This page is part of the site Global Development, dedicated to promoting a new approach to eliminating poverty, reversing environmental deterioration and generating sustained economic growth that benefits all of humanity. The site has been developed by Frans Doorman. No copy rights are claimed, but those using material are kindly requested to name the source.
GLOBALISATION AND GLOBAL DEVELOPMENT:
REALITIES AND REQUIREMENTS
The key issues and arguments on the site Global Development are summarised in a brief, 800 word version and in a more elaborate, 4000 words version. On this page the more elaborate version is presented; for the shorter version click on Global sustainable development: a summary
The globalisation debate misses the point
The globalisation debate of the past years has focused primarily on the freeing of trade, the pro’s and con’s of foreign investment, and the effects of macro-economic policies described by the international financial institutions. The anti-globalisation movement has targeted multinational corporations for exploiting labourers, natural resources and the environment in poor countries, and destroying homegrown industries. It has also directed its wrath at the international financial institutions for fostering the expansion of multinational companies by forcing poor nations to open up their markets and privatise government services. Globalisation and free trade proponents counter that foreign investment is needed for economic development, that international competition benefits consumers, and that usually, multinational firms treat their personnel and the environment better than local entrepreneurs.
As usual, there is truth in the arguments on both sides. What needs to be stressed, though, is that both sides miss the main point. That point is that the development needed, that is, sustainable economic growth that leads to increased wealth and well-being for all, the elimination of destitute poverty and the rational use of natural resources, does not hinge on free trade, foreign investment and globalisation. The key obstacle to the road to sustainable development is lack of economic demand, caused by a lack of money.
Demand, needs, and economic growth
Economic demand is demand backed up by purchasing power. As such it differs from needs: the poor have many needs, for even the most essential goods and services. But since these are not backed up by the capacity to pay for them, they do not translate into demand. Likewise, from the perspective of the common good there is a discrepancy between needs and demand. For the common good there is an obvious need to invest in environmental protection as well as in improving public services such as education, health care and safety. But with governments having insufficient money to satisfy these needs, they are only partially translated into economic demand.
Public and private needs are of course, especially urgent in poor countries. The only way to satisfy these needs, so economists and in their wake, most politicians and mainstream journalists would have us believe, is through economic growth. This growth, so it is claimed, has to come about through exports and international trade, which have to be fostered by foreign investment. However, competition in international markets is fierce, and is dominated by the rich nations and by a limited number of (medium-) poor countries. Most poor nations lack the potential for exports and foreign investment to become the motor of economic growth. Furthermore, even in countries where foreign investment and exports do drive economic growth the benefits are so unevenly distributed that poverty levels are barely dented. This is the case particularly for large populous countries such as China, India, Brazil, and Indonesia.
Domestic demand
If export production and foreign investment are unable to do the job, economic growth will have to be driven by domestic demand. Interestingly, the same international financial institutions and experts that advocate foreign investment and exports as the path to growth for poor countries propagate, for the rich nations, stimulation of domestic demand as the way out of the current economic doldrums. The reason for not advocating this same recipe for poor nations is not clear. Perhaps economists consider that the very poverty of poor countries, i.e., their lack of money, causes the lack of demand. Therefore, it is argued, money will have to be attracted from the outside (through foreign investment) and earned (through exports). Only then can it be spent and thus, be used to push domestic demand.
The shortage of capital is worsened by two factors. First, in many poor countries a significant part of local capital, held primarily by a small political and economic elite, is moved abroad, to safer places where higher returns can be obtained at lower risk. Second, there is the debt problem. Many countries spend up to half of their export income to service their debts. These two outflows make the shortage of money in the local economy even more acute.
Trickle down
Prevailing ideology holds that poverty in poor countries will have to be eliminated in the same way as it was in the rich countries. That involves a process in which first, economic growth creates wealth for a small economic elite. In a second phase, an increasing share of continued economic growth benefits a growing middle class. Only in the third instance, through what has been called the "trickle down" effect, does the entire population benefit. Over the past 40 years phases two and three have been observed only in a handful of relatively small and rather exceptional nations: the four Asian tigers Singapore, Hong Kong, Taiwan and South Korea. In practically no other (formerly) poor nation has phase three taken place. Moreover, in many countries, notably in Latin America, Africa and Southern Asia, the past ten to fifteen years have shown a reverse with regard to phase two, as large numbers of middle class households have slipped into poverty. One might expect for these facts to have discredited the theory but is hasn’t: it’s stronger than ever.
The quagmire of poverty
Thus we have, on the one hand, the continued emphasis on foreign investment and exports as the path to growth. On the other there is, for most poor countries, the lack of export potential and consequent limited attractiveness for foreign investors. Moreover, in those countries that, under pressure from the international financial institutions and the rich nations have opened up their markets, local production is being clobbered by cheap imports. Consequence of this discrepancy is that most poor countries are stuck in poverty. Exports and foreign investment are insufficient to drive economic growth. And domestic demand cannot drive economic growth because there is no money.
It is lack of money, therefore, that keeps countries from fully utilising their productive potential. Labour is in ample supply, as are, in many nations, skills and knowledge: in most poor countries there is massive unemployment and underemployment among unskilled as well as skilled workers. Most countries also dispose of sufficient land; many have ample other natural resources. Though capital, especially in the form modern production facilities, may be in short supply most nations have a much higher productive potential then is actually used. But without money there is insufficient economic demand: there is no incentive to produce goods and services since people won’t be able to buy them. Therefore production potential remains unused or underused. Moreover, what is produced has to be sold at low prices, depressing both wages and profits. That increases poverty and the outflow of investment capital even further. Thus poor countries are caught in a downward spiral of poverty.
In conclusion, it is an illusion to think that free trade and capital flows, and the economic growth generated by it, will draw more than a minor proportion of the billions of people now living in poverty into the modern economy. Moreover, in the poor countries low skilled workers that are now in the modern economy or will enter it in the coming years do not escape poverty either: wages remain dismally low, and worker benefits minimal or nil. On the other hand, it is hard to see how the withdrawal of foreign investment and closing of markets implicitly advocated by many anti-globalisation activists would help matters. Indeed, certainly if complying with minimal conditions of corporate responsibility – a compliance that, under pressure from international consumer activists corporations are more and more inclined to - foreign investment is, overall, likely to have more positive than negative effects. The key point, however, is that with or without foreign investment and free trade, in today’s status quo, a large part of humanity will continue to live in extreme poverty. Worse, due to population growth and environmental deterioration (notably, of agricultural land and fresh water supply), the number of poor and levels of deprivation are likely to increase rather than diminish.
Fostering demand
Orthodox economics and conventional economic policy do not present a way out of the above-described dilemmas. Yet the answer to both alleviating poverty and jumpstarting economic growth in poor countries is simple. It is, in fact, the same as is advocated by many economists as the way out of the current economic doldrums for the rich countries: to increase demand for goods and services on the part of consumers as well as business. Within current economic thinking, however, that’s going to be difficult. The Keynesian approach, with governments injecting money into the economy at the cost of (supposedly temporary) budget deficits, is a non-starter. Governments of poor countries lack revenues to do so and are in most cases already so heavily indebted that taking on more debt would be irresponsible. The problem is, of course, that Keynesian policy is aimed at alleviating cyclic downturns, whereas the poverty in the poor countries is structural. (Grant) aid from rich to poor countries can help, but the amount does not come near to the amounts needed to make a real impact. That is the not only because the overall amounts are too small, but also because most of the money flows straight back to suppliers of goods and services in the donor countries. In fact, due to the huge and still rising debt obligations, in many poor countries, with the notable exception of China, more capital flows out (in the form of interest payments to the rich nations and exports of profits) then is flowing in (through foreign investment, loans and grant aid).
Money creation for sustainable development
So if Keynesian policy, exports and foreign investment can’t do the job, what can? The answer to this question is as simple as it is contrary to economic dogma. It is to create demand though the large-scale infusion of capital created specifically for this purpose. Money should be created for financing a global sustainable development program, focusing on improving education, health care, the working of government, environmental protection, and improvement of infrastructure. Employment programs aimed at environmental and infra-structural improvement would aim, among others, at fighting erosion and desertification, recuperation of eroded land, reforestation, and the construction of infrastructure for water management and transport. Such programs would double as employment generators and thus, would jumpstart a process of sustained, and sustainable economic growth. Improved education and health care would contribute to a more skilled and healthy work force able to further develop production.
In addition to the above, direct income support could be given through child support (limited to two children, to avoid it becoming an incentive for having larger numbers of offspring), and pensions. Together with wages earned through employment programs this would kill two birds with one stone. First, it would eliminate destitute poverty. Second, it would generate the demand required to jumpstart economic growth. The income transfers would create increased demand for food, clothing, and housing materials, most of which are produced locally. Also, it would cause a surge in the demand for simple appliances and means of transportation, providing incentives for local production as well as foreign investment. Increased local production and foreign investment would generate new jobs, profits and demand, thus further stimulating economic growth.
For the rich countries also the way out of the current economic doldrums would be a large-scale public investment program. Those investments should likewise be aimed at improving public education, heath care, and safety, and the conversion to an environmentally sustainable economy. As with the poor countries, it would be unwise to finance such a program through large-scale borrowing: the rich economies too are already heavily indebted. Instead, these investments should be financed by money creation, within the framework of a global sustainable development program, for rich as well as poor countries.
Conditions for money creation
The biggest danger of money creation is, of course, runaway inflation. This could be avoided by tying money creation to strict conditions. The first condition would be that money creation should be limited to what national, regional economies and the global economy can handle. That means that the demand generated by money infusions should not exceed productive capacity. To achieve that capital transfers should be part of a comprehensive, multi-year sustainable development program. They should take place gradually, to allow economies, notably producers, to adapt to growing demand by increasing production capacity. The nations receiving the created funds should accept intensive monitoring to check inflation and ensure the adequate spending of funds under an overall regime of sound fiscal and monetary policies.
A second key condition for money creation would be that faith in the value of money would be maintained. This could be achieved only if the global financial, economic and political elite would support the idea. It should be noted that the few times that economists are right is when their prophecies become self-fulfilling. That could also be the case with inflation resulting from money creation. If economists would proclaim that massive inflation would be unavoidable people would act upon this by using their money to buy anything that they would think would keep its value. Moreover, they might just spend it out of fear that at later stage, it would buy fewer goods and services. Happening on a major scale this could lead to such an increase in demand for real estate, securities and consumer goods that prices would indeed rise. Moreover, workers would pressure for wage increases, which could lead to a wage-price spiral. In short, inflation would occur - as a result of behaviour induced by the prediction that it would. On the other hand, if opinion leaders would convincingly assure people that money creation would take place in such a manner that people’s money holdings would not loose their value, people would not engage in inflation-fostering behaviour.
To maintain faith in the value of money its creation for sustainable development would have to be made the responsibility of an international financial agency that is well regarded in the financial community: the IMF. That agency should impose and enforce the strict conditions mentioned above, with unconditional support from the main hard currency nations and the rest of the international financial community. Under those conditions the faith in the value of the existing and the created money could be maintained and demand-driven inflation prevented.
The above would entail a radical expansion of the roles of the international financial institutions, notably the much-maligned IMF. The IMF would not only function, as it does at the moment, as a global monetary watchdog, lender of last resort, and promoter of what orthodox economists consider sound economic policies. It would also become responsible for creating and issuing money required for sustainable development in accordance with the needs of participating economies, without causing excessive inflation, and in ways that would ensure that the money is properly spent. To fulfil this role adequately the IMF should be free of political interference, in the form of influence peddling by either rich or poor countries. Instead the organisation should be managed and supervised by highly qualified professionals with no ties to particular national governments.
Money creation and economics
Money creation for the common good runs, of course, wholly counter to economic dogma. Indeed, according to economists and in their wake, politicians, mainstream journalists and other opinion makers it is the ultimate economic sin. But is it? Let’s put aside economic dogma and look at facts. Of all the factors that determine production, money is the only one that in principle, can be made at will. There are physical limits to the quantity of land, labour, skills, and capital goods, i.e., production facilities. But there are no physical limits to the amount of money - certainly not today, when a large part of the global money supply is virtual. Yet we see that all production factors that are tied to physical limits are under-utilised because of a shortage of the one factor that is not tied to such limits. Present production facilities operate at up to 30% below capacity. Productive capacity, that is, actual production capacity plus new capacity that could be created fairly rapidly, is much higher. So what sense does it make to have the only factor that can be made at will be the main impediment to increasing production aimed at addressing the main problems facing humanity today: poverty, environmental deterioration, and the resulting economic and social distress? Moreover, capital is created – and destroyed - constantly, notably through the lending of banks (which as a rule, lend more than they have in deposits) and through speculation on stock markets. So why not create capital for sustainable development?
Because, so economists and in their wake, the entire political, economic and opinion-forming elite proclaim, economic theory holds that large scale money creation for use by the public sector creates runaway inflation. But would it? Logic dictates it would not if the demand created by the extra inflow of money would not exceed production capacity, and if faith in the value of money would be maintained. To determine how much money can be created for investment in sustainable development, at national, regional and global level, would be a challenge for economists. The starting point should be the obvious fact that at present, in practically all countries, and certainly in most poor nations, there is a huge gap between productive capacity and economic demand. With in most poor countries unemployment and underemployment hovering between 20 and 50%, with ample natural resources including land, and with an enormous reservoir of internationally available but under-utilised knowledge and technology, the productive potential of humankind is much greater than it is today. The aimed infusion of money created to finance sustainable development would activate that potential. If done adequately, that is, by maintaining an adequate margin between demand and productive capacity, it would do so without runaway inflation.
Of course, responsible money creation for the public good, that is, for a global sustainable invest program, would be a highly complex matter. It has many economic, political and social implications that cannot be addressed in an essay such as this. Nothing, therefore, is easier then dismissing the idea by pointing out the risks and instances where things could go wrong, and the many obstacles – many perhaps seemingly insurmountable - to be overcome. That, however, is an attitude that would not get us anywhere. What is needed is to open the debate on money creation for sustainable development: to analyse, with an open mind, the pro’s and con’s, objectively and without pre-judgements, and especially, without the ballast of economic dogma.
What would be needed, in fact, is a new economics: a science focusing on the optimal allocation of scarce production factors to satisfy not only economic demand, but also the basic needs of all of humanity. This new economics should concentrate particularly on how wealth can be created in an ecologically sustainable and socially just manner. In doing so it should no longer see money as a scarce factor, and the quantity of money as a given entity. Instead, it should consider the amount of money as a variable to be manipulated, so as to optimise the use of the production factors that are tied to physical limits.
Opening the debate: a moral imperative
Everyone would benefit from money creation. The very poor would get access to services and a minimum income that would allow them to satisfy their basic needs. Lower and middle-income groups would benefit from better public services and more and better job opportunities. The rich and the business sector would benefit from expanded investment and business opportunities. And politicians and governments would benefit from happier voters and citizens. Considering these benefits it would be in everyone’s interest to initiate the debate on financing sustainable development through money creation as soon as possible.
In fact, putting money creation on the development agenda should be seen as a moral imperative. Billions of people are now suffering from deprivation that can be remedied. Our environment is steadily deteriorating, endangering the livelihoods and quality of life of coming generations. Public services are in decline, and major dangers lie ahead for an already stagnating economy. The productive capacity - technology, labour, and natural resources - to address these issues exists or could be created rapidly. The prime obstacle to addressing all these problems is lack of money. Doing away with economic dogma that is an item of faith, not an established scientific fact, can eliminate this obstacle. Considering the potential benefits and risks it is a moral imperative, for all citizens with a minimal social conscience and concern for future generations, to push the economic, political and financial elite to put the concept of money creation on the agenda.
Alternatively, of course, we can continue on our present path, with billions of people living in deprivation, thousands of people, most of them children, dying each day because of lack of basic services, a deteriorating environment and an economy in the doldrums. We can continue to take the risk that things get worse rather than better, because of a deteriorating environment and very possibly, a downward economic spiral resulting in an expansion and deepening of poverty. Considering this alternative it would seem appropriate to at least explore the idea of money creation for sustainable development. What’s to loose?
A call for action to open the debate
To get us on the path of sustainable development it would be necessary for all persons and groups with some measure of a social conscience and concern for future generations to form a coalition for sustainable development. That coalition should argue for opening the debate on money creation. The call for opening the debate should be aimed at forums where global development issues are discussed and at the international academic community. Goal would be to win over leading economists to the standpoint that in principle, money creation for sustainable development is possible. From there on the challenge would be to force political decision makers to accept the premise, and to take the action required to put it on the agenda of the international financial institutions - notably, the IMF, World Bank and OECD. Goal would be to win over leading economists to the standpoint that in principle, money creation for sustainable development is possible. From there on the challenge would be to force political decision makers to accept the premise, and to take the action required to put it on the international political agenda. The main task of economists and other experts would be to design the mechanisms and instruments that would allow for money creation for sustainable development without causing excessive inflation or other adverse side effects on national and global financial and economic systems. The main task for politicians - spurred on by the movement for sustainable development – would be to establish an international coalition for money creation for sustainable development. That coalition should then give the mandate to the relevant international agencies to implement and use the designed mechanisms and instruments.
The current myriad action groups and other organisations of the anti-globalisation movement have the potential to become the spearhead of the movement to promote money creation for sustainable development. Indeed, at present it is difficult to imagine another force with the potential to do so. But a radical change in their approach is needed. Mostly, these groups are now, or are perceived to be, against things: against globalisation, against capitalism, against corporations, against free trade, and against the IMF and the World Bank. They get together to protest but for the remainder, pursue their own agendas. Therefore, it is difficult to establish what they are for. The challenge would be to convert their opposition to a proposition: money creation for sustainable development. A proposition that would, in almost all cases, be instrumental in achieving the current, widely diverse goals of the organisations involved.
For a further elaboration of these points return to Global Sustainable development: the issues.
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