national and global levels. The issue is to address global problems without trimming jurisdictions so that national or local problems can be tackled effectively; a complex and controversial topic due to the close interaction among levels that turns the borders of what is global, national and local blurred. In spite of all these complexities it will be nevertheless necessary to explore ways to move forward in that transition.

A baffled society

Contemporary acceleration and rapid transformations affect all social layers (certainly young and indigent people all the more), generating an ever more disconcerted society. An astonished look at their problems and challenges prevails, the opposite side of the same coin being a slow response capacity to find solutions, which leads to greater anxiety, confusion and alienation taking the form of addictions (alcohol, drugs, gaming, consumerism), expressions of nihilism, intolerance, aggressiveness, social and domestic violence.

A disconcerted society contributes to sustaining the dynamics leading to the crisis; it entails a weakness to understand, resist and adjust behaviours. It facilitates will-power manipulation and the development of a culture of fear that, when a crisis bursts out, easily turns into panic that enormously magnifies the impact of the crisis.

On the face of this situation, what counts is to put forth a permanent effort to throw light, help understand complex dynamics, identify better choices, strengthen self-confidence and resilience, motivate to face and overcome difficulties. Actions oriented towards raising individual and group awareness, reinforcing values adapted to the present historic phase of humanity.

No magical potion will solve the confusion, and no enlightened whomsoever will either. Instead, daily efforts made by public, private and civil society players to articulate reflection, strategic thinking and transforming action on all fronts of our social and political life will help.

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