Opinion Sur
The social, economic and political structure of a country conditions the way it functions, and the way a country functions impacts on its structure. Some structural factors produce serious functional imbalances, and dysfunctional ways of functioning contribute their impact to unleash explosive situations such as the present global crisis. On the face of this situation, it is necessary to choose among different options: from working on organic solutions that may ensure systemic sustainability to resorting to substitutes that help gain time but procrastinate outcomes. How do we characterize these options and what kind of measures are taken in each case? Is it possible to draw a path between self-regulation and excessive state intervention?The social, economic and political structure of a country conditions the way it functions, and the way a country functions impacts on its structure. A deficient structure compromises the way it functions in terms of its direction and systemic performance, and the type of social and economic functioning produces direct effects on the very structure. This interrelation weaves the social, economic and political dynamics of a country. Something similar, though with greater institutional complexity, happens at the international level.
To exemplify how this structural-functional interrelation occurs let us take one of the most typical features among countries: inequality. In economic terms inequality implies that there are sectors of the population that are wealthier than others. In some cases the differences among sectors is abysmal and tends to grow bigger, while in others those differences are somewhat lesser but also tend to persist, or worsen.
Wealth differences in an unequal social and economic structure are expressed in many different ways, such as the segmentation of effective demand and the concentration of saving capacity.
Effects resulting from the segmentation of effective demand
Effective demand segmentation causes affluent, conspicuous consumption sectors to coexist with popular sectors that can hardly meet their bare necessities; in between there are middle class sectors that consume basic goods and, whenever they have any surplus, reproduce at their own level the prevailing superfluous consumption pattern.
How does this demand segmentation impact upon the way of functioning? In several ways; some are of an economic nature, others of a social and political one. To begin with, superfluous consumption by affluent sectors and other middle class sectors generates a segment within the productive apparatus dedicated to producing superfluous goods. This results in a somewhat socially suboptimal allocation of available resources and, at the same time, makes room for the emergence of economic players (superfluous goods suppliers) interested in sustaining this type of conspicuous consumption and the unequal structure that originates and underpins it.
There are more effects, however. Conspicuous consumption by affluent sectors is not capable of demanding all the goods and services generated by the productive apparatus, which unceasingly seeks to expand. To be able to sustain its growth, supply needs to be accompanied by a demand that is capable of keeping up with it. When the accumulation process becomes ever more concentrated, this balance is upset and, if there were not an intervention exogenous to the economic system, demand would be likely to lag behind.
Different possible reactions to address the imbalance
Here, a critical aspect of economic functionality takes the stage: how the system reacts in order to adjust an imbalance that may jeopardize its expansion. One formula –that is part of an organic growth– would consist in gradually raising consumers’ income so that they may absorb with their own genuine resources the supply generated by the productive apparatus. If this formula works, supply and demand will accompany each other, even if they change their composition due to modifications in consumer preferences, which are strongly influenced by technological development, the launch of new goods and services, and a greater growth or appreciation of different sorts of satisfiers. Yet, regardless of this significant internal dynamics driven by innovation and discoveries, in aggregate terms, supply and demand, demand and supply, would grow organically.
If, however, there exists, as it occurs in reality, a process of wealth concentration that is projected into a concentration of income and, hence, into an unequal purchasing and saving power, then this organic growth will be jeopardized. A perilous gap would be opening between production and consumption capacity which, if not corrected, might block economic functioning and, ultimately, cause it to slide towards collapse: due to the lack of demand, businesses close down, unemployment grows, income falls, demand shrinks all the more, and what once had been a virtuous circle becomes a vicious descending spiral.
But will this be inevitably so? No way. Before collapsing, the economic system strives to find other ways out, some of them healthy from a systemic viewpoint, while others only procrastinate the traumatic outcome.
When tension appears due to a demand that is not capable of accompanying supply, we may resort to a battery of effective measures. These measures are intended to generate or gain access to resources that are capable of sustaining genuine demand. What are those resources?
(i) Possibilities offered by the foreign sector
On option is to look at niches of foreign demand for our products. That is, a country may export to other countries a portion of the production that its domestic market is unable to absorb. Yet, this has a twofold limitation: on the one hand, many other countries compete to attract those same buyers, and hence, even though there are very interesting niches worth exploring, the key effort consists in becoming ever more competitive by enhancing productivity and positioning as far ahead as possible in terms of innovation and latest trends. There will be some exportable products over which the country has competitive advantages that will enable it not to depend solely on its domestic market. In those cases, it will remain to be seen who manages to export and how the revenue thus generated permeates into the country.
But beware: our production units are also receiving foreign competition in their own domestic market as we import goods and services that capture a portion of the resources generated within the country. This means that, on the foreign sector side, there are opportunities but also challenges that may turn into threats. A lot, a little, or nothing may be obtained from the foreign sector depending on the international circumstances and the efficacy of our own decisions.
(ii) Possibility to generate genuine domestic resources
Another possibility is to generate within the country genuine income to fuel domestic consumption. There is a good policy space to ensure that the income the concentration process places in few hands gets distributed more equitably, eliminating or reducing inequity. In previous issues of Opinión Sur we addressed this subject so we don’t need to expand on it.
We explored (i) macro-policies in fiscal matters, public spending, monetary stability, channeling of saving toward real investment, export promotion, (ii) mesoeconomic initiatives by production network leading firms oriented to strengthening their value chains, ensuring a fair distribution of results among those who are a part of it, and optimizing the secondary effects of their strategic decisions on other players, (iii) direct support to the bottom of the social and productive pyramid through channelling knowledge of excellence, financing capital formation, assisting in management development, devising good business structures, and facilitating market access.
(iii) Decision to resort to substitute solutions
Now, what happens if due to political reasons, powerful interests, negligence or any other reason, those measures meant to generate a genuine income base are not actually implemented (or are implemented at a level bordering on insignificant or inconsequential cosmetics)? Well, as the system is not going to choose to commit suicide, it will resort to poor substitutes that do not solve but procrastinate on the issue of structural supply-demand imbalance. There are certain solutions based in repression and the imposition of authoritarian regimes, which we will not dwell on because we intend to focus on countries with more or less democratic systems (much could be said about just political democracy and full democracy which secures economic, social and environmental rights).
One of those substitute solutions is to fund families lacking genuine income so that they can turn into consumers. To this end credit allocation criteria are relaxed so that more people may gain access to loans that are renewed year after year. If the genuine income base of consumers has not improved after some credit cycles, they will fall into the typical, well-known situation of over-indebtedness. Purely and simply, this means that they are unable to meet their debts. When only a few fall into insolvency the problem may be contained, but when the phenomenon gains massive magnitude, the debacle is inevitable, as was the case with the infamous subprime mortgages and the explosive credit card segment. The consequences are plain to see.
Effects resulting from saving concentration
Unfortunately, the effects described above are not the only ones resulting from a social and economic structure characterized by the concentration of wealth. Saving concentration adds other set of specific effects.
The sectors that benefited from the concentration process accumulate huge financial surpluses that need to be recycled. In normal times, those surpluses are sought to be placed in financial investments or the real economy rather than remain immobilized, in order to –given certain risk levels– obtain the greatest possible yield.(1) However, as the concentration process restricts effective demand, there are fewer opportunities for good investments in the real economy, inducing the shifting of placements toward speculative financial transactions, including those oriented to sustaining consumption beyond the harsh limits of genuine income.
The financial system creates sophisticated products to absorb surpluses in need of recycling, obtaining high returns in the process. To lure surplus resources financial operators compete in terms of prices (rates of return) that are weighted against the risk inherent to each transaction. The greatest returns are obtained through bold financial engineering schemes and a certain concealment of the underlying risks, as was the case with the above-mentioned subprime mortgages and credit cards, where responsibilities were diluted through complex operations with diverse intermediation and derivation chains. And thus emerge another factor that complements and reinforces the harmful vicious circle that leads to the crisis.
A conclusion open to choices
In closing this analysis zeroed in on one of the key contemporary structural characteristics (inequality generated by a concentrating accumulation process) we may draw some important conclusions. Even though main conditions for a crisis to occur are derived from a concentrated social and economic structure, the resulting imbalances might be lessened without affecting the composition of that structure (and in some cases, they might even be solved), if the measures adopted as to the functional aspects offset the structural effects.
What is clear is that if on top of a vicious concentration structure a way of functioning unable to offset the destabilizing effects is added, crises such as the one almost the whole world is going through will become inevitable.
At this point of the analysis, the obvious is worth explaining. In spite of its critical importance, inequality is not the only factor impacting on the course of events. There are other very significant ones, and ignoring them would be a serious mistake since, in a way or another, they condition and fuel one another. Among others we can mentioned environmental deterioration, competitiveness, political regimes, global governance, military power asymmetries, media concentration, the threatening action of aggravated criminal systems, social values context and the influence our individual attitude has upon local processes and, indirectly, on the course of world events.
All these variables being at stake, some believe that their long or mid-term management is impracticable, while others think the opposite. As far as I am concerned, I observe that there exist self-regulatory systemic mechanisms to address the small or mid-sized imbalances produced by certain structural-functional combinations, but everything seems to indicate that the major imbalances exceed the self-regulatory capacity. While the economic system might endogenously adjust multiple small deviations, it is hard to deny that economy-exogenous decisions are required to overcome severe dysfunctionalities and ensure a smooth systemic functioning. The automatic pilot is good for certain legs of the journey, but when at critical or turbulent times strategic changes are required, we need to resort to our leadership to adjust and then sustain the course.
How leadership should be exercised, how critical strategic decisions should be addressed effectively is a complex endeavour requiring knowledge, experience, temper, a proper correlation of social forces and attachment to certain values that define our humanity. This is certainly an open socio-political issue, as at the individual level are the options we need to address in each life circumstance.
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Note: 1) Even though a promising current of responsible investment is beginning to take significance, the yield and risk levels criteria to apply resources do not generally take into account the social and environmental impact of the investment, evidencing that there does not yet exist a self-regulatory mechanism capable of ensuring the best global use of available resources.
