Opinion Sur
The long or the short view? In the haste to avoid a second Great Depression, many governments around the world took emergency measures that did not really address the deep causes of the crisis. They are short-term measures that leave intact the institutions and practices that led to the crisis in the first place. Those institutions and the pressure groups around them try to block the reforms or dilute them. Politicians funded by them and who see in those actions some opportunistic dividends join them in this task.<emb132|center>
So far Latin America has been spared the worst of the crisis. Economists concur in thinking that for the region the crisis has been more a problem in trade than a financial stranglehold. However, the evolution of the global economy indicates that Latin American countries too should take rational measures of austerity in the second decade of the century. This runs counter, of course, to the political needs of the moment, which leads governments to spend more than they should in periods of elections. Moreover, at the global level itself –in the central economies– the rescue measures that were originally taken have been partial and shy. By leaving culprit institutions in place, they end up fostering a return to the dubious practice of speculation, they promote the further concentration of wealth and power, and they leave in the shadow of a weak recovery hundreds of millions of people who wish to work but can’t. The appropriate slogan for this “recovery” should be “more of the same” or “let’s fall forward.”
In this rather somber context of recovery with slow growth, big unemployment, and greater social inequality, we may anticipate an even worse crisis in the future. It is n o longer only Japan that faces a “lost decade”, but the United States and Europe as well. These economic zones have not yet left the danger of deflation behind them, or the risk of a dispiriting combination of deflation and inflation (stagflation) for a considerable period of time.
In Latin America the prospects are rosier, based on two factors. One is structural and the other circumstantial. Favorable circumstances rest on the expectation that the new motor of economic growth will be in East Asia, and in China in particular. In geopolitical terms, what drives the absolute necessity of fast growth in China? The answer is simple and perhaps brutal: China is on a race to become rich before it becomes old. The other Asian nations follow behind. But to bet on this prospect on the part of Latin Americans is to put too many eggs in one basket without knowing the basket too well. It is a prospect based on faith. In any event, it is highly probable that Asian markets will increase their demand for industrial inputs and foodstuffs, and such circumstances augur well for the economies of the South. But the projected favorable circumstances assume the same structure of the world economy.
If however a prolonged stagnation in the central economies puts an end to the Chinese model of vendor finance, the Chinese leadership will have to turn inwards and launch policies of societal inclusion and internal prosperity to keep the economy humming. This could take place in two ways: first by the rise in purchasing power of the coastal population, and second by moving the current frontier of breakneck growth with cheap labor further west, to the more remote hinterland, thus completing the transformation of farmers and peasants into an industrial workforce. None of this is easy, and the ensuing dislocation may produce serious unrest. That is how, in an interdependent world, disorder in a remote province of China may affect the cash flow of Latin American governments.
Given these considerations, the post-crisis world has several options before it. One option I have already named “more of the same.” It is convenient; it does not upset the apple cart of those who benefit from the present system, and puts everybody else at ease, because “better the Devil you know than the Devil you don’t.” A crisis is always a trauma. For many the fear of the unknown dims the imagination and a dumbs down thought. This first scenario leaves structures intact, and hence the near certainty of new crises down the road.
Structural reforms instead are reforms for the long haul. Without them, we can say once more that those who forget history are condemned to repeat it. The warnings of this type come from prestigious figures of the international financial regulatory establishment. I shall mention a few. One is Tomasso Padoa-Schioppa, president of “Our Europe” (a research center founded by Jacques Delors) and a former Minister of the Economy in Italy, as well as central banker in Rome and Frankfurt and an officer of the European Commission. In a book titled La veduta corta (The Short Sight) he castigates the limited purview of the markets (always after quick profits) and of governments (always minding the next election), of the media (keen on sensationalist news and on their ratings), of business enterprises, of families, and of popular psychology in general. Without a calmer, long-range perspective, without the distant view of the whole (not the speedy view of the airplane moving on the runway but the soaring view of high altitudes), Padoa- Schioppa contends that our society is condemned to live constantly at risk, jumping from one crisis to the next. Also in Europe, Jacques Attali, former head of the European Development Bank and former adviser to FrançoisMitterrand, holds similar opinions.
In the United States a number of very distinguished economists (two of them Nobel Prize winners) are also critical of current policies, which they deem complacent and supportive of the status quo. They have moved away from the assumptions of their discipline. But the strongest view comes from the former chairman of the Federal Reserve in previous times of turbulence, Paul Volcker, in an Op Ed article published recently by The New York Times. In short, Volcker argues that the large banking conglomerates like Citibank should break up their different operations, putting “firewalls” between them, and that in case of a new financial crisis, the government should preside over the liquidation of the large banking houses. In other words, for Paul Volcker, the financial institutions that are deemed “too large to fail” are too in fact large to exist. In a modernized version, Volcker repeats the recommendation of Adam Smith in The Wealth of Nations, that banks should be small.
A strategy that goes beyond propping up the status quo would be more rational and would have a better chance of success. But this option is comprehensive and ambitious. It means the technocratic and international regulation (coordinated among the industrialized and the emergent nations, nowadays grouped in the G-20) of the financial sector, coupled with an aggressive policy of social protection for the populations that lose jobs and homes. It would entail a new New Deal.
The obstacles to such strategy are strong and many. They stem from a basic fact: the world has not made yet a full transition from geopolitics to geo-economics. National interests trump the common interest. The latter staggers in zigzags, between unfulfilled promises and treatises that do not mean much.
There is no doubt in mind that the rational planning strategy is more attractive and sane than anything we have seen so far, because it anticipates problems and manages risk. It is the position of President Obama, but only in a philosophical sense. In practice he finds it very difficult to convince politicians in both parties, and the citizenry at large that rational state intervention is not all bad. From economic controls to social security and health, his policies are either diluted or blocked. Europe in turn has the opposite problem: it has a single currency without a single government. In the various European countries however, the legacy of social democracy means that the very same institutions that in periods of economic bonanza act as a break on fast growth, in periods of crisis act as parachutes to slow the fall.
A third possible scenario in this repertoire of exits from the crisis is perhaps the worst of all: it is one of more crises and fragmentation. Under conditions of prolonged stagnation and financial duress, countries could be tempted to withdraw into their own defensive cocoons. Regional, national, and local autarky can only lead to international anarchy and to tensions that could ultimately produce wars. Confrontation and conflict would define such world.
Each of the scenarios presented above is only an ideal type; an abstract stylization of what in reality is a more complex and messy world. What we are likely to get is a combination of them, most likely in sequence, as in a musical piece. But do not bet on a good orchestral arrangement.
Opinion Sur has long been of the opinion that the underlying source of trouble is the excessive concentration of wealth and the exclusion of majorities from the mobilization of their productive potential. Latin America –the most unequal region of the world—could, precisely because of that, lead the way by showing, through intelligent initiatives, that the reduction of inequality can lead to prosperity and to the elimination of dire poverty. As in other matters of policy, there are good and bad ways of seeking this goal. A short-term view (la veduta corta) leads politicians to sacrifice growth in order to get votes. Such tactics lead to temporary welfare but long-run decline. Populism and clientelism are convenient tools to arrive to power or to stay in it. What the countries need, instead, are investments in education, infrastructure, tax simplification, and the breakup of monopolies of all sorts.
Unfortunately, both in the North and in the South, the larger rational view has few followers. The gap is wide between intention and practice, between the many politicians and the scant men and women of state.
