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From the book Global development -
Part 2, Solutions, Chapter VI:Sustainable economic growth
Quotes:"The problem of development is more social than economic. It is not to maximize economic growth by meeting demand in the most efficient way. It is to generate development that enables all people to make a decent living, in ways that guarantee that future generations can do the same. If we can convert the needs of humanity into demand, we can create economic growth that is both socially equitable and environmentally sustainable."
"Demand should be stimulated through a global investment program for sustainable development. In line with the objectives of sustainable development, this program should aim to make good quality education and health care accessible to all, to make the global economy ecologically sustainable, and to improve the world's social and economic infrastructure in ways that allow all people to enjoy an acceptable standard of living."
"To counter the downward spiral of cut-throat international competition that today, forces countries to sacrifice their environment and workers' rights, a "bottom line" is needed: an international set of minimum social and environmental norms to which business should comply."
"The new strategy for economic growth in poor countries should not, as today, focus on increasing exports and liberalizing international trade, but should foster internal demand through job creation and pay raises resulting from a social bottom line."
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Selected text from the book:
A global investment program for sustainable development
In Chapter I, I mentioned the growing gap between productivity and demand as one of the key economic problems facing society today. Growing competition forces companies to cut jobs and cap wages. This dampens demand, which leads to even fiercer competition. That, and technological development, causes productivity to rise, meaning that even fewer workers are needed to satisfy demand. More people lose their jobs, wages are lowered, and demand is stifled further. Thus the downward spiral will continue.
To reduce the gap between productivity and demand, demand should be stimulated. Economists usually recommend to do so by increasing people's after-tax income, through tax cuts. Not such a bad idea, if the beneficiaries of such cuts are the lower income groups. Unfortunately, as we've seen, the tax cuts most economists and politicians propose favor the rich much more than the poor. After what happened in the 1980s that should, from any reasonable point of view, be out of the question: it would be patently unfair to shovel even more wealth to the rich. Besides, it wouldn't do the trick: consumer demand would not rise very much, as this group is fairly small in numbers and consumption levels are already high. Instead, the extra income from tax breaks would further the speculative investment discussed in Chapter I. That would mean an even bigger extraction of capital from the productive sectors of the economy than is the case today.
Tax cuts that would mostly benefit lower income groups would be a better idea. The amount of income over which no income tax is due could be increased. Also, the percentage to be paid over the lowest income tax bracket could be reduced. The problem, however, is that because all taxpayers would benefit from such measures, even minor changes would be very costly. Take the U.S.: if we put the number of income earners at 150 million, tax cuts that would provide all of them with $500 in extra expendable income would cost $75 billion. That would either lead to new budget deficits, or force even greater cuts in public spending. In the latter case, at least part of the cuts would likely be made in those areas that are important for sustainable development: education, public health, fighting crime and poverty, environmental protection, and economic and social infrastructure. That would not only be contrary to sustainable development, but also lead to a reduced demand for goods and services from the state - offsetting at least partly the gains in consumer demand.
The above problems could be overcome if the cost of the tax cuts could be covered through higher taxes on the wealthy. From the point of view of fairness this would be an attractive option: the rich would be returning, to the rest of society, some of the enormous wealth that has been sluiced to them since the 1980s. Still, tax cuts for the lower and middle income groups would not effectively address our prime economic problem: the growing gap between productivity and demand. True, consumer demand would rise, but a $500 increase in expendable income would not have the major impact on demand that is needed. On the one hand, that's because the sums involved are small compared to the overall size of the economy. On the other, it is doubtful that this extra income would indeed be spent on the purchase of goods and services. Especially the middle income groups, faced with growing economic security and rising costs for (higher) education, health care and retirement plans, are more and more prone to save rather than consume. Besides, the middle and lower income groups still have debts to settle. Obviously, if the proceeds from tax cuts are used to increase savings or to pay off debts, the effect on demand will be minimal.
Finally, one should ask if increasing consumer demand is the most adequate way for ecologically sustainable growth. The answer is no. In the rich countries, more consumption of the present kind would make our society even less sustainable than it is today. Finite materials would be used up faster, emissions of pollutants and Greenhouse gasses would increase, as would our garbage disposal problems.
My proposal for fostering demand, therefore, would not be to do so by stimulating more consumption of consumer goods and services. Instead, demand should be stimulated through a global investment program for sustainable development. In line with the objectives of sustainable development, this program should aim to make good quality education and health care accessible to all, to make the global economy ecologically sustainable, and to improve the world's social and economic infrastructure in ways that allow all people to enjoy an acceptable standard of living.
This global investment program should consist of five components. The first would aim at the conversion of today's economy into one in which our natural resources are used in a sustainable manner. It would involve global measures for pollution control, the recycling of wastes, and the conversion from non-renewable to renewable energy, such as wind, sun and hydro power. Also, it would focus on building a worldwide infrastructure for water management, to resolve current and future shortages of water, control flooding, and make more water available for irrigation. The latter would be of major importance for increasing food production and raising farm incomes, especially in poor countries. A further point of attention would be the protection and reclamation of soils through reforestation, terracing, drainage and other measures. All these themes will be looked at in some more detail in Chapter VIII.
The second component of public investment would aim to ensure to the extent possible that all people lead healthy and productive lives. For the young, this implies to prepare them as well as possible for their entry into social and economic life. For adults who, in some way or another, have been pushed to the margins or out of society, it would mean to help them reintegrate. The main areas of attention would be day care for the very young, education, health care, law enforcement, the rehabilitation of offenders, and care for the elderly. Special attention for babies and toddlers and better health care and education are, as we'll see in Chapter VII, of key importance for people's social and economic development. Also, in Chapter IX, we'll see how these measures would contribute to lowering crime rates - as would better law enforcement and, especially, rehabilitation.
The third public investment component would be to improve the world's economic and social infrastructure. With economic infrastructure, the emphasis would be on improving transport and communications in both rich and poor countries. Special attention should be paid to improve public transportation systems such as railways and subways. That would reduce the need to use cars and thus, alleviate traffic jams and reduce pollution. Work on the world's social infrastructure would focus on urban renewal, building low income housing and, in poor countries, improving fresh water supply and sanitation. In both rich and poor countries, the repair and renovation of existing social and economic infrastructure would also be major points of attention.
The fourth component of public investment would be to improve the working of government bureaucracies. Especially in poor countries, this would be a condition for successfully carrying out the other three components. The staff of government institutions should be motivated and trained, and brought to accept and apply the principles and ethics of public service. Particular attention should be paid to tax and law enforcement agencies, and to key public services such as education, health care, natural resource management and rural and urban development. Efficiency should be increased though phasing out excess staff and training those remaining. Where necessary, budgets for operational costs should be boosted. Especially in the poor countries, salaries and allowances should be raised to levels comparable to those in the private sector, to raise motivation and reduce the incentive for corruption.
The fifth public investment component would aim at research, especially in fields related to the first four components. Technical research on the substitution of non-renewable resources, recycling, and raising agricultural production in an environmentally sustainable manner would be of key importance. Studies on the more efficient use of scarce resources such as water and minerals would also be of interest. So would medical research and studies on the development of the mind, criminal behavior, and ways to improve learning and teaching.
Carrying out the above program would have a huge economic impact. Components one and three (environmental measures and infrastructural development) would generate an enormous upsurge in the building sector. That would create both blue collar jobs and employment for white collar technical workers, such as engineers. The second and fourth components would be major employment creators for white collar workers in the "soft" sector, such as teachers and special educators, management specialists, medical personnel, psychologists and other social scientists. The fifth sector would generate jobs for both technical and social scientists.
In addition to the direct effect of job creation, the proposed program would also generate a huge demand for goods and services - most of which would be satisfied by the private sector. That would lead to more jobs as well as profits, which in turn, would further stimulate further economic growth and increase the demand for consumer goods and services. The latter, in turn, should raise demand for capital goods: the equipment needed to satisfy the new consumer demand. All this growth would lead to higher government revenues, giving governments the chance to further invest in sustainable development. Thus, the downward spiral caused by the growing gap between productivity and demand could be checked.
It's important to note that in time, investment in sustainable development would have similar or even stronger effects on lower and middle incomes than tax cuts. New employment opportunities and a slowing down of the competitive rat race would reduce the downward pressure on wages and thus, allow incomes to rise with productivity. Also, for both lower and middle income groups public services would not only become better but also cheaper, leaving more money to be spent on other things. Middle income groups might benefit the most as, seeing that public services would once more reach adequate levels, they could reduce today's growing dependency on the much more expensive private sector.
A global program for sustainable development as described above would create huge numbers of jobs and allow lower and middle level incomes to rise. Still, these effects would probably not be enough to break the downward spiral of cut-throat international competition that today forces countries to sacrifice their environment and workers' rights. To counter this process, a "bottom line" is needed: an international set of rules for establishing the minimum social and environmental norms to which business should comply.
The environmental bottom line should set international standards for pollution and the use of nonrenewable natural resources. This should prevent business from nations that now set the lowest or no standards from gaining a competitive edge. Thus, environmental dumping, that is, keeping down production costs at the cost of the environment, would no longer be possible.
Likewise, a social bottom line should make business from all nations comply with a set of standards for worker safety, benefits such as insurance and vacation, maximum working hours and minimum wages. The latter should vary from country to country, depending on overall productivity and the cost of living. That means that poorer countries could still maintain a labor cost advantage over the rich nations. As happens now, the rich countries should compensate by raising productivity through the use of high-tech production methods.
As we've seen in Chapter I, today business can play off governments against each other so as to get the most favorable terms for investment. That leads not only to weakened social and environmental regulations, but also to governments trying to lure business with all sorts of tax breaks. The end result is that companies can operate paying only the barest minimum of taxes, or even none at all. At the same time, they enjoy direct and indirect subsidies in the form of cheap energy and the use of government built infrastructure such as roads, harbors and airports. Frequently, therefore, the cost of attracting foreign companies, especially for so-called "free trade zones", outweigh the benefits. Thus, to ensure that business pays its fair share in taxes, the proposed bottom line would also have to include international agreements on corporate and other business taxes.
With the ground rules for international competition set, governments would no longer have to sacrifice the environment and well-being of their citizens to the scramble for investment capital. Likewise, with all companies having to comply with the same regulations, business would no longer compete at the cost of the environment and workers' rights. Instead, they would be forced to gain an advantage by making better products more efficiently. Thus, the downward spiral caused by global competition could be broken.
The main problem in implementing a bottom line would be that some nations would try to dodge it. In an open international market, this would mean unfair competition for business from complying countries. To prevent this, countries adhering to the norms should form a free trade block. Participating countries would freely trade amongst themselves, but would protect their private sector, through tariffs or import bans, from unfair competition from non-complying countries. The ultimate goal of such protective measures should, however, not be to protect national producers against foreign competition. Instead, it would be to push noncomplying countries into adopting and enforcing the bottom line, and so join the free-trade block.
The proposal to base free trade on a bottom line and especially to impose import barriers on non-complying nations, runs counter to the current drive for unconditional free trade. Mainstream economists and politicians will reject any proposal to tie trade to social and environmental restrictions. They will argue that doing so would endanger the economic growth that results from free trade. That, however, is doubtful. In 1992, the projected benefits of current free trade arrangements were estimated at some $120 billion a year, roughly 1/2% of the world's gross product. A more radical freeing of markets was figured to double that. However, these projections do not consider the social, environmental and long term economic costs of social and environmental dumping. Nor do they account for the earlier mentioned effects of unchecked global competition: the vicious circle of stagnant demand, rising unemployment and declining real wages.
Another argument to defend unconditional free trade is that social and environmental regulations will make it more difficult for poor countries to compete in world markets. There's some truth to that. But this disadvantage could easily be compensated for through other measures. Current import barriers in the rich countries could be lowered, and the debts of the poor countries reduced. Also, poor countries should be helped, technically as well as financially, to comply with environmental norms. In any case, the problem of reduced competitiveness would be less than might appear at first sight. In export markets, producers from poor countries are more likely to compete with each other than with business from the rich nations. As the bottom line would apply to all poor countries, the new regulations would affect them equally. And in comparison with the rich countries, the poor countries would still retain a significant labor cost advantage.
Fostering local demand and production
The combined proposal of a bottom line in trade and a global investment program for sustainable development would mean a new strategy for economic development. Today's strategy, as we've seen, is to generate economic growth through increased international trade. The new strategy, on the other hand, would aim at fostering internal demand: through job creation generated by implementing a global program for sustainable development, and through pay raises resulting from a social bottom line.
Real economic development requires growth in both internal demand and the local capacity to efficiently produce high quality goods. Today, the problem in many poor nations is that this capacity cannot be developed. On the one hand, free trade allows cheap imports to push local, less efficient producers out of the market. Thus, countries in Africa and Latin America are today flooded by cheap products from Asia, notably China. On the other, because of low transportation costs and low or non-existent import barriers, it is much more attractive for business to export to a country than to set up shop there. Yet in less developed areas, the latter is what's needed. Companies should be coaxed to set up production in the market they want to serve, with local partners, using local labor and management and, whenever possible, locally produced raw materials.
To achieve this, foreign investment in less developed areas should be promoted by eliminating red tape and allowing the free flow of investment capital and profits. Also, the import of capital goods needed to set up production should be facilitated. On the other hand, import taxes should be levied temporarily to allow companies the time to set up production and conquer market share by pushing out imports. However, to ensure that locally producing companies would set and maintain sufficiently high standards of production, duties and tariffs should not aim to keep out imports altogether. Moreover, import barriers should be reduced gradually so as to force local business to remain competitive.
Local production should also be stimulated by promoting direct links between producers and consumers. The potential for eliminating distribution chains is particularly promising in agriculture and services. In hundreds of communities, especially in North America, Northern Europe and Australia, local groups are already engaged in community-supported agriculture, or CSA. As will be described in more detail in Chapter VIII, CSA involves a group of families purchasing their food directly from a local farmer. Payment takes place in advance; the produce is picked up at the farm or delivered to the consumer's home or central collection point once or twice a week.
Likewise, local production can be stimulated through Financial Micro-Initiatives. FMI's, which will be discussed in more detail in Chapter XIII, promote the local exchange of goods and services without the actual use of money. Instead, transactions are registered in the form of credits earned and spent. These credits can be considered as a kind of local money, used on a micro scale: hence the phrase FMI. FMI's are a particularly promising alternative for poor communities, where economic activity is hampered due to a lack of regular money.
CSA, FMI's and other cooperative efforts aimed at strengthening local economies all have social as well as economic benefits: in addition to fostering local economies, they build community ties and spirit. Moreover, as a rule they have a positive impact on the environment. CSA's promote diversified, ecologically sustainable forms of farming, in which care of the land is an integral part of agricultural production. Moreover, the local production of goods and services reduces transport needs as well as the, often unsustainable, exploitation of natural resources in other regions or countries.
From speculation to investment in production
As we've seen in Chapter I, governments in rich as well as poor countries are deeply in debt. For the time being, the cost of debt servicing will increase rather than diminish. Moreover, in the rich countries, the graying of populations will result in growing expenditure on health care and pensions. That leaves even less money for investment in sustainable development than is the case today.
The problem is not that there's no capital: as we've seen, trillions of dollars circulate in the world's capital markets. Only about 1% of the $1 trillion that changes hands each day is used for the trade in goods and services, the rest involves speculative transactions. This puts entire economies at the mercy of a handful of money managers and speculators. Tapping into this capital would therefore be doubly beneficial. On the one hand, it would generate funds for the production of goods and services for sustainable development. On the other, it would weaken the stranglehold financial markets now have over all but the largest economies.
One way to tap into these funds would be to tax all sales of stocks, bonds and currencies. This could generate billions of dollars each year. At the same time, it would make large capital transactions more expensive, which would reduce speculation and the volatility of markets. Of course, taxing capital transactions would meet with a clamor of objections from money managers and economists. They would assert that such a tax would hinder trade and prevent capital from flowing where it can be used in the most efficient way. But a tax of, say, 0.5%, would not impede a transaction if the intended investment were really worth it. It would put a brake, however, on the mad scramble for short term capital gains that marks trading today.
Although a tax on capital transactions would help curb the speculation in international financial markets, it would not be enough to end it. Curbing speculation requires going to where the money comes from: the wealthy and institutional investors such as pension funds and insurance companies. We've seen in Chapter I how since the 1980's, the rich have acquired huge wealth at the cost of the rest of the population. High time, then, that they pay something back. Higher taxes on the wealthy would put money that is now drawn into the international financial circuit at the disposal of the state, which should use it to finance programs for sustainable development.
Mainstream economists and politicians will oppose raising taxes on the rich. They'll claim that it will reduce investment, and therefore, hamper production and economic growth. That's nonsense. As we've seen, the rich increasingly use their newly acquired wealth for speculation rather than productive investment. The only growth this has created is in the financial sector. But society hardly needs even richer bankers and financial managers. What it does need is investment in sustainable development, and the kind of jobs, profits and growth such investment would generate.
Institutional investors - insurance companies, mutual funds, pension funds - are also major contributors to speculative investment. To meet future obligations (payment of insurance claims, interest on deposits, and pensions) and of course, to turn a tidy profit on their operations, they constantly search for the highest capital gains. In doing so, they pump hundreds of billions of dollars into the international financial circuit, driving up the rate of speculation. Their role could be reduced by shifting part of their tasks back to the state. More elaborate government pension plans, involving all citizens, would increase the premiums paid to the state while diminishing those paid into private pension schemes. Similarly, disability and health insurance, as well as insurance for damage caused by natural disasters, could be taken over partially or entirely by the state. The premiums paid would increase the capacity to invest in sustainable development; future obligations could be met by the revenues resulting from those investments.
To increase the government's role in providing pensions and insurance goes, again, against established dogma. Today's economists, politicians and opinion makers favor reducing the role of the state. Pension funds, health care, disability insurance and other forms of social security are increasingly "privatized": delegated to the private sector. This is supposed to increase efficiency, especially in the management of assets. Because of this, the argument goes, the private sector will be better able to meet future obligations than the government.
This is doubtful at best. The track record of financial institutions in the 1980s has hardly been encouraging. True, institutional investors played a relatively minor role in the speculation and the crash that followed it. That, however, was at least partly due to the fact that pension funds and insurance companies were more subject to regulation. Since then, as financial markets have been liberalized further, part of these restrictions have disappeared. There is little reason to assume that, once they get the chance to play the game all-out, institutional investors will do a better job than banks. A greater role of the state in managing pensions and some forms of insurance would, therefore, be no more than prudent. In the short and medium term, yields of the capital involved could turn out to be somewhat lower. But this would be more than compensated for by the lesser chance of massive losses through speculation or other forms of high-risk investment. Thus, problems like the banking crises of the last decade, which cost tens of billions of taxpayer money to resolve, could be avoided.
Obviously, the wealthy and institutional investors would strongly oppose the above proposals. Still, in the end they might benefit even more than society at large. The proposed measures could help avert the financial collapse that will be unavoidable if the current rate of speculation continues. In addition to causing a global economic and financial crisis, this crash would ruin private as well as institutional investors. Better, then, to restructure before it is too late - even though some of the beneficiaries will have to be dragged in kicking and screaming.
The roles of private enterprise, the market and the state
The above proposed measures for sustainable development, fair trade and tapping into the international financial circuit require a stronger state. Today, talking about strengthening the state is taboo: one of the worst things one can say about politicians is that they favor a greater role of government. Instead, government should "get off the backs" of citizens and, in the economic sphere, let the "invisible hand of the market" do its work.
Yet to expect the private sector to plan, coordinate and carry out something resembling a program for sustainable development is foolish. Private enterprise strives for short and medium term profits. That's a goal that is fundamentally different from, and can be contrary to, the long term common good. Private enterprise reacts to demand: it satisfies the needs of those who can pay for it. The problem is that many needs in society are not backed by this ability. Sustainable development aims to satisfy all people's basic needs: at taking the measures to fight poverty, crime and environmental deterioration. Private enterprise will engage in sustainable development only if it's paid to supply the required goods and services. That means the initiative for sustainable development will have to come from elsewhere: from an entity concerned with the short, medium and long term common good. That entity is, and can only be, the state.
As said, the fact that the government plans and leads the drive for sustainable development does not mean the private sector is left out. On the contrary, private enterprise would be essential for producing the needed goods and services. Market forces, in the form of companies competing for contracts, should be used to ensure that this production would take place as efficiently as possible. Thus, the state, by converting the needs of society into demand, would orient part of the energies of the private sector to production for sustainable development.
Let's use an analogy. The private sector can be seen as a large herd of very well built, strong and smart animals, each with its own single-minded purpose: to eat as much as possible. If this herd is set free the animals will move in any direction, fighting among each other, damaging and in some cases destroying their environment. Therefore, the herd must be harnessed. It must be set on the right path and made to face the right direction. Its strength must be garnered to move a huge structure, society, situated in a delicate environment, in a specific direction: that of sustainable development.
Once the structure is moving along, the herd must be guided to follow the right path. It must be controlled and fed. The road over which it draws the structure must be prepared. All that is the role of the state. It must develop and maintain a good transport and communications system, and feed business with well-trained people and knowledge generated through scientific research. Through a Central Bank (in the U.S., the Federal Reserve System), it also supplies the private sector with that most important lubricant of business: money. Moreover, the state sets rules so that the single-minded pursuit of profit does not harm the environment, workers or consumers.
Business should not be afraid for a stronger role of government. Using another analogy, we can look at the state as both the coach and the referee of a game in which many players take part. In combining these roles, the state should set and enforce the rules needed to ensure that the game is played fairly, and that non-players don't get hurt. That is, the state should ensure free competition, and avoid that workers, consumers or the environment get hurt by companies breaking the rules. For people as well as companies, it's more fun, safer and more profitable to play a game when the rules are clear and apply to everybody. Especially smaller players will profit: it is only the strongest, most vicious players who gain in a free-for-all. Most companies, therefore, benefit from a strong state that is able to level the playing field for all contenders.
In fact, one of the prime beneficiaries of a state strong enough to set in motion a sustainable development program would be business. The above described program, especially the first and third components (the conversion to an ecologically sustainable economy and the improvement of the world’s economic and social infrastructure), would offer huge opportunities. On the other hand, if something like the proposed program for sustainable development is not set in motion, increasingly large numbers of companies will fall prey to the growing gap between productivity and demand. In spite of laying off workers and capping the wages of those remaining, they may no longer be able to compete and will drop out of the treadmill. In the longer run, therefore, sustainable development, and the strong state required to set it in motion, are their best bet for survival.
Much of the drive for sustainable development would be aimed at the poor countries. There the needs are greatest, whereas demand is smallest. Rich countries should therefore assist poor countries in fostering sustainable development. For the rich countries' business sector, that would mean vast opportunities in engineering, construction and management.
Of course, the history of international business operating in poor countries is not without blemish. Yet for sustainable development, both poor and rich nations must garner the know-how and productive potential that international business can offer. To do so in the most effective way, and to ensure that the involved companies would comply strictly with national and international regulations, would require all nations to cooperate closely.
To next chapter: Fighting poverty
To Part 3: Financing:
Chapter XI : Conventional: (Progressive) taxation, cutting wasteful spending
Chapter XII: Unconventional: Money creation
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