Opinion Sur
Water covers nearly three-quarters of the earth’s surface and the poor represent a similar percentage of the world’s population (To set the record straight, I do not use the term “poor” just to refer to indigent people, but to all those who are not able to reach the minimum “human development” level as defined by the United Nations). Maybe this is the ultimate cause of a rather striking trend: nearly always, discourses about poverty resort to water-related metaphors. From the elementary realization that poverty is an acute form of the lack of liquidity, to the very fact that more than a century ago it was an English shipbuilder that became a perceptive social critic, Charles Booth, the first to talk about a “poverty line”, extrapolating this concept from the floating line of the vessels he built.
Let’s see: one can be a man overboard, sink or drown in misery, go down the drain, hit rock bottom, be swept by the tide, be left high and dry, become swamped, be up to one’s neck in hot water, become stagnant, submerge in debts, become shipwrecked, flooded with debts, fall into deep waters. Except, of course, if one is able to keep one’s head above the water or at least float on one’s back and maybe come to safe harbor – especially if someone throws you a lifesaver before sharks eat you alive.
Economists could not be indifferent to this trend and thus, in the USA, the most conservative among them were happy to borrow what was originally an irony used by the humorist Will Rogers in the midst of the 1930’s crisis. Thus, a few years later, they turned it into the trickle down effect theory. Needless to say, the term trickle means a thin stream of liquid and the verb to trickle, to flow or fall in drops. Hence the trickle-down effect theory, which President Reagan used in January 1981 to justify an amazing 60% tax-cut for the rich. Contrary to the beliefs that were held up to that moment by the soft-hearted liberals of the Democratic party, increasing the inequality gap would end up decreasing poverty, thanks to such trickle down effect.
The core of the argument is remarkably simplistic. It assumes that people’s responses are always directly linked to the incentives offered and therefore, if profits are allowed to increase undisturbed, this will immediately prompt an increase in productive investments that in turn will raise the demand for labor. As a result, sooner or later this process will trickle down and benefit the lower social classes, through higher wages and more possibilities of consumption. There are two conditions, however: that no allegedly progressive tax reforms affecting returns are promoted, and there is no tampering whatsoever with the operation of the markets. Once those requirements are met, the trickle-down effect will inevitably follow, since it does not even depend on the generosity or benevolence of the entrepreneurs.
Except that American contemporary history proves just the opposite. Led by Keynesianism, the American economy experienced a very significant growth after WWII while social inequalities were declining.
After 1973, when such inequalities were deepened thanks to the rise of neo-liberalism, first, and Reaganomics, later, economic growth was halted or reduced to comparative low levels. In a word, the benefits of the trickle down effect are far from obvious in theory, due to its very shaky foundations, and they have been sufficiently and repeatedly refuted in practice. As Stiglitz (2010) concludes: “The poor have been the victims of market fundamentalism. Trickle-down economics did not work”.
But this happened not just n the USA, as evidenced by several World Bank and OECD studies. For example, in their well-known comparative study of 65 industrial nations, Alberto Alessina and Dani Rodrick have shown that income and wealth inequality are inversely related to economic growth: growth was much slower where 5 % or 20 % of the wealthier citizens obtained a larger portion of income, and it was higher in those countries where the opposite happened, i.e., where less wealthier sectors had a greater share of the income.
In the light of these facts, it is more remarkable what several so-called experts and many politicians and social communicators have been doing in Latin America since the 80’s. With a wit worthy of better causes, they soon realized that, given the serious social situation that obtained, appealing to a trickle-down theory to defend and extend the privileges of the establishment was not a hot-selling idea. They resorted then to a trick that went unnoticed even to their critics: with no hesitation whatsoever, they replaced “trickle-down” by “spill-over” and were thus able to establish such term both in academic discussions and in everyday language.
The truth is that, if in the field of income distribution analysis the theoretical foundations of the “trickle-down effect” were already questionable, the idea of a “spill-over” effect has really no theoretical foundations at all. To put it bluntly, a spill-over theory was never formulated in this area. The concept was simply borrowed from the literature about technological innovations where” it refers to the so-called “externalities”. It is a common occurrence in innovative companies that cannot prevent a part of the knowledge developed by them from escaping their control and spilling over the boundaries of the firm Obviously, this use has nothing to do with my prior observations (and even less so, the current applications of the “spill-over effect” in the fields of cognitive psychology or international studies).
That is to say, among those who decreed the end of ideologies, there are many who used (and continue to use) any means at hand to disseminate false ideas that serve their own interests and those of the sectors represented by them. Because the fabrication I am criticizing continues to have some serious consequences today. For a better understanding of the matter, it may be good to recall the theorem formulated by William I. Thomas in 1928. In short: if men define situations as real (even though they may not be so), they become real in their consequences. In this case, to say that the spill-over theory does not exist is not the same as denying the significance of its effects.
One example will suffice by way of illustration. In August 1976, the Argentine military dictatorship enacted the Law No. 21.382, on Foreign Investments. Several speeches given by the Minister Martínez de Hoz paved the way for the law arguing that local conditions should be liberalized as much as possible to create a more “favorable business environment” for major transnational investments. This meant that any protectionist measures had to be eliminated and foreign investments had to be placed on an equal footing with domestic ones, based on the familiar argument that inequalities resulting from their different financial power would eventually benefit everyone. It is to be noted that among many other things, the Law set forth that foreign investors should have full access to the domestic credit market; that they could “transfer abroad liquid and realized profits resulting from their investments and repatriate their capital”; purchase local companies; be allowed to count any new or used goods brought into the country as an investment, etc. To complete this picture of unfair advantages, Executive Order No.
1853/93 was passed under the Menem Administration granting foreign companies the right to resort to international arbitration courts in case of conflict, an option obviously unavailable to Argentine companies.
What have been the effects of such generosity? A dramatic process of “foreignization” of our economy, first through privatizations and afterwards through the sale of domestic companies. Between 2003 and 2009, almost 50% of all Argentine exports were made by 70 foreign companies; in 2009, 117 of the 200 biggest companies in Argentina (leaving aside the agricultural and financial sectors) were also foreign.
These data have been extracted from an excellent paper by Daniel Azpiazu, Pablo Manzanelli and Martín Schorr, soon to be published. The authors conclude that the policies undertaken have not resulted in “any relevant contributions in terms of expanding the stock of capital or redefining the industrial structure, let alone generating any type of ‘spill-over’ effect whatsoever”.
I have not chosen this example at random. As I said before, in spite of all theoretical and empirical refutations, the sequels of this false “trickle down effect” could still be operating. May I add that, thirty five years (and several administrations) later, the foreign investment law enacted by the military dictators is still in force.
